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By Yin Wilczek
The U.S. Chamber of Commerce is among business groups weighing in on a Delaware Supreme Court case addressing whether Wal-Mart Stores Inc. shareholders can sue board members over an alleged bribery scheme at the company’s Mexican subsidiary.
How the state high court proceeds on the shareholders’ appeal could limit the managerial discretion of corporate boards, and increase derivative litigation against companies in multiple jurisdictions, the groups said in Sept. 7 filings ( Calif. State Teachers’ Ret. Sys. v. Alvarez, Del., No. 295,2016, filings 9/7/17 ).
Derivative lawsuits are actions in which shareholders sue a third party—usually a corporate insider—on the company’s behalf. Under Delaware law, a pre-suit demand on the board to take legal action or a demonstration of why such a demand would be futile is a threshold requirement for a derivative action.
The state’s chancery court dismissed the shareholders’ case in May 2016 after finding that an Arkansas federal court dismissed similar claims brought by another group of shareholders for failure to show demand futility.
In July, the chancery court issued a supplemental decision in which it concluded that its May 2016 ruling hadn’t violated the Delaware plaintiffs’ due process rights. However, it also recommended that the Delaware Supreme Court depart from current law and adopt a new bright-line rule on when a judgment may bar subsequent derivative litigation.
The Chamber, the world’s largest business federation, the Retail Litigation Center Inc. (RLC)—an organization that litigates on issues impacting the retail industry—and the Business Roundtable urged the Delaware Supreme Court to reject the bright-line rule.
By “denying preclusive effect to a finding that demand futility was inadequately pleaded, Delaware courts would give stockholder plaintiffs a nearly unlimited opportunity to litigate the issue of demand futility,” the Chamber argued in a joint filing with the RLC. “This would increase the already high costs corporations bear to defend against duplicative derivative litigations, and would weaken the ability of boards to manage corporate affairs.”
The Business Roundtable, in its submission, told the Delaware Supreme Court that it would be “ill-advised” to depart from the current legal standard and adopt the chancery court’s recommendation.
“The current state of the law protects corporations and boards of directors from the need to relitigate successively whether the board is entitled to its usual prerogative of controlling the litigation of corporate causes of action, viz., the essence of the demand futility issue,” the group comprising chief executive officers said. “Once the board’s right has been confirmed by a court of competent jurisdiction, it would be wasteful to require relitigation of the same issue.”
The Delaware Supreme Court Sept. 7 allowed the business groups to file friend-of-the-court briefs in the case.
Wal-Mart is facing several investor lawsuits that followed news reports of a U.S. government probe into whether it bribed foreign officials. The company has been in settlement talks with the Justice Department and Securities and Exchange Commission to resolve the agencies’ investigations, according to Bloomberg News.
The Chamber, RLC and Business Roundtable are represented by Wilmington, Del.-based attorneys from Young Conaway Stargatt & Taylor LLP.
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