What is a derivative suit
War looms between plaintiffs’ firms after suit vs. Walmart board is tossed
(Reuters) – When Delaware shareholder lawyer Stuart Grant of Grant & Eisenhofer gets mad, he says so.
A decision Tuesday by a federal judge in Texarkana, Arkansas, has left him enraged. The ruling, which tossed a derivative suit against Wal-Mart’s directors and officers for allegedly covering up bribes paid by the company’s Mexican subsidiary, has left the fate of Grant’s long-running Delaware investigation of Wal-Mart’s board in serious doubt. He blames Wal-Mart and its lawyers at Gibson Dunn & Crutcher for delaying his case so the company could litigate in Arkansas instead. But Grant also says the plaintiffs’ lawyers who brought the Arkansas derivative suit made a big mistake in their handling of the case. And if Delaware judges ultimately decide that the Arkansas dismissal precludes Grant from bringing Delaware claims against Wal-Mart’s board, he told me Tuesday, he may file a malpractice suit against the plaintiffs’ lawyers who litigated the Arkansas case. “If I were them, I’d be letting my malpractice carriers know,” Grant said.
That’s a pretty radical idea, not least because Grant would actually be suing on behalf of Wal-Mart. Remember, derivative suits are filed by shareholders standing in the shoes of the corporation itself to assert allegations against directors and officers. So any purported malpractice claim stemming from the Arkansas derivative litigation would actually belong to Wal-Mart, not to shareholders. I’m sure a derivative malpractice suit by one set of shareholders against lawyers for another set of shareholders acting on behalf of the corporation would raise all kinds of questions about standing and adequacy of representation.
But what about the merits? How did this litigation get to a point in which the future of Grant’s Delaware case depends on work by other plaintiffs’ lawyers in Arkansas?
That story begins in 2012, after the New York Times broke the news of Wal-Mart’s alleged coverup of bribes paid by the company’s Mexican subsidiary. The Times revelations were blood in the water for the shareholder bar. In addition to a securities fraud class action based on the company’s supposed misrepresentations to investors, shareholder lawyers initiated derivative litigation against Wal-Mart directors and officers in two different jurisdictions, Delaware, where Wal-Mart is incorporated, and Arkansas, where the company is headquartered.
Grant, who is one of the savviest plaintiffs’ lawyers in Delaware, recognized that judges in Delaware Chancery Court have come to look askance at derivative suits by shareholders that haven’t conducted a pre-suit investigation of corporate books and records. So instead of rushing to file a complaint against Wal-Mart, he made a demand to see the corporation’s books. That is supposed to be a relatively quick process, but Grant and Wal-Mart ended up in heated litigation over what Wal-Mart must produce to shareholders. Grant won a 2014 Delaware Supreme Court decision giving him access to a broad swath of documents, but Wal-Mart managed to narrow the scope of production in subsequent litigation before Chancellor Andre Bouchard .
Grant is now trying to have Wal-Mart and its lawyers sanctioned for misrepresenting how the documents were produced in certifications to the court. Bouchard is scheduled to hear Grant’s contempt motion in May. After nearly three years of fighting over the books and records he is entitled to see, Grant has still not actually filed a derivative suit against Wal-Mart’s board, though he told me Tuesday that his draft complaint is just about ready.
In Arkansas, meanwhile, plaintiffs’ firms led by Scott & Scott filed a derivative complaint in federal court that included, in addition to state-law breach of duty claims, additional claims under the federal Securities and Exchange Act. Scott & Scott didn’t move first to see Wal-Mart’s books and records, said lead partner Judy Scolnick. because there was no need: The public record already contained copious evidence to justify shareholders’ derivative claims.
Wal-Mart moved to stay the Arkansas case while the Delaware books-and-records action moved forward. The trial judge agreed to defer to Delaware, but in December 2013, the 8th U.S. District Court of Appeals ruled that the Arkansas derivative suit should proceed in federal court.
