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  • Delaware Derivative Action Barred by Dismissal of Competing Action in Arkansas

    The Delaware Chancery in In re Wal-Mart Stores, Inc. Del. Deriv. Litig., C.A. No. 7455-CB (Del. Ch. May 13, 2016) dismissed derivative litigation on issue preclusion grounds after another court dismissed a competing derivative action.  This case provides helpful guidance on three key questions: 
    (i)   Are plaintiffs who assert derivative claims in separate actions in privity with each other?
          Answer:  Yes.
    (ii)  Does the failure to make a Section 220 demand constitute inadequate representation for purposes of issue preclusion?
                Answer:  No.
    (iii) Should evidence unavailable in the first case be considered in the second case to determine whether issue preclusion applies?
          Answer:  No.

    Following an April 2012 New York Times article describing a purported bribery scheme at Wal-Mart Stores, Inc.’s Mexican subsidiary, Wal-Mart stockholders raced to file derivative actions, with parallel actions ultimately filed in Arkansas federal court and Delaware Chancery court.  While the Delaware plaintiffs spent the next three years litigating a demand for access to the company’s books and records under 8 Del. C. § 220, the Arkansas plaintiffs pressed forward without such materials.  The Arkansas complaint was ultimately dismissed with prejudice for failure to plead sufficient detail to establish demand futility.
    The Delaware action has now been dismissed for failure to adequately allege demand futility because the court found that the Arkansas ruling on the issue prevented the Delaware plaintiffs from re-litigating the matter, notwithstanding that the Delaware complaint contained more robust factual allegations.  In so holding, the court considered several complicated questions related to the doctrine of issue preclusion, which prevents a party (and those in privity with it) from relitigating an issue already decided in another forum. 

    To apply the doctrine to the Wal-Mart action, the court first had to determine whether two different stockholder plaintiffs asserting derivative claims on behalf of the same corporation are in privity under Arkansas law.  Observing that the “vast majority” of other jurisdictions hold that the corporation is the real party in interest in both the first derivative action and the subsequent suit, Vice Chancellor Bouchard ruled that Arkansas courts would reach the same conclusion.  In so ruling, he noted that the Delaware Court of Chancery had itself once reached a different outcome under Delaware law.  See La. Mun. Police Emps.’ Ret. Sys. v. Pyott, 46 A.3d 313, 334 (Del. Ch. 2012) (holding that a stockholder asserting derivative claims does not represent the corporation until after demand futility is established), rev’d on other grounds, 74 A.3d 612 (Del. 2013).  However, VC Bouchard concluded that an Arkansas court would not apply Pyott’s reasoning because it conflicts with both the weight of authority from other jurisdictions and prior statements of the Arkansas Supreme Court.

    Having concluded that Wal-Mart was the true party-in-interest in both the Arkansas and Delaware actions, the Court next evaluated whether Wal-Mart’s interests had been adequately represented in the Arkansas case, such that binding Wal-Mart to the Arkansas judgment would not run afoul of Constitutional due process.  The Delaware plaintiffs claimed that their Arkansas counterparts were “grossly deficient” in representing Wal-Mart’s interest because they failed to obtain the corporation’s books and records before filing their claims.  The court rejected this argument, concluding that to hold otherwise would create the presumption that any stockholder of a Delaware corporation who did not first pursue a Section 220 demand was an inadequate representative.  The court deemed such a presumption untenable and instead examined the substance of the Arkansas plaintiffs’ decision to proceed without the corporate books and records.  The court found that while that approach fell “into the category of an imperfect legal strategy,” it did “not rise to the level of litigation management that was so grossly deficient as to render [the Arkansas plaintiffs] inadequate representatives.” 

    In conjunction with this ruling, the court declined to consider whether the documents that the Delaware plaintiffs obtained in their Section 220 action might have established demand futility.  The parties claimed that the value of that evidence should be considered in assessing the adequacy of the Arkansas plaintiff’s representation, but the court found it relevant only to the question of futility itself.  Because that issue had already been decided by the Arkansas court, the Delaware court refused to assess the Section 220 evidence and dismissed the case for failure to plead demand futility.

    The Delaware plaintiffs are expected to appeal the ruling.
    CATEGORY: Fiduciary Duties