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By Michael Greene
April 1 — A federal judge March 31 dismissed a derivative lawsuit alleging that Wal-Mart Stores Inc. executives breached their fiduciary duties by misleading investors and covering up possible FCPA violations at its subsidiary in Mexico.
Applying Delaware law, Judge Susan O. Hickey held that the plaintiff stockholders had not established that a pre-suit demand on Wal-Mart's directors to take action would be futile because they failed to plead that a majority of the board knew about or consciously ignored the alleged wrongful conduct.
“Plaintiffs have failed to plead with particularity that at least eight Director Defendants face a substantial likelihood of personal liability so that their ability to consider a demand impartially would be compromised,” she wrote.
In a statement e-mailed to Bloomberg BNA, Randy Hargrove, a Wal-Mart spokesman said, “We are pleased with the decision. We have said all along that the Walmart Board of Directors has the appropriate authority to conduct an investigation into the matters alleged in the complaint.”
Commenting on the impact of the case, Mike Koehler, a professor at the Southern Illinois University School of Law, wrote on the FCPA Professor blog: “Those who predicted that the Wal-Mart derivative actions would set a new standard for director liability were once again proven wrong”
The possible FCPA violations also lie at the center of an ongoing, contentious books and records action in the Delaware Chancery Court. The plaintiff in that case has warned that the Arkansas court's decision could collaterally estop the underlying Delaware derivative lawsuit. Also March 31, the judge presiding over the §220 action notified the parties that he would hear oral arguments regarding a pending contempt motion against Wal-Mart May 7.
Hickey found that the plaintiffs failed to establish a reason to doubt that at least 10 of the defendant directors could have properly exercised independent and disinterested business judgment in responding to a demand to bring claims that the defendants breached their fiduciary duties by permitting directors and officers to violate foreign and federal laws.
In doing so, she rejected the plaintiffs' allegation that a reasonable doubt of disinterestedness existed because a majority of the directors faced a “substantial likelihood” of personal liability by either actively participating or acquiescing to the alleged wrongful conduct.
Because Wal-Mart's charter contained an exculpation provision that immunized its directors from liability to the fullest extent available under Delaware law, Hickey determined that the plaintiffs were required to plead particularized facts that demonstrated that the directors had actual or constructive knowledge that their conduct was improper.
“Nothing in the Complaint suggests any particularized basis to infer that a majority of the Board had actual or constructive knowledge of the alleged misconduct, let alone that they acted improperly with scienter,” she wrote.
As to five of the defendant directors that were on the board during the alleged misconduct, Hickey refused to impute knowledge of wrongdoing based on “group-wide conclusory allegations.”
She additionally found that the plaintiff failed to offer any reason why five other directors, who joined the board in recent years, would face a substantial likelihood of liability.
Hickey also rejected the plaintiffs' allegation that a majority of the defendants faced liability for allowing Wal-Mart to file false proxy statements.
Like the plaintiffs' other claims, the court found that they were based on impermissible and unsupported inferences that imputed knowledge on the directors.
“[T]he Complaint does not contain specific factual allegations that reasonably suggest that a majority of the Director Defendants were involved in the preparation or approval of the proxy statements,” the court wrote. “There are no allegations explaining any process by which the Board actively or purposefully made a decision to omit the allegedly missing information.”
While the Arkansas derivative litigation has been ongoing, the plaintiff in the fiercely contested Delaware General Corporation Law §220 books and records action in the chancery court has warned of a scenario in which the Arkansas court could render a judgment that would be binding on the underlying derivative lawsuit in Delaware.
Plaintiff's counsel, Stuart Grant, co-founder and managing director of Grant & Eisenhofer, P.A., did not immediately respond to a request for comment about the Arkansas ruling.
The plaintiff has filed a contempt motion against Wal-Mart for allegedly failing to comply with a production order requiring the retailer to turn over internal documents related to what directors may have known about the bribery claims.
Recently, Wal-Mart sent a letter to the chancery court asserting that it has provided the plaintiff with all the responsive documents that were inadvertently omitted from its earlier production. Chancellor Andre G. Bouchard has scheduled oral argument about the contempt motion for May 7.
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The opinion is available at http://www.bloomberglaw.com/public/document/Cottrell_v_Duke_et_al_Docket_No_412cv04041_WD_Ark_Apr_25_2012_Cou.
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