Both Grant and Scolnick say that their firms discussed how to deal with the situation, in which parallel derivative cases were moving forward in two separate jurisdictions. Those discussions do not appear to have been amicable. Grant, who represents pension funds
with a combined stake of nearly $1 billion in Wal-Mart shares, told me he invited Scott & Scott to drop the Arkansas suit and join the Delaware case. According to him, Scott & Scott said it wouldn’t do that unless he agreed to permit Scott & Scott to serve as lead counsel in Delaware. Grant refused.
Scolnick told me in an email that Scott & Scott asked Grant several times to join its Arkansas case, which, unlike a suit in Chancery Court, could be tried before a jury. “Mr. Grant refused to participate for no apparent reason other than to serve his own economic self-interest and sense of self-aggrandizement,” she wrote.
That’s the background to the decision Tuesday, in which U.S. District Judge Susan Hickey ruled that the derivative suit must be dismissed because Scott & Scott didn’t serve a demand letter on the Wal-Mart board and failed to establish that such a demand would have been futile. Scott & Scott’s Scolnick said the firm intends to appeal the decision and believes the 8th Circuit will reverse Judge Hickey on demand futility.
Wal-Mart lawyer Theodore Boutrous of Gibson Dunn sent me a very circumspect statement when I emailed to ask how the Arkansas ruling will impact the Delaware case: “The shareholder plaintiffs, represented by experienced counsel, had a full and fair opportunity to litigate the question of demand futility in Arkansas,” the statement said. “Judge Hickey correctly ruled that their allegations were insufficient.”
You can be dead sure, however, that Wal-Mart and Gibson Dunn will argue in Delaware that Judge Hickey’s ruling precludes any derivative action by Grant’s plaintiffs under the doctrine of collateral estoppel. They’ve got very strong precedent for that contention. In 2013, the Delaware Supreme Court considered a case with facts very similar to the ones in the Wal-Mart litigation. Parallel derivative suits were brought against Allergan in Delaware and federal court. The federal case was tossed, and Allergan moved to dismiss the Delaware case, arguing that the California decision disposed of it as well. Vice-Chancellor Travis Laster. blasting the plaintiffs’ firms in the California case for rushing to file without conducting an adequate pre-suit investigation, refused to dismiss the Delaware suit. But the Delaware Supreme Court reversed Laster in 2013, finding that the complaints in the Delaware and California cases were so similar that the two sets of plaintiffs – one in Delaware and the other in California – were in the same boat.
Wal-Mart lawyer Mark Perry of Gibson Dunn just happens to have argued and won that 2013 ruling for Allergan, which is why there is absolutely no doubt that Wal-Mart knows exactly how potent the Arkansas dismissal will be in Delaware.
But Grant told me there is a critical difference between the Allergan and Wal-Mart facts: Because of the material he has obtained in his long quest for Wal-Mart documents, he said, his complaint will be much stronger than the complaint in the dismissed Arkansas suit. He said, in fact, that the allegations in his yet-to-be-filed complaint will show why Scott & Scott and the other plaintiffs’ firms in the Arkansas derivative litigation ill-served shareholders by moving forward with a case before conducting a books and records investigation.
“This is a perfect example of what happens when you have a small shareholder running to a foreign jurisdiction filing a derivative suit without investigation” he said. “I don’t believe this is the way Delaware wants things to be.”
Grant says he will consider a derivative malpractice case against the plaintiffs’ firms in the Arkansas case only if his Delaware suit is barred as a result of the Arkansas dismissal. Scolnick of Scott & Scott said in an email that such case would be utterly unfounded. “While we were working our case in the Western District of Arkansas, Mr. Grant has been tilting at windmills in Delaware,” she wrote. “Now, in an apparent temper tantrum, Mr. Grant has resorted to Monday morning quarterbacking, name-calling and lobbing incendiary and frivolous charges at our firm … Mr. Grant’s resort to name calling and threats is unfortunate, and only empowers the wrongdoers that we should be joined in seeking to hold accountable. We have an important job to do in pressing our appeal before the Eighth Circuit and should not have to be distracted by the brouhaha created by Mr. Grant’s petulance.”
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