(Reuters) - The justices of Delaware’s Supreme Court didn’t ask a whole lot of questions during oral arguments Wednesday in their second consideration of a closely watched shareholder derivative suit against former board members of Wal-Mart – but the few posed by Justices Karen Valihura and Gary Traynor hinted that the court may be looking at a way to decide the case without upending longtime Delaware precedent on successive derivative suits by different shareholders.
The issue before the Supreme Court is whether shareholders have a due process right to bring a derivative suit in Delaware even if a parallel case by other shareholders has been dismissed in a different jurisdiction. To summarize ruthlessly the arguments on both sides: Wal-Mart’s lawyers at Gibson Dunn & Crutcher contend that once a judge has tossed a derivative suit in which shareholders received adequate representation, that dismissal precludes parallel claims in other courts. Delaware plaintiffs, represented by Grant & Eisenhofer, counter that because of the nature of derivative suits, in which shareholders must establish their right to stand in the shoes of the corporation to sue board members for breach of duty, shareholders in one jurisdiction cannot be bound by a ruling in a different jurisdiction in which they were not represented.
It’s easier to understand the theoretical issue, as well as the significance of the Supreme Court justices’ questions, if you reacquaint yourself with the long and unusual history of the Wal-Mart derivative litigation in Delaware. (This will be as streamlined a recap as I can manage!)
After the New York Times exposed Wal-Mart’s handling of bribery allegations at its Mexican subsidiary, Grant & Eisenhofer, following Delaware Chancery Court’s directive to investigate before filing shareholder derivative complaints, sought to obtain Wal-Mart’s corporate books and records. That turned into an intensely-fought, three-year litigation.
While it was underway, a different shareholder firm brought a derivative suit in federal court in Arkansas. Stuart Grant of Grant & Eisenhofer urged the Arkansas court to defer to the Delaware case, but did not formally intervene in the Arkansas litigation. The Arkansas derivative suit was ultimately dismissed because shareholders failed to show the futility of demanding Wal-Mart sue its board directly.
Chancellor Andre Bouchard subsequently tossed the Delaware case (2016 WL 2908344), finding that under Delaware Supreme Court precedent from 2013’s Pyott v. Louisiana Municipal Police Employees’ Retirement System (74 A.3d 612), the Grant & Eisenhofer suit was precluded by the previous dismissal of the Arkansas case. The Delaware Supreme Court, in its first consideration of the case revived the suit (2017 WL 239364), asking Chancellor Bouchard to reconsider the dismissal in light of the due process rights of the Delaware shareholders.
Last summer, Chancellor Bouchard issued a radical response to the Supreme Court’s remand order (167 A.3d 513). The chancellor, as I’ve written, proposed upending Delaware law to hold shareholder derivative suits in Chancery Court are not precluded by the dismissal of parallel suits in other courts. The key point, he said, is that shareholders in derivative actions can be compared to potential class members in class actions. Just as class members’ interests aren’t actually represented by lead plaintiffs until the class is certified, he reasoned, shareholders are not representatives of all investors until they’ve been granted the right to sue on behalf of the corporation. Bouchard said his proposed scheme protected Chancery Court’s interest in discouraging fast, unfounded complaints and instead encouraged shareholders to investigate before filing.
I predicted that businesses were not going to like Bouchard’s proposed new rule. They didn’t. Both the Business Roundtable, represented by Wachtell Lipton Rose & Katz, and the U.S. Chamber of Commerce, with counsel from Sullivan & Cromwell, filed amicus briefs at the Delaware Supreme Court, arguing that if the justices adopted Chancellor Bouchard’s rule, defendants would never be able to stamp out serial derivative suits by successive shareholders.
That was the first question the justices asked Wednesday, several minutes into Stuart Grant’s presentation. Grant told Justice Valihura the argument was “pure malarkey,” because, among other things, plaintiffs’ firms won’t waste their money relitigating loser cases. The Wal-Mart litigation was exceptional, Grant said, because the Delaware plaintiffs, thanks to their diligent pursuit of Wal-Mart’s books and records, were able to file a stronger complaint than the suit dismissed in Arkansas.
Justice Valihura said Grant’s argument sounded like one he should have made before the judge in Arkansas – the first of several questions she and Justice Traynor — the only two judges who asked questions at Wednesday’s argument – posed about Grant’s strategy in Arkansas. The plaintiffs lawyer insisted that he could not have formally intervened in the Arkansas litigation because he was still fighting Wal-Mart in Delaware to obtain corporate books and records. Had he drafted a premature complaint in order to move to intervene in Arkansas, he said, he would not have been able to show the results of his investigation.
During Wal-Mart’s presentation by Theodore Boutrous of Gibson Dunn, Justice Valihura asked if Grant’s explanation held up. Boutrous said Grant could have filed a statement of interest in Arkansas if he wasn’t prepared to file a complaint and a motion to intervene. Grant was “simply incorrect” that he could not have done more to protect his clients’ interests in the Arkansas litigation, Boutrous said.
Courts are already supposed to consider the adequacy of shareholders (and their lawyers) seeking to stand in the shoes of the corporation with derivative claims. The adequacy inquiry, Boutrous said, is the right way for judges to enforce Delaware’s policy of encouraging pre-suit investigation.
During Grant’s rebuttal, Justice Traynor picked up the theme. “You never impressed me as particularly bashful,” he told Grant (prompting titters in the courtroom). So why, the justice asked, didn’t Grant raise a stink in Arkansas? “I still didn’t have the documents,” Grant responded.
Chancellor Bouchard had implied that he could not determine whether the due process rights of Grant’s clients were violated until the Supreme Court decided whether, as he proposed, derivative plaintiffs don’t represent the interests of all shareholders unless they are authorized to sue on behalf of the corporation – in other words, if they survive the dismissal motion that Wal-Mart shareholders in Arkansas lost.
I’m reading a lot into a few questions from Justices Valihura and Traynor, but it’s possible the Supreme Court will decline Chancellor Bouchard’s invitation to adopt a new due process scheme and instead reach the much narrower conclusion that in this particular case, Grant’s clients lost the right to claim due process violations in Delaware because they failed to raise the issue in Arkansas.
I emailed Grant to ask about that possibility. “Left my crystal ball at home,” he said in an email. “Was glad they challenged me and hope I brought them along.”