The Delaware Supreme Court recently ordered Wal-Mart Stores, Inc. (“Wal-Mart”) to provide a stockholder with documents relating to its initial internal investigation into allegations of bribery of foreign officials at its Mexican operations. The far-reaching order in Wal-Mart Stores, Inc. v. Indiana Electrical Workers Pension Trust Fund IBEW 1 not only found that the conduct of Wal-Mart’s internal investigation was fair game for a record request by shareholders, but also that privileged documents and work product from the investigation should be produced. Shareholder plaintiffs and their counsel are sure to try to leverage the Wal-Mart ruling into a broader opportunity to obtain documents from other internal investigations.
A key to the Wal-Mart ruling was the Supreme Court’s endorsement of a Delaware Chancery Court’s finding that there was a “colorable basis” for believing that “part of the wrongdoing was in the way the investigation itself was conducted.”2 The Supreme Court concluded that investigating such potential wrongdoing was not only a “proper purpose” for making a demand for documents under Section 220 of the Delaware General Corporation Law (“DGCL”),3 but also that it (i) made the production of investigative records “necessary and essential” to fulfilling that proper purpose; (ii) constituted
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1. No. 614, 2013, 2014 WL 3638848 (Del. July 23, 2014) (“Wal-Mart”).
2. Wal-Mart, 2014 WL 3638848 at *12.
3. Del. Code Ann. Tit. 8, § 220.
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FCPA Update n Vol. 6, No. 1
Documents Now at Risk: The Wal-Mart Ruling n Continued from page 1
“good cause” for the disclosure of privileged documents under the standard set forth in the Fifth Circuit’s seminal decision in Garner v. Wolfinbarger;4 and (iii) provided a basis for ordering the production of documents otherwise protected by the work product doctrine.
In the wake of Wal-Mart, stockholders in future cases are likely to raise questions about
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the ways in which investigations have been conducted to see whether those questions also provide a “colorable basis” for seeking a broad range of investigative records. Companies that conduct investigations, therefore, will want to structure the investigation from the outset in a way that limits the ability of shareholders to assert that it was done improperly or otherwise may give rise to any legitimate shareholder concern. This, in turn, will place a premium on early decisions about who should conduct the review, who should supervise the review and the scope of the inquiry. Those decisions, which are generally made before any review has been conducted and based upon limited information, are sure to get close scrutiny from stockholders and should be undertaken with the utmost deliberation and care.
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- The New York Times Article about Wal-Mart’s Early Investigation of Potential Bribery and the Resulting Stockholder Inspection Demand
On April 21, 2012, The New York Times published an article raising questions about the way in which Wal-Mart had conducted a 2005 and 2006 investigation of bribery allegations at Wal-Mart’s Mexican subsidiary, WalMex.5 According to The New York Times article, when allegations of potential bribery were raised by a former Wal-Mart employee in Mexico, Wal-Mart dispatched an internal team of investigators from corporate headquarters that found $24 million in suspicious payments and evidence that the payments were known to senior executives at WalMex. The New York Times claimed that the initial report concluded that “[t]here is reasonable suspicion to believe that Mexican and USA laws have been violated.” The authors of the initial report, The New York Times reported, had recommended a deeper investigation using private investigators.
That recommendation was never followed, according to The New York Times article. Instead, a further review was undertaken by the General Counsel of WalMex – a person The New York Times article described as “evasive” and “hostil[e]” towards the initial investigators of the issues. Several weeks after initiating the follow-up investigation, the General Counsel issued a six-page report finding “no evidence or clear indication of bribes paid to Mexican government authorities.” After a preliminary draft of the report was
presented to executives at Wal-Mart headquarters, The New York Times said, the General
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Counsel was asked to put his report into final form, and the case was closed.
On June 6, 2012, less than two months after The New York Times article, the Indiana Electrical Workers Pension Trust Fund IBEW (“IBEW”), a Wal-Mart stockholder, sent
a letter to Wal-Mart seeking to inspect documents under Section 220 of the DGCL
(the “Demand”). The Demand cited three purposes, “to investigate: (1) mismanagement in connection with the WalMex [a]llegations [described in The New York Times article];
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4. 430 F.2d 1093 (5th Cir. 1970).
