Cottrell v. Duke et al
Filing
137
ORDER granting 109 Motion to Dismiss Case. Signed by Honorable Susan O. Hickey on March 31, 2015. (mll)
IN THE UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF ARKANSAS
TEXARKANA DIVISION
____________________________________
)
IN RE WAL-MART STORES, INC.
)
SHAREHOLDER DERIVATIVE
)
LITIGATION
)
____________________________________)
)
This Document Relates to:
)
ALL ACTIONS
)
____________________________________)
Master Docket No. 4:12-cv-4041
ORDER
Before the Court is a Motion to Dismiss Case for Failure to Establish Demand Futility
filed by Nominal Defendant Wal-Mart and the Individual Defendants. 1 ECF No. 109. Plaintiffs
have filed a response. ECF No. 114. Defendants 2 have filed a reply. ECF No. 115. The Court
has reviewed the memoranda and various supplements submitted by the parties. ECF Nos. 110,
116, 119, 121, 122, 124, 125, 127, 128, 129, 131, 132, 133, 134, 135, and 136. For the reasons
set forth below, the Court will grant the motion filed by Defendants.
I. BACKGROUND
The following facts are drawn from allegations contained in Plaintiff’s Consolidated
Verified Shareholder Derivative Complaint (“Complaint”). ECF No. 16. The Court notes that,
in this Order, page number references from ECF documents refer to the page number found in
the ECF heading at the top of the filed ECF document.
Wal-Mart, a multinational retail company, is a Delaware corporation headquartered in
Bentonville, Arkansas.
1
2
Wal-Mart de Mexico (“Walmex”) is Wal-Mart’s largest and most
The term “Individual Defendants” refers to all persons named as defendants in this action.
The “Defendants” collectively refers to Nominal Defendant Wal-Mart and the Individual Defendants.
profitable subsidiary. When the fiscal year 2012 ended, Walmex had generated approximately
28% of Wal-Mart’s net sales.
At the time the Amended Complaint was filed in May 2012, Wal-Mart’s board of
directors (“the Board”) was made up of the following fifteen members (collectively referred to as
“Director Defendants”):
•
H. Lee Scott has served as director since 1999. He was Wal-Mart’s President
and CEO from January 2000 through January 31, 2009.
He continued as
Executive Officer of Wal-Mart and as Chairman of the Board’s Executive
Committee until his retirement on January 31, 2011.
•
Michael T. Duke has served as a director since November 2008. He is currently
President and CEO of Wal-Mart. He has served on the Board’s Executive
Committee since 2008.
He has also served as the Vice Chairman with
responsibility for Wal-Mart International and as Executive Vice President and
President and CEO of Wal-Mart U.S.
•
S. Robson Walton has served as a director since 1978 and as Chairman of the
Board since 1992. He has served on the Board’s Executive Committee since
2005. Prior to becoming Chairman of the Board in 1992, he held a variety of
positions with Wal-Mart, including Senior Vice President, Corporate Secretary,
General Counsel, and Vice Chairman. He is the son of Wal-Mart’s founder,
Sam Walton.
•
Jim C. Walton has served as a director since September 28, 2005. He has
served on the Board’s Strategic Planning and Finance Committee since 2005.
He is also the son of Sam Walton.
2
•
James W. Breyer has served as a director since 2001. He has served on the
Board’s Strategic Planning and Finance Committee since 2005.
•
Michelle Burns has served as a director since 2003. She served on the Board’s
Audit Committee between 2003 and February 20, 2006, and on the
Compensation, Nominating and Governance Committee during 2007. She has
served on the Strategic Planning and Finance Committee since 2007.
•
Christopher J. Williams has served as a director since 2004. He has served on
the Board’s Audit Committee since March 4, 2005, and has been the Chairman
of the Audit Committee since 2008.
•
Douglas N. Daft has served as a director since January 2005. He has served on
the Board’s Compensation, Nominating and Governance Committee since 2005.
