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By Yin Wilczek
Wal-Mart Stores Inc. shareholders Nov. 1 will try to convince the Delaware Supreme Court to revive claims that the company’s directors botched a probe into bribes allegedly paid to speed up construction of Mexican stores.
At issue is whether the shareholders should be allowed to sue the company even though shareholders in similar litigation against Wal-Mart were barred from doing so after a court in Arkansas concluded that they failed to satisfy a first-step requirement.
The Delaware Supreme Court Nov. 1 will hear the parties’ arguments. How it proceeds could limit boards’ decision-making ability and increase derivative litigation against companies in multiple jurisdictions, business representatives say ( Calif. State Teachers’ Ret. Sys. v. Alvarez, Del., No. 295,2016, oral argument 11/1/17 ).
Derivative lawsuits are actions in which shareholders sue a third party—usually a corporate insider—on the company’s behalf. Under Delaware law, shareholders must ask the board to take legal action or show why such a demand would be futile before they can bring a derivative action.
The Delaware 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 of this year, 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 its usual approach and adopt a new rule on when a judgment by another court may bar subsequent derivative litigation.
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 trying to resolve the Justice Department and Securities and Exchange Commission’s investigations, according to Bloomberg News.
In their appeal, the shareholders argued that the fate of the Arkansas case couldn’t bar their lawsuit until after the Arkansas plaintiffs had successfully crossed the demand-futility threshold. The chancery court, by ruling as it did, violated their constitutional rights, they said.
In September, the U.S. Chamber of Commerce, the Retail Litigation Center Inc. (RLC)—an organization that litigates on issues impacting the retail industry—and the Business Roundtable weighed in in support of Wal-Mart’s board. They urged the Delaware Supreme Court to reject the bright-line rule recommended by the chancery court.
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 Sept. 7 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 Council of Institutional Investors tried to submit a friend-of the-court brief in support of the shareholder plaintiffs, but the Delaware Supreme Court rejected it for being filed too late in the process.
The shareholder plaintiffs will be represented at the oral argument by Stuart M. Grant, Grant & Eisenhofer PA. The Wal-Mart defendants will be represented by Theodore J. Boutrous Jr., Gibson, Dunn & Crutcher LLP.
Also on Nov. 1, the Delaware Supreme Court will hear an appeal by former shareholders of Calistoga Pharmaceuticals Inc. They argue that the chancery court improperly stopped them from receiving a $50 million payment from Gilead Sciences Inc. by concluding in March that a post-merger milestone related to the development of a leukemia drug hadn’t been met ( S’holder Representative Servs. LLC v. Gilead Scis. Inc., Del., No. 162,2017, oral argument 11/1/17 ).
Gilead acquired Seattle-based biotechnology company Calistoga in 2011 for $375 million. Under the merger agreement, Gilead had to pay an additional $225 million to former Calistoga shareholders if Calistoga’s CAL-101 compound—now sold by Gilead under the name “Zydelig"—achieved three milestones.
The appeal centers on the chancery court’s reading of the word “indication” in the merger agreement.
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