- David Barstow, “Wal-Mart Hushed Up a Vast Mexican Bribery Case,” The New York Times (Apr. 21, 2012), http://www.nytimes.com/2012/04/22/business/at-wal-mart-in-mexico-a-bribe-inquiry-silenced.html.
Documents Now at Risk: The Wal-Mart Ruling n Continued from page 2
- the possibility of breaches of fiduciary duty by Wal-Mart or WalMex executives in connection with bribery allegations; and
- whether a pre-suit demand on the board would be futile as part of a derivative suit.”6 In response, Wal-Mart produced 3,000
documents covering FCPA compliance policies, Board and Audit Committee materials related to the WalMex allegations and Board and Audit Committee materials related to FCPA compliance policies.7 IBEW responded on August 13, 2012 by
filing a complaint in the Delaware Chancery Court seeking a more extensive production in response to the demand.8
II. Section 220 Provides Stockholders the Opportunity to Inspect Corporate Books and Records, Including, in Some Cases, Privileged Documents9
Under Delaware’s Section 220, a stockholder is permitted, upon written demand under oath, to “inspect for any proper purpose” the “books and records” of a company.10 Section 220 codifies and expands on the well-established common law right of stockholders to inspect the books and records of the corporation.
That right arises from the proposition that as part owner, the stockholder is entitled to know how his or her agents are managing
the business.11 Section 220 provides stockholders with a means to access documents of the corporation that are necessary to make informed decisions and to protect their interests as stockholders.
“A stockholder’s right to access documents, however, is not unlimited. The interests of the stockholders must be carefully balanced against the legitimate interests
of the corporation. Section 220 is not an invitation to a ‘fishing expedition’; nor will inspection be granted for speculative purposes or to satisfy ‘idle curiosity.’”
Delaware courts recognize the statutory inspection right as an important information- gathering tool and encourage potential plaintiffs to use the “tools at hand” before pursuing litigation.12 A stockholder’s right to
access documents, however, is not unlimited. The interests of the stockholders must be carefully balanced against the legitimate interests of the corporation. Section 220 is not an invitation to a “fishing expedition”; nor will inspection be granted for speculative purposes or to satisfy “idle curiosity.”13
To properly exercise a Section 220 demand for inspection, the stockholder must (i) comply with the procedural requirements of the statute, (ii) prove
a proper purpose for the inspection, and
(iii) narrowly tailor the request to only those documents that are essential to accomplishing the asserted purpose.
A. Inspection Normally Limited to a “Proper Purpose”
The propriety of a stockholder’s stated purpose is “paramount” to determining whether a stockholder is entitled to inspection.14 Section 220 defines a proper purpose as one that is “reasonably related to such person’s interest as a stockholder.”15 Delaware case law has recognized that
a stockholder has a proper purpose to investigate corporate wrongdoing including waste, mismanagement, self-dealing or other breaches of fiduciary duty.16 This is the most commonly alleged proper purpose under Section 220. Where the stockholder’s stated purpose is to investigate wrongdoing,
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6. Wal-Mart, 2014 WL 3638848 at *2.
- Id. at *3.
- Those already familiar with the requirements of Section 220 and Garner v. Wolfinbarger may wish to go directly to Section III, below.
- Del. Code Ann. Tit. 8, § 220(b).
11. Guthrie v. Hawkins, 199 U.S. 148, 153-55 (1905); Saito v. McKesson HBOC, Inc., 806 A.2d 113, 116 (Del. 2002).
- See Saito, 806 A.2d at 115; Sec. First Corp. v. U.S. Die Casting & Dev. Co., 687 A.2d 563, 567 n.3 (Del. 1997); Grimes v. Donald, 673 A.2d 1207, 1216-17 (Del. 1996).
- Sec. First Corp., 687 A.2d at 565; Shaw v. Agri-Mark, Inc., 663 A.2d 464, 467 (Del. 1995).
- CM&M Group, Inc. v. Carroll, 453 A.2d 788, 792 (Del. 1982).
- Del. Code Ann. Tit. 8, § 220(b).
- Seinfeld v. Verizon Commc’n Inc., 909 A.2d 117, 121-22 (Del. 2006); Thomas & Betts Corp. v. Leviton Manuf. Co., 681 A.2d 1026, 1031 (Del. 1996).
