Wal-Mart case in Delaware: How much discovery can shareholders get?
Shareholder lawyer Stuart Grant of Grant & Eisenhofer told me Friday that he was feeling pretty good about his oral argument at the Delaware Supreme Court the previous day, in a case that will determine how much discovery plaintiffs are permitted when they sue to see corporate books and records.
Grant said his opponent, Wal-Mart counsel Mark Perry of Gibson, Dunn & Crutcher, gave so smooth and polished a presentation that the state justices might easily have glided along with what, according to Grant, was Perry’s “radical rewriting” of Delaware law. Instead, Grant said, “the court was not buying into Wal-Mart’s extreme theory.”
Wal-Mart, you will not be surprised to hear, had a different view of the argument: “We think it went very well,” Perry told me Friday. “We presented strong arguments and look forward to the court’s decision.”
Both sides agree on one thing: If the Delaware Supreme Court affirms then-Chancellor Leo Strine’s 2013 discovery order in IBEW v. Wal-Mart, it’s great news for shareholders and a big reason for Delaware corporations to worry. (Strine, who is now Chief Justice of the Delaware Supreme Court, was recused from hearing Thursday’s argument.)
One of the crucial advantages for corporations defending their conduct in shareholder suits is that investors can’t find out very much about internal decision-making until they’ve gotten past defense dismissal motions. Wal-Mart claims that if it loses at the Delaware Supreme Court, plaintiffs will be licensed to go on deep-sea-fishing expeditions for corporate documents before they even file a breach-of-duty complaint.
That’s because the Wal-Mart case involves a discovery demand from shareholders who haven’t yet filed a derivative suit accusing the company’s directors of breaching their duties. Lawsuits seeking corporate books and records are based on a 1967 Delaware statute that gives shareholders a right of access to certain corporate documents for certain purposes. The dispute at the Delaware Supreme Court Thursday centered on the scope of the materials shareholders should be permitted to see and what purposes investors may pursue through books-and-records suits.
According to Wal-Mart’s brief to the state justices, these cases have only one purpose: to permit shareholders to amass information about why it would be futile for them to demand that the board itself take action against directors. (As you know, shareholders who bring derivative claims stand in the shoes of the corporation; to move forward with the cases, they must either show that the board refused to respond to their demand for investigation or that there was no point in asking the board to act.)
Wal-Mart and Gibson Dunn argue that Delaware precedent restricts books-and-records discovery to materials board members saw before they made their supposedly faithless decisions. But in 2013, when then-Chancellor Strine considered the Wal-Mart shareholders’ books-and-records suit, he rejected Wal-Mart’s cramped interpretation. Strine said that the board’s minutes and other records don’t necessarily reflect everything directors may have known. He ordered Wal-Mart to produce a broad array of documents — including materials from Wal-Mart executives, on the theory that the board can be assumed to know whatever the company’s top officers knew.
That order, Wal-Mart lawyer Perry told the Delaware Supreme Court on Thursday, was “absolutely indefensible” in a books-and-records case. Perry said that shareholders are supposed to be permitted only “necessary and essential” materials under Delaware precedent on the scope of the 1967 books-and-records statute, known as Section 220. “This thing has gone so far beyond Section 220 that it’s unrecognizable,” Perry said in oral argument.
He got some support from Justice Carolyn Berger, who wrote the seminal Delaware opinion on books-and-records discovery in the 2002 case Saito v. McKesson. Berger pressed shareholder lawyer Grant about the breadth of Strine’s order: Wasn’t he effectively granting shareholders discovery on the merits of their potential claims against directors? Books-and-records discovery, she said, is supposed to be much more restricted than merits discovery. Shareholders just need enough to craft a derivative complaint that will survive a defense motion to dismiss, according to the judge.
Grant responded that he’s permitted to get his hands on whatever he needs to state a claim. He contradicted Wal-Mart’s assertion that books-and-records suits have the sole purpose of permitting plaintiffs to establish demand futility. (Justice Henry Ridgely seemed to side with Grant on this point.) In fact, Grant said, the union suing Wal-Mart for books and records explicitly stated in its complaint that it wanted documents to investigate whether officers mismanaged the company and whether directors breached their duty. “Who specifically authorized the coverup?” Grant said. “I need 220 documents so I can see who ought to be defendants.”
There are all kinds of interesting dynamics in the Wal-Mart case, including how much deference the Delaware Supreme Court will pay to a controversial ruling by the judge who’s now Chief Justice. I’m also curious to see the impact on securities fraud litigation if Strine is affirmed and the Delaware Court permits broad discovery in books-and-records suits. Shareholders who file fraud class actions are severely handcuffed on early discovery. Might we see plaintiffs’ firms file books-and-records suits in Delaware to bolster discovery in securities fraud cases in federal court?
Grant said federal judges generally frown upon that sort of back-door maneuvering. In any event, he said, whatever documents he ends up getting from Wal-Mart in his books-and-records suit won’t go beyond the derivative complaint he will file eventually against Wal-Mart’s directors. “None of these documents are going to securities plaintiffs,” he said.