In re Wal-Mart Stores Inc. Delaware Derivative Litigation, C.A. No. 7455 (Del. Ch. May 13, 2016) (Bouchard, C.)
In this memorandum opinion, the Court of Chancery, applying Arkansas law, dismissed derivative claims on the basis of issue preclusion, finding that the plaintiffs were precluded from arguing that demand on the corporation’s board of directors would have been futile. Specifically, the Court held that the Delaware plaintiffs were barred from re-litigating the issue of demand futility in their derivative action because a federal court in Arkansas had already dismissed identical claims by other stockholders on the basis of failure to adequately allege demand futility.
In April 2012, following a New York Times article regarding an alleged bribery scheme at Wal-Mart de Mexico, fifteen derivative lawsuits were filed in Arkansas and Delaware by Wal-Mart Stores, Inc. (“Wal-Mart”) stockholders. The Delaware actions were consolidated, including a books-and-records action under Section 220 of the Delaware General Corporation Law. Following the books-and-records litigation, in May 2015, the Delaware plaintiffs filed an amended derivative complaint in the Court of Chancery. Meanwhile, in March 2015, a federal district court in Arkansas dismissed the derivative complaint there under Rule 23.1, concluding that the Arkansas plaintiffs failed to adequately allege demand futility. Defendants then moved to dismiss the Delaware action, arguing that issue preclusion prevented the Delaware plaintiffs from re-litigating demand futility.
The Court of Chancery, relying on the Delaware Supreme Court’s decision in Pyott v. Louisiana Municipal Police Employees’ Retirement System, 74 A.3d 612 (Del. 2013), concluded that the preclusion law of Arkansas would apply. The Court next determined whether, under Arkansas law, the elements of issue preclusion were satisfied: (1) the issue was the same as the issue in the Arkansas litigation; (2) the issue was actually litigated in the Arkansas litigation; (3) the parties were in privity, and (4) representation was adequate.
First, the Court concluded that the core demand futility issue in both the Delaware and Arkansas complaints was the same. Second, the Court rejected plaintiffs’ argument that the issue was not actually litigated because the Arkansas court applied Rales instead of Aronson, because both tests functionally covered the same ground. Third, in examining whether privity exists, the Court noted that issue preclusion in the context of stockholder derivative suits was never addressed by Arkansas courts. Specifically, Arkansas courts had never addressed the precise issue of “whether two different stockholder plaintiffs asserting derivative claims on behalf of the same corporation in separate cases are in privity.” Applying the clear weight of authority from other jurisdictions to determine how a court in Arkansas would likely resolve that question, the Court of Chancery found that an Arkansas court would find privity in this situation. The Court noted that “[t]he common theme in the opinions where privity has been found is that the corporation is the real party in interest in both the first derivative action and the subsequent suit.” Thus, Wal-Mart was bound by the Arkansas decision in the subsequent Delaware litigation. The Court also examined Arkansas’ public policy and noted that “Arkansas courts have opined that the practical goal of preventing re-litigation by substantially identical parties trumps the need for precise identicality.”
Finally, the Court of Chancery determined whether an Arkansas court would find that a stockholder plaintiff who failed to pursue books and records before filing a derivative suit was an adequate representative of the corporation. The Court looked to the Restatement of Judgments to determine the adequacy of the representation of the Arkansas plaintiffs. Specifically, the Court examined whether the interests of the representative and the represented individual were aligned, and whether the representation was grossly deficient. Rejecting the Delaware plaintiffs’ argument that attorney’s fees for the Arkansas plaintiffs’ counsel created an adverse interest, the Court found that counsel’s preference to litigate in a specific jurisdiction did not make the Arkansas plaintiffs inadequate representatives. The Delaware plaintiffs further argued that the Arkansas plaintiffs “were grossly deficient because they failed to pursue books and records from Wal-Mart before pursuing their case.” The Court found that while such a strategy may be unwise, “an Arkansas court would not presume inadequacy from failing to pursue books and records but would conduct a case-specific inquiry of the issue with principles of due process in mind, and based on the particular circumstances of this case, would find the Arkansas plaintiffs to be adequate representatives.”
Thus, because the factors for issue preclusion under Arkansas law were met, the Court of Chancery held that the Arkansas federal court’s holding that demand was not futile precluded re-litigation of the issue in the Delaware action.