Documents Now at Risk: The Wal-Mart Ruling n Continued from page 3
he must establish a credible basis to infer that waste or mismanagement may have occurred.17 However, because a Section 220 action is not a full trial on the merits,
the stockholder need not prove actual wrongdoing by a preponderance of the evidence. The credible basis threshold is satisfied by a showing through documents,
“In a Section 220 action, the scope of permitted inspection is much narrower than discovery permitted in civil lawsuits. The stockholder bears the burden of showing that each category of books and records requested is necessary and essential to accomplish a
logic, testimony, or otherwise that there are legitimate issues of wrongdoing.18
Delaware cases also recognize a variety of additional proper purposes for a Section 220 demand, including (among others) to uncover the facts necessary to plead demand futility with particularity19 and to determine the independence of a special committee and whether the board
complied with Delaware law in refusing a litigation demand.
- Inspection Normally Limited to “Necessary and Essential” Documents Once a stockholder has established that
he or she is entitled to a Section 220
inspection, the court’s analysis shifts to determining the appropriate scope of inspection. In a Section 220 action, the scope of permitted inspection is much narrower than discovery permitted in civil lawsuits. The stockholder bears the burden of showing that each category of books and records requested is necessary and essential to accomplish a proper purpose.20 Generally speaking, a document is essential for Section 220 purposes if it addresses the “crux” of the stated purpose and if the information in the document is unavailable from another source.21
A trial court’s order granting inspection of corporate books and records must be circumscribed “with rifled precision.”22 Nevertheless, the “rifled precision” requirement should not prevent a stockholder who demands inspection for a proper purpose from accessing all of the documents in the corporation’s possession, custody, or control that are necessary to satisfy that proper purpose.23 Importantly, the Court of Chancery is also charged with a duty
to safeguard the rights of the corporation:
“[t]he Court of Chancery is empowered to protect the corporation’s legitimate interests and to prevent possible abuse of the shareholder’s right of inspection by placing such reasonable restrictions and limitations as it deems proper on the exercise of the right.”24 Achieving a proper balance between these competing interests is critical to determining the scope of inspection.
C. Inspection Normally Limited by Attorney-Client Privilege and Work Product Immunity
Normally, the attorney-client privilege and work product immunity apply in the context of a stockholder demand, and documents may be withheld from inspection on that basis. The U.S. Court of Appeals for the Fifth Circuit, however, long ago recognized an exception to the attorney- client privilege that could arise in the context of a stockholder claim. In Garner v. Wolfinbarger, the court ruled that “where the corporation is in suit against its stockholders on charges of acting inimically to stockholder interests, protection of those interests as well as those of the corporation and of the public require that the availability of the privilege be subject to the right of the stockholders to show cause why it should not be invoked in the particular instance.”25 Under this standard, the Garner court said that “good cause” for overcoming the
CONTINUED ON PAGE 5
- Thomas & Betts Corp., 681 A.2d at 1031.
- Sec. First Corp., 687 A.2d at 568.
19. Grimes, 673 A.2d at 1216-17.
- Sec. First Corp., 687 A.2d at 569.
- Espinoza v. Hewlett-Packard Co., 32 A.3d 365, 371-72 (Del. 2011).
- Id. at 372 (citing Sec. First Corp., 687 A.2d at 569-70).
- Saito, 806 A.2d at 115.
- CM&M Group, Inc., 453 A.2d at 793-94; see also Del. Code. Ann. Tit. 8, § 220(c) (granting court discretion to place limitations or conditions on books and records to be made available for inspection).
25. Garner, 430 F.2d at 1103-04.
Documents Now at Risk: The Wal-Mart Ruling n Continued from page 4
privilege could be based upon a variety of factors, including “the apparent necessity or desirability of the shareholders having the information and the availability of it from other sources.”26
Before Wal-Mart, the Delaware Supreme Court had never explicitly endorsed Garner as a correct interpretation of Delaware law, although the Chancery Court had looked to the case on several occasions to determine in derivative actions whether the privilege should prevent disclosure to stockholders.27 In relying on Garner, the Chancery Court had generally focused on “(i) whether [the stockholder] claim is colorable; (ii) [the] necessity or desirability of information and its availability from other sources; and
(iii) [the] extent to which information sought is identified as opposed to blind fishing expedition.”28
Historically, Garner has been applied solely to the attorney-client privilege and not to work-product immunity. Under Delaware Court of Chancery Rule 26(b)(3), however, work product immunity also can be overcome where a claimant can show “substantial need of the materials in the preparation of the party’s case and that
the party is unable without undue hardship to obtain the substantial equivalent of the
“Historically, Garner has been applied solely to the attorney-client privilege and not to
materials by other means.” Although the 26(b)(3) requirements are close to Garner’s oft-cited necessity and availability factor, the Garner standard normally has been applied separately from the work-product analysis.
