Opinion

Alison Frankel

Wal-Mart case in Delaware: How much discovery can shareholders get?

Alison Frankel
Jul 11, 2014 20:56 UTC

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.

How much should corporations admit to SEC, Justice Department?

Alison Frankel
Oct 19, 2012 21:33 UTC

Last April, as a follow-up to revelations that Wal-Mart had allegedly covered up bribes paid by its Mexican subsidiary, the great Corporate Counsel reporter Sue Reisinger ran a very surprising piece. Despite the scandal engulfing Wal-Mart, defense lawyers told Reisinger that the company may have made a strategically smart decision not to disclose the matter to the government. Smart? Really? Would Wal-Mart’s alleged bribery have blown up into a public relations fiasco that cried out for governmental consequences if the company had quietly admitted the facts to the Securities and Exchange Commission or the Justice Department?

I figured Dodd-Frank’s whistle-blower provisions would make corporate self-reporting even more of a no-brainer, since insiders now have not only a moral and legal incentive but also a powerful financial motive to alert the SEC when they suspect wrongdoing. According to BuckleySandler partner Thomas Sporkin, who until last June was chief of the SEC’s Office of Market Intelligence, the commission receives 1.2 whistle-blower tips a day, on average. If I were a corporate official wondering whether to self-report, I’d assume that one of those tips was about my company and run to the feds before they came to me.

But according to several of the most prominent SEC enforcement advisers in Washington, w ho were speaking Thursday at Securities Docket’s Securities Enforcement Forum, corporations should think hard about the decision to confess their sins or handle problems internally. “You have to decide whether the issue merits the government’s involvement,” said William McLucas of Wilmer Cutler Pickering Hale and Dorr in a follow-up phone conversation Friday. Even in an era in which “you have to assume there are no secrets,” McLucas said, problems that fall short of systemic wrongdoing call for judgment, not reflexive confession. “That’s why you have compliance systems and controls,” he said.

Del. judges mean it: Don’t file derivative suit pre-investigation

Alison Frankel
Jul 18, 2012 04:15 UTC

There’s an antitrust conspiracy in Delaware Chancery Court. Chancellor Leo Strine and Vice Chancellor Travis Laster are engaged in a cooperative effort to restrain the trade of shareholder lawyers who file derivative suits without obtaining books and records discovery. I’ve told you about Laster’s decision in the Allergan case, in which he found that shareholders who rushed to sue in California didn’t adequately represent the corporation (the nominal plaintiff in derivative litigation); and about Laster’s follow-up explanation that “diligent plaintiffs should get to litigate,” when he certified the case for appeal. On Monday, Strine echoed Laster when he refused to appoint a lead plaintiff in the derivative litigation over Wal-Mart’s alleged bribes in Mexico.

“More energy was spent by dueling plaintiffs over who gets to be lead counsel and lead plaintiff than was spent writing the complaints,” Strine said, according to my Reuters colleague Tom Hals. The chancellor chastised the two state pension fund giants vying to be named lead plaintiff for basing their complaints on the New York Times scoop on Wal-Mart’s alleged payments rather than on their own investigations, and said everyone should come back to court after the Indiana Electrical Workers Pension Trust Fund, IBEW, and its lawyers at Grant & Eisenhofer have obtained access to Wal-Mart’s books and records through the demand they have served on Wal-Mart’s board.

The California State Retirement System (CalSTRS) and the New York City Employees’ Retirement System had moved for appointments under what was previously considered the leading Delaware case on the standard for lead plaintiffs, Hirt v. U.S. Timberlands ServiceHirt laid out six factors the court should consider in choosing a lead in derivative litigation, including the quality of the complaint and the plaintiff’s economic stake in the outcome. (Remember, there’s no statutory framework for lead plaintiffs in derivative cases, as opposed to federal securities class actions.)

The Bentonville Black SOX? Wal-Mart’s Sarbanes-Oxley problem

Alison Frankel
Apr 23, 2012 20:16 UTC

The follow-up to the New York Times blockbuster scoop on Wal-Mart’s alleged cover-up of $24 million in Mexican bribes has, quite rightly, focused on the company’s potential Foreign Corrupt Practices Act exposure. But that’s not the only law Wal-Mart and its executives should be worrying about.

Good old Sarbanes-Oxley, passed in 2002 in the wake of accounting scandals at Enron, WorldCom, Tyco, Adelphia and other public companies, was intended to prevent exactly the kind of cover-up Wal-Mart allegedly engaged in, according to the Times report. The 10-year-old law imposed gatekeeper duties on corporate lawyers, who are supposed to report material violations of the securities laws up the chain of command, all the way to the audit committee of the board, if necessary. SOX also requires corporations and their auditors to report on the company’s internal controls for financial reporting – and requires that CEOs and CFOs certify the material accuracy of financial reports. According to securities-law experts, if the Times allegations are true, Wal-Mart may have run afoul of all these provisions.

The bribery allegations originated with a Wal-Mart lawyer in Mexico, who told Wal-Mart International’s general counsel, Maritza Munich, about the “irregularities.” She authorized a preliminary investigation by outside counsel in Mexico, then – quite appropriately – reported the findings to Wal-Mart’s then-General Counsel Thomas Mars, among other senior officials. Mars brought in Willkie Farr & Gallagher, which proposed that it conduct a far-reaching internal investigation. So far, so good.

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