In re Wal-Mart Stores, Inc. Delaware Derivative Litigation: Court of Chancery Finds Delaware Plaintiffs Collaterally Estopped from Arguing Demand Futility
January 12, 2017
In In re Wal-Mart Stores, Inc. Delaware Derivative Litigation, 2016 WL 2908344 (Del. Ch. May 13, 2016), the Court of Chancery, applying Arkansas law, held that plaintiff stockholders were precluded from arguing demand futility in a derivative action filed in Delaware because the same issue had already been fully litigated and decided in an Arkansas court by adequate representatives in privity with the stockholder plaintiffs in the Delaware action. On this basis, the Court of Chancery granted the defendants’ motion to dismiss.
In 2012, the New York Times published an article alleging that employees of a foreign subsidiary of Wal-Mart Stores, Inc. (“Wal-Mart”), Wal-Mart de Mexico (“WalMex”), had bribed Mexican government officials. After the publication of the New York Times article, Wal-Mart stockholders filed fifteen derivative suits in Delaware and Arkansas, Wal-Mart’s place of incorporation and Wal-Mart’s headquarters, respectively.
Plaintiffs in the actions filed in the Court of Chancery (the “Delaware Plaintiffs”) demanded inspection of Wal-Mart’s books and records under Section 220 of the General Corporation Law of the State of Delaware (“Section 220”), seeking to uncover information in support of their derivative claims. Following Wal-Mart’s production of certain documents in response to the Section 220 demand, the Delaware Plaintiffs filed a complaint under Section 220 alleging deficiencies in Wal-Mart’s document production (the “220 Action”). Ultimately, the Delaware Plaintiffs obtained some of the additional documents sought, but the 220 Action took three years to resolve and involved proceedings in the Court of Chancery and an appeal to the Delaware Supreme Court.
In the actions filed in Arkansas, plaintiffs did not seek access to Wal-Mart’s books and records, and instead determined to move forward with their lawsuit without waiting for the outcome of the 220 Action. Wal-Mart moved to dismiss the Arkansas complaint for failure to adequately allege demand futility. About a month before the 220 Action was resolved, Wal-Mart prevailed on its motion to dismiss in Arkansas, and the Arkansas case was dismissed with prejudice.
After the 220 Action was resolved, the Delaware Plaintiffs filed a complaint alleging a single count of breach of fiduciary duty related to the alleged cover-up of the WalMex bribery. Wal-Mart then moved to dismiss the Delaware action, arguing, among other things, that the Arkansas judgment precluded the Delaware Plaintiffs from re-litigating demand futility.
The Court of Chancery, analyzing the issue under Arkansas law, concluded that the Delaware Plaintiffs were precluded from re-litigating demand futility in light of the Arkansas judgment because: (i) the issue was the same in both actions; (ii) the issue was actually litigated in Arkansas; (iii) the issue was determined by a valid and final judgment; (iv) the determination was essential to the judgment; (v) although the Delaware Plaintiffs were not the same parties as the Arkansas plaintiffs, they were in privity; and (vi) the Delaware Plaintiffs were adequately represented in the Arkansas litigation.
Although the Court’s analysis involved whether the elements of issue preclusion were met under Arkansas law, including whether the Delaware Plaintiffs were adequately represented in the Arkansas litigation, the Court’s holding has implications for multi-forum litigation. As explained in the Court’s analysis, the Delaware Supreme Court has previously noted that there is no requirement that a plaintiff bring an action under Section 220 in order to be considered an adequate representative under Delaware law, but Delaware courts have also encouraged plaintiffs to use all of the “tools at hand” (including Section 220) to investigate derivative claims before filing suit. The Court of Chancery concluded that while the Arkansas plaintiffs’ litigation strategy may have been “imperfect” and the decision not to pursue books and records under Section 220 potentially “ill-advised,” it was not “so grossly deficient as to render them inadequate representatives” for purposes of the issue preclusion analysis. Thus, while pursuing a pre-suit Section 220 demand may have provided the Delaware Plaintiffs with useful information to support their claim against Wal-Mart’s directors, they were ultimately unable to pursue such claim due to the actions of plaintiffs in another jurisdiction.
The Court of Chancery’s decision has been appealed to the Delaware Supreme Court.