III. Proceedings in the Delaware Chancery Court
As frequently happens in disputes over Section 220 demands, the Chancery Court ordered a trial to be conducted on the basis of a written record. The trial took place on May 20, 2013 and essentially took the form of oral argument based upon the submitted record. The trial focused on the scope of the stockholder’s requests; the extent of the effort undertaken by Wal-Mart to produce
documents; and the applicability of the attorney-client privilege and attorney work product immunity to the stockholder requests.29 Chancellor Leo Strine, who has since become Chief Justice of the Delaware Supreme Court, ruled that “core information regarding the WalMex bribery, construction-permitting situation and how [the initial investigation] was handled within Wal-Mart by high-level officers and directors” was “central to the [stockholder’s] request” and was necessary and essential to a proper purpose.30 Chancellor Strine
added that “there’s a colorable basis that part of the wrongdoing was in the way the investigation itself was conducted” and, as
a result, the stockholder should be given access to privileged documents and attorney work product, because “it’s very difficult to find those documents [i.e., evidence of such wrongdoing] by other means.”31
Based upon this ruling at trial, Chancellor Strine entered a final judgment on October 15, 2013, ordering Wal-Mart to produce data from certain specified sources, including specific individual officers of
Wal-Mart and data not only from live servers, but also from certain back-up tapes and handheld devices; review all data from
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- Id. at 1104. Other factors cited by the Garner court included:
the number of shareholders and the percentage of stock they represent; the bona fides of the shareholders; the nature of the shareholders’ claim and whether it is obviously colorable; . . . whether, if the shareholders’ claim is of wrongful action by the corporation, it is of action criminal, or illegal but not criminal, or of doubtful legality; whether the communication related to past or to prospective actions; whether the communication is of advice concerning the litigation itself; the extent to which
the communication is identified versus the extent to which the shareholders are blindly fishing; the risk of revelation of trade secrets or other information in whose
confidentiality the corporation has an interest for independent reasons.
- See, e.g., Grimes v. DSC Communications Corp., 724 A.2d 561, 568 (Del. 1998).
- Id. (quoting Sealy Mattress Co. of N.J., Inc. v. Sealy, Inc., No 8853, 1987 WL 12500 (Del. Ch. June 19, 1987)).
- See generally Trial Transcript and Rulings of the Court, Indiana Elec. Workers Pension Trust Fund IBEW v. Wal-Mart Stores, Inc., Civ. Action No. 7779-CS 2013 WL 3818580 (Del. Ch. May 20, 2013) (“Trial Tr.”).
- Id. at 29-30.
- Id. at 31-32.
Documents Now at Risk: The Wal-Mart Ruling n Continued from page 5
12 specific individuals for responsiveness; and produce certain documents previously identified on a privilege log as attorney- client privileged or attorney work product.32 As summarized by the Supreme Court, the Chancery Court order encompassed “officer (and lower)-level documents regardless of whether they were ever provided to
Wal-Mart’s Board of Directors or any committee thereof; [. . .] documents spanning a seven-year period and extending well after the timeframe at issue” and “contents of Responsive Documents that are protected by the attorney-client privilege . . . and the contents that are protected by the attorney work-product doctrine under Court of Chancery Rule 26(b)(3).”33
IV. Wal-Mart’s Appeal to Delaware Supreme Court
Wal-Mart appealed the Chancery Court’s judgment to the Delaware Supreme Court, claiming that the scope of production was overbroad and the requirement to produce privileged documents and work product was unfounded.34
A. Scope of Production
Wal-Mart’s first challenge was to the lower court’s decision “requiring it to ‘produce documents that were never presented or created by members of [Wal-Mart’s] Board of Directors.’”35
Wal-Mart argued that the proper purpose of the inspection was to determine whether demand on the current board would be futile and that the Chancery Court’s ruling, which included ordering access to documents that went only to non-director senior executives, was overly broad.
