On January 25, 2018, the Supreme Court of Delaware ruled that the Court of Chancery’s dismissal on issue preclusion grounds of the derivative claims of stockholder plaintiffs against the directors of Wal-Mart Stores, Inc. (“Wal-Mart”)—after a parallel derivative suit in federal court was dismissed for failure to allege demand futility—did not violate plaintiffs’ due process rights. In re Wal-Mart Stores Inc. Del. Deriv. Litig., C.A. No. 7455-CB (Del. Jan. 25, 2018). In affirming the dismissal, the Delaware Supreme Court declined to adopt the recommendation of the Delaware Court of Chancery to adopt a rule refusing to give preclusive effect to other courts’ decisions on demand futility on federal due process grounds.
As discussed in our post regarding the Court of Chancery’s initial decision on issue preclusion in this case, plaintiffs alleged that the Wal-Mart directors breached their fiduciary duties in connection with an alleged bribery scheme at a Mexican subsidiary. Chancellor Bouchard’s original order of dismissal found that Delaware plaintiffs were barred under the doctrine of issue preclusion (or collateral estoppel) from relitigating the issue of demand futility, which the federal court in the District of Arkansas found was inadequately pleaded when it dismissed a derivative suit asserting substantively similar claims. In re Wal-Mart Stores Inc. Del. Deriv. Litig., 2016 WL 2908344 (Del. Ch. May 13, 2016). On appeal from that Court of Chancery decision, the Delaware Supreme Court remanded the case for further consideration of whether the application of issue preclusion violated due process in this context. On remand in a supplemental opinion (as discussed in our subsequent post), Chancellor Bouchard found that—under the present state of the law—due process rights were not violated, but advocated the adoption of a rule providing that a Rule 23.1 dismissal does not have preclusive effect in order to “better protect derivative plaintiffs’ Due Process rights.” In re Wal-Mart Stores Inc. Del. Deriv. Litig., 167 A.3d 513 (Del. Ch. 2017).
The Delaware Supreme Court declined to adopt the new rule recommended by Chancellor Bouchard. Instead, relying in part on federal appellate case law, the Court determined that the “Due Process rights of subsequent derivative plaintiffs are protected, and dismissal based on issue preclusion is appropriate, when their interests were aligned with and were adequately represented by the prior plaintiffs,” notwithstanding that the prior case was dismissed for failure to plead demand futility.
Accordingly, the Delaware Supreme Court found no violation of due process and upheld the dismissal of the subsequent derivative claims. The Court explained that the required privity among parties to the federal court and Delaware actions existed because “the corporation is always the sole owner of the claims” and the derivative plaintiffs “share an identity of interest in seeking to prosecute claims by and in the right of the same real party in interest—i.e., as representatives of—the corporation.” The Court also found that the federal plaintiffs were adequate representatives because there was no misalignment of interests and no demonstration that the quality of their representation was grossly deficient. Notably, the Court also determined that the federal plaintiffs’ decision to forgo a Section 220 demand for books and records may have been a “tactical error,” but did not “rise to the level of constitutional inadequacy.”