Del. Supreme Court Eyes Section 220 Scope In Lawsuit About Wal-Mart Bribery

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By Che Odom  

During oral arguments July 10 before the Delaware Supreme Court, an attorney for Wal-Mart Stores Inc. said the Delaware Court of Chancery failed to apply the correct standard when it ordered the company to turn over thousands of documents to a shareholder investigating possible wrongdoing by directors and officers related to accusations of bribery in Mexico.

The shareholder, on the other hand, said the lower court used the discretion given to it by Delaware General Corporation Law §220 in ordering Wal-Mart to provide the documents, and it only erred by not including more documents.

“The court below felt strongly that there was something wrong here with Wal-Mart's conduct,” the plaintiff's attorney Stuart M. Grant, co-founder and managing director of Grant & Eisenhofer PA, Wilmington, Del., told the five Supreme Court justices.

The Delaware Supreme Court is considering an appeal brought by Wal-Mart and a cross-appeal by the Indiana Electrical Workers Pension Trust Fund IBEW of a May 20, 2013 chancery court decision. In an oral opinion, then-Chancellor Leo Strine, now chief justice of the Supreme Court, ordered Wal-Mart to hand over certain internal files that concerned what its directors knew about claims that executives paid bribes to facilitate Mexican real estate deals, in violation of the Foreign Corrupt Practices Act.

Strine's decision concerned a § 220 books-and-records complaint filed by the pension fund (Ind. Elec. Workers Pension Trust Fund IBEW v. Wal-Mart Stores, Inc.,Del. Ch, No. 7779-CS, 5/20/2013), but the company faces at least eight similar shareholder lawsuits. Complaints filed by pension funds from two other states have been consolidated into the IBEW case.

Strine recused himself from the instant matter.

Scope of Order Criticized

Mark Perry, the attorney arguing on Wal-Mart's behalf, told the justices that the chancery court erred by not limiting the scope of its § 220 order to documents that are “necessary and essential” to prove that board members breached their duties to shareholders.

Instead, the chancery court order cast too wide a net by including documents related to any possible officer wrongdoing, Perry said.

The order lacked the “precision” required by Delaware Supreme Court case law, said Perry, a litigation partner in the Washington office of Gibson, Dunn & Crutcher LLP.

The purpose of the § 220 complaint was to address “demand futility,” he said.

Other Proper Purposes

However, Justice Henry duPont Ridgely said the shareholder plaintiff identified three “proper purposes” for filing the complaint and asked Perry if there could be more than one proper purpose.

Perry said that in a “demand futility” case, the “only question at this stage is what directors knew and when did they know it.”

When it was Grant's turn to talk, Justice Randy J. Holland asked him about the purpose of the § 220 complaint.

“You are trying to ascertain if there are red flags that they board should have known” or did know about “but did nothing about?” Holland said.

Grant agreed, adding that communications and documents relating to internal auditors, audit committee member, internal investigators and former Wal-Mart compliance officer Maritza Munich are also needed to make that determination.

‘Necessary and Essential' Documents

These are the sorts of documents Strine did not include in his order to Wal-Mart, Grant said. The company claimed conversion of those documents, which are now in Grant's possession. Some of the files, however, are already part of the public domain, published by the New York Times and posted online by two members of Congress, Grant said.

Strine ordered that the documents, except for those already shown to the public, be returned to Wal-Mart without hearing any evidence and within any discussion about them in pleadings, Grant said.

Justice Carolyn Berger emphasized that IBEW should be only entitled to documents that meet the “necessary and essential” standard. Berger expressed concern that what the IBEW wanted goes too far for the § 220 stage.

“The description of what you would get sounds a lot like what you would get in normal discovery,” she said.

The pension fund sued to force Wal-Mart to hand over records about internal probes of the bribery allegations and contends that the company had been “woefully deficient” in producing documents. In contrast, Wal-Mart said it has reviewed more than 160,000 documents, and searched computer servers and executives' personal files, according to a Mar. 6, 2013 court filing.

According to Bloomberg News, Wal-Mart said in March it had spent $157 million on probes of bribery allegations in its international operations and expects to rack up more costs as the investigations continue. The company has said it is investigating possible FCPA violations in Brazil, India and China, in addition to Mexico.

Was CEO Alerted?

Among the documents in dispute are those that concern Munich, a former in-house counsel and compliance officer for Wal-Mart.

In 2005, Munich alerted Wal-Mart's then-CEO Michael Duke of bribes being paid to obtain permits for a store in Mexico, according to a January 2013 letter from Democratic representatives Henry Waxman (D-Calif.) and Elijah Cummings (D-Md.).

Munich has since resigned from Wal-Mart. Duke was succeeded as CEO by Doug McMillon in November 2013.

Both U.S. and Mexican prosecutors said last year they are investigating the bribery allegations.

Time to Freshen Up Caremark

The IBEW litigation, as well as lawsuits brought by other Wal-Mart shareholders over the bribery accusations, presents the Delaware Court of Chancery an opportunity to “reexamine the well-established Caremark standard” governing directors' responsibilities to oversee and monitor corporate compliance programs, said Michael Volkov, CEO of The Volkov Law Group LLC and a regular speaker on compliance, internal investigations and enforcement matters.

A Caremark claim seeks to hold directors of a Delaware corporation liable for either knowingly causing the corporation to violate the law or for failing to implement a system for corporate compliance and monitoring of a company's compliance program (In re Caremark Int'l Inc. Derivative Litig., 698 A.2d 959, 970–71 (Del. Ch. 1996)).

Caremark is “a standard that does not impose any specific requirements with regard to the nature and quality of the oversight process,” Volkov, a former federal prosecutor who now focuses his practice on white-collar defense, wrote in a July 9 e-mail to Bloomberg BNA.

“The Wal-Mart case presents a set of circumstances where the court could find that Wal-Mart failed to meet the threshold standard or, more importantly, failed to exercise proper oversight and monitoring of the compliance program in accordance with a more stringent standard reflecting an up-to-date recognition of the change in corporate governance requirements and expectations since the Caremark decision,” he added.

‘Heightened' Board Sensitivity

Stuart H. Deming, founder of Deming PLLC, agreed that the case could have sweeping ramifications for corporate compliance programs.

“A decision enforcing the rights of shareholders in this context should certainly heighten the sensitivity of boards of directors to their obligations under Caremark,” Deming, who represents foreign and domestic companies in a range of compliance matters, told Bloomberg BNA July 9.

“Interestingly, even if an opinion is issued that does not enforce the rights of shareholders in the context of the circumstance associated with Wal-Mart, the mere fact that the issue has been raised is likely, at least in the short run, to have an impact in heightening the sensitivity of boards of directors to compliance obligations,” he added.

Compliance Program Changes

Michael Scher, a contributing editor of the FCPA Blog who has more than 30 years of experience as a senior compliance officer and attorney, considers the revelations about Munich's attempt to alert officers to be particularly interesting.

Had Wal-Mart's audit committee invited Munich to give her account of the facts in 2005, the board's “final decision might have been different,” he told Bloomberg BNA July 9.

“The world has changed and now at Wal-Mart and many companies, the chief ethics and compliance officer meets directly with the board—which is a very good, new thing,” Scher said. “But it leaves a question for the Courts.”

That question, according to Scher, is what are boards obligated to do with information received directly from the chief ethics and compliance officer?

“Can the directors say, ‘Thank you for that information,' and close the file or is something more required by the Courts?” he said.

To contact the reporter on this story: Che Odom in Washington at codom@bna.com

To contact the editor responsible for this story: Ryan Tuck at rtuck@bna.com