The Supreme Court acknowledged the Chancery Court’s view that the purpose of the inspection demand “was primarily to look for facts to determine whether demand is, in fact, excused,” but added that the purpose to investigate the underlying bribery and how the initial investigation was handled also constituted proper purposes for an inspection demand. To be sure, Chancellor Strine said in his ruling that the documents he ordered produced all related to whether the stockholders could “plead and get demand excusal,”36 drawing a link between the “core information” about the underlying bribery and initial investigation, on the one hand, and how that information was handled by Wal-Mart’s directors and senior officers, on the other hand.37 The Supreme Court also highlighted the importance of this “core information” to the stockholder’s case, but unlike Chancellor Strine, the Supreme Court elided the connection between that core information and demand excusal. As a result, it is somewhat unclear whether the Supreme Court found the stockholders’ interest in
the underlying bribery and the initial investigation were subsidiary to the proper purpose of determining the demand excusal issue, as Chancellor Strine seemed to suggest, or whether the issues of
the underlying bribery and initial investigation were themselves distinct and independent proper purposes for the stockholder’s inspection demands.
In affirming the scope of Chancellor Strine’s order, the Supreme Court also determined that the production of documents related to the knowledge of non-director officers of the Company was required because the stockholder “may
establish director knowledge of the WalMex Investigation by establishing that certain Wal-Mart officers were in a ‘reporting relationship’ to Wal-Mart directors, that those officers did in fact report to specific directors, and that those officers received key information regarding the WalMex Investigation.”38 Overruling Wal-Mart’s objection that information known only to officers could not be relevant to what
Wal-Mart’s directors did or did not know unless there was evidence of communication from the officers to the directors, the Supreme Court held that the Chancery Court “properly exercised its discretion” when it found that a “reasonable inference . . . would be that those officers passed the information on to the directors.”39
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- Final Order and Judgment, Indiana Elec. Workers Pension Trust Fund IBEW v. Wal-Mart Stores, Inc., No. 7779-CS, 2013 WL 5636296 (Del. Ch. Oct. 15, 2013). 33. Wal-Mart, 2014 WL 3638848 at *4.
- IBEW cross-appealed, arguing that the Chancery Court’s order did not go far enough, because it did not require Wal-Mart to correct deficiencies in prior productions and also ordered IBEW to return documents it obtained from an anonymous source. Id. at *1. The Supreme Court ultimately rejected both aspects of the cross appeal. Id. at *14-15.
- Id. at *6 (quoting Wal-Mart’s brief ).
- Trial Tr. at 30.
- Id. at 29-30.
38. Wal-Mart, 2014 WL 3638848 at *7.
39. Id. at *7.
Documents Now at Risk: The Wal-Mart Ruling n Continued from page 6
B. Privileged Documents
Wal-Mart’s second challenge was to the Chancery Court’s order that documents subject to the attorney-client privilege and work product immunity also should be produced for inspection. With respect to attorney-client privilege documents,
Wal-Mart had argued that the Delaware Supreme Court had never endorsed the
Fifth Circuit’s opinion as the law of
Court recognized that application of
Garner should be “narrow, exacting, and
. . . very difficult to satisfy.”42 But the Court then quoted from and endorsed Chancellor Strine’s conclusion that he could not “understand how you would probe these decisions [about the structure and scope of the initial internal investigation] through any other means,” given the participation of counsel in the decisions
has substantial need of the materials in the preparation of the party’s case and that
the party is unable without undue hardship to obtain the substantial equivalent of the materials by other means.”47 According to the Supreme Court’s analysis, where Garner
“As a result, the Supreme Court expressly said that Garner
Delaware and, in any event, that the
about structuring the investigation.
‘applied in plenary stockholder/
doctrine should not apply in the context of
a Section 220 demand. The Supreme Court dispatched both arguments, noting that it tacitly had endorsed Garner in two prior cases and that the Chancery Court had expressly adopted it many times, including in the Section 220 context.40 As a result, the Supreme Court expressly said that Garner “applied in plenary stockholder/ corporation proceedings” and was applicable in Section 220 actions so long as the “necessary and essential inquiry . . . precede[d] any privilege inquiry.”41
The Supreme Court then applied the Garner standard to the inspection demand made by IBEW, concluding that the facts identified by the Chancery Court warranted a finding of “good cause” for overcoming the attorney-client privilege. The Supreme
Supreme Court also found that the record
supported the application of the other Garner factors, including that the privileged communications were not about advice concerning the litigation itself44 and that the plaintiff was not “blindly fishing” as it had asked for specific documents. Lastly, the Court noted that the allegations
at issue concern potentially criminal conduct under the FCPA, which also supported production.45
The Supreme Court noted that the Garner doctrine traditionally had not been applied to work product documents.46
The Court said, however, that an “overlap” existed between the Garner factors and “the required showing under the [Chancery Court] Rule 26(b)(3) work product doctrine,” because Rule 26 provides “upon a showing that the party seeking discovery
corporation proceedings’ and was applicable in Section 220 actions so long
as the ‘necessary and essential inquiry . . . precede[d] any privilege inquiry.’”
is invoked because the information being sought is unavailable to a stockholder by other means, the analysis may not differ significantly from the showing of “substantial need” and “undue hardship” that can overcome work product protection. But the Court also noted that the work product analysis is “separate,” even where the two analyses may overlap.48
CONTINUED ON PAGE 8
40. Id. at *10-11.
- Id. at *11.
- Id. at *11.
- Id. at *12.
- However, the Chancery Court limited the production of privileged material after January 1, 2011, perhaps because at that point, the privileged material may have been more closely related to legal advice concerning pending or anticipated litigation than the investigation itself.
45. Wal-Mart, 2014 WL 3638848 at *13.
46. Id. at *13-14 (citing Saito v. McKesson HBOC, Inc., No. Civ. A. 18553, 2002 WL 31657622, at *11 (Del. Ch. Nov. 13, 2002)). 47. Id. at *14; Ct. Ch. R. 26(b)(3).
48. Wal-Mart, 2014 WL 3638848 at *13-14.
Documents Now at Risk: The Wal-Mart Ruling n Continued from page 7
V. Implications of Wal-Mart
In many respects, the Wal-Mart ruling presents as an unremarkable application of established legal requirements under the “proper purpose” and “necessary and essential” standards for a Section 220 demand. Even the adoption of the Garner standard by the Delaware Supreme Court,
“What sets the Wal-Mart ruling apart, however, is that it provides stockholders and their
counsel with a potential road-map for seeking and possibly obtaining an extensive set of documents about corporate internal investigations, especially
in the FCPA context.”
though a first because the Court had never explicitly endorsed Garner, is arguably
a straightforward application of a well- established standard that has long held sway in the Chancery Court. What sets the Wal-Mart ruling apart, however, is that it provides stockholders and their counsel with a potential road-map for seeking and possibly obtaining an extensive set of documents about corporate internal
investigations, especially in the FCPA context. Stockholders are sure to seize upon the ruling as a potential basis for far- reaching inquiries into the conduct of internal investigations. The key to any such effort will be the Supreme Court’s apparent reliance on a part of the Chancery Court’s ruling allowing such a production where “there is a colorable basis that part of the wrongdoing was in the way the investigation itself was conducted.”49
That portion of the Chancery Court
ruling appeared to provide a foundation for the “proper purpose” determination and the conclusion that “good cause” existed for
the production of privileged and work product documents.50
The facts undergirding the Wal-Mart case are unusual to say the least. Rarely is an investigation of potential wrongdoing subjected to the level of intense scrutiny that has been given to the initial WalMex investigation. And the kinds of allegations contained in The New York Times article are almost unprecedented in their scope and detail. Stockholders in future cases are sure to attempt to portray other investigations as being similar to the facts of the Wal-Mart case – meaning that future investigations are likely to be subjected to extraordinary scrutiny to see whether they can be portrayed in terms similar to those in
Wal-Mart. And counsel for stockholders can be expected to deploy investigators and other resources looking for current or former employees or other knowledgeable
witnesses who may disagree with the way in which an inquiry was conducted. In cases where stockholders and their counsel believe they have colorable arguments supporting an inquiry into the conduct of an investigation, corporations responding to Section 220 demands are likely to face significantly greater challenges and
the prospect of expedited trials in the Chancery Court.
Ultimately, it will be for the Chancery Court to determine whether the Wal-Mart ruling set a broad precedent or was nothing more than a narrow ruling on a unique set of facts. But until those rulings come, addressing Section 220 demands may be much more complicated than in the past – especially in FCPA cases where internal reviews already have been conducted.
Companies undertaking internal reviews of new FCPA issues (or other issues warranting an internal review) can and should anticipate these potential challenges by stockholders and structure their investigations from the outset in a way that is most likely to insulate the investigation from a successful Section 220 demand. That means taking appropriate steps to assure that no “colorable basis” exists for finding wrongdoing in the way the internal investigation was conducted. That does not mean that outside counsel will need to be retained in every case, or that the Audit Committee needs to be burdened with conducting every review, or that the scope of every inquiry needs to encompass broad
CONTINUED ON PAGE 9
49. Id. at *12.
50. Id. at *12-13.
Documents Now at Risk: The Wal-Mart Ruling n Continued from page 8
segments of the company. But it does mean that extra care should be taken at the outset of an inquiry, when decisions about structure, supervision and scope are being made, to think about how those decisions could be perceived in the future, and to document the basis for the determinations about how the review was conducted.
To that end, counsel or compliance personnel considering how to structure and conduct future investigations may want to consider the following key decision points and document the rationale for the decisions that actually are made:
• Who should conduct the review?
In some cases, a review by internal resources, including resources in a local business unit, may be perfectly appropriate. But where allegations or
emerging evidence suggests the possible participation of local management, consideration should be given to having the review conducted by more independent and distant resources, such as internal audit or compliance personnel from the home office.
Where there is any suggestion that members of senior management may have been implicated, including senior officials in a local business unit, careful consideration should be given to having outside counsel conduct the review – again using counsel who may be more independent of the local management who may be under scrutiny.
• Who should supervise the review?
Supervision of any review is a critical
component of the early decision- making process. Again, where local management could be implicated in any way in the wrongdoing, careful
“Extra care should be taken at the outset of an inquiry, when
decisions about structure, supervision and scope are being made, to think
about how those decisions could be perceived in the future, and to document
the basis for the determinations about how the review was conducted.”
consideration should be given to having the review supervised by personnel at another location and who are senior to those being scrutinized. Where more senior management may be implicated, consideration should be given to having independent members of the Board oversee the review.
- What should be the scope of the review? Any internal investigation can be an enormous diversion and drain
on corporate resources – especially if extensive collection and review of
documents and lengthy interviews are
required. Companies understandably want to right-size any review to fit the allegations and potential risks. The Chancery Court trial in the Wal-Mart case illustrates, however, that even seemingly minute details about the conduct of a review can be subjected to close scrutiny. As reflected in the Chancery Court’s order following the trial, the names of specific document custodians were identified and the manner of conducting document collection (from server data, backup tapes, BlackBerry servers and hand- held devices) was extensively reviewed and became the subject of controversy and the Court’s order.51 Here again, companies and counsel should consider at the outset the depth of analysis and inquiry that is warranted by the allegations. In particular, it
is important from the outset to not prejudge the outcome of a review by being unnecessarily dismissive of
serious allegations simply because they come from a questionable source or because they raise concerns about a senior corporate official – even one with a sterling reputation. For example, allegations concerning actions by one individual in a mid-level management position may warrant a scope that
is initially limited, but allegations of extensive misconduct by multiple employees including more senior
officials almost always will warrant an investigation of a different scale.
CONTINUED ON PAGE 10
51. Indiana Elec. Workers Pension Trust Fund IBEW v. Wal-Mart Stores, Inc. Final Order and Judgment, No. 7779-CS, 2013 WL 5636296 (Del. Ch. Oct. 15, 2013).
There is no “one-size-fits-all” solution to the question of how a review should be structured, supervised, and conducted. Each situation is unique and each situation needs its own analysis of the potential risks presented by the underlying allegations and the potential costs of getting to the bottom of what may have gone wrong.
In light of Wal-Mart, this is more true than ever. As companies consider how to structure internal investigations, they should do so bearing in mind the real possibility that their early decisions will be subjected to close and critical scrutiny. Where those decisions are
internally controversial, consider how that controversy will be viewed in the future
if the problem turns out to be bigger
than initially expected. As investigations mature, if evidence accumulates that adds credence to the allegations, as appeared to happen in the initial
Wal-Mart inquiry, consideration should be given to promptly expanding the scope of inquiry and potentially reconsidering who should conduct and supervise the
review. Companies should make their early decisions in any investigation by thinking about how they may be required to explain those decisions to stockholders making Section 220 demands and potentially to a Delaware Chancellor to convince both that there is no “colorable basis” for deciding that there was any wrongdoing in the conduct of the investigation itself.