•
Linda S. Wolf has served as a director of Wal-Mart since June 2005. She has
served on the Board’s Compensation, Nominating and Governance Committee
since 2006.
•
Gregory B. Penner has served as a director since 2008. He served on the
Board’s Strategic Planning and Finance Committee in 2009. From 2002 to
2005, he served as Wal-Mart’s Senior Vice President and Chief Financial
Officer-Japan. He is the son-in-law of S. Robson Walton.
•
Aida M. Alvarez has served as a director since 2006 and a member of the
Board’s Audit Committee since 2007.
•
James I. Cash has served as a director and a member of the Board’s Audit
Committee since 2006.
•
Roger C. Corbett has served as a director since 2006.
3
•
Steven S. Reinemund has served as a director and a member of the Board’s
Compensation, Nominating and Governance Committee since 2010.
•
Arne M. Sorenson has served as a director and a member of the Board’s Audit
Committee since 2008.
These fifteen individuals constitute the Board for purposes of evaluating demand futility. Eight
of these fifteen Director Defendants were on the Board in 2005-2006, which is when most of the
alleged wrongful conduct in this case occurred.
Plaintiffs, who are certain shareholders of Wal-Mart, allege that, beginning in 2003,
Walmex’s top leaders, including its lead executive Eduardo Castro-Wright and general counsel
José Luis Rodriguezmacedo, engaged in a systemic campaign of bribery throughout Mexico to
ensure quick and easy approval of building permits for Walmex’s new stores. This scheme was
first revealed to the public on April 12, 2012, by a journalist in the article titled “Wal-Mart
Hushed Up a Vast Mexican Bribery Case” published by the The New York Times. The primary
source quoted in the article is a former Walmex in-house attorney, Sergio Cicero Zapata
(“Cicero”), who had worked in Walmex’s real estate department for over ten years before he
retired in 2004.
On September 21, 2005, Cicero sent an email to Maritza Munich, general counsel of
Wal-Mart International, which stated that he had information about irregularities authorized by
individuals at Walmex, including its board chairman, general counsel, chief auditor, and top real
estate executive. Munich hired a prominent attorney in Mexico City to debrief Cicero. Cicero
detailed how Castro-Wright and Rodriguezmacedo, along with other top Walmex officials, had
funneled millions of dollars to middlemen, known as “gestores,” to bribe local government
officials to approve plans to build Walmex stores. This allowed Walmex to quickly build
4
hundreds of new stores. The payments to gestores were masked by fabricated invoices and
recorded as legitimate business expenses.
In October 2005, Munich sent memos detailing Cicero’s allegations to Wal-Mart’s senior
management, including Wal-Mart’s general counsel, Thomas Mars. On October 15, 2005, a
Wal-Mart attorney sent Duke, who was Vice Chairman of the International Division, an email
detailing Cicero’s allegations. Wal-Mart hired an outside law firm, Willkie Farr & Gallagher,
who had extensive experience in Foreign Corrupt Practices Act 3 cases, to conduct an
investigation regarding the bribery allegations. Willkie Farr proposed a four-month investigation
plan. The proposed investigation plan called for: (1) tracing all payments to anyone who had
helped Walmex obtain permits in the past five years; (2) scrutinizing any and all payments to
government officials; and (3) interviewing every person who might know about the payoffs,
including implicated members of Walmex’s board of directors.
Wal-Mart rejected Willkie Farr’s investigation proposal. Instead, Wal-Mart assigned its
own Corporate Investigations Unit to conduct a preliminary investigation. Once the preliminary
investigation was completed, Wal-Mart would proceed with a full investigation if it determined
that there was a likelihood that laws had been violated. The Corporate Investigations Unit was
comprised of less than seventy employees, and only four of these employees specialized in
corporate fraud.
Ronald Halter, a former FBI agent, led the two-week investigation that
commenced on November 12, 2005. Duke traveled to Mexico City to meet with Walmex
officials who were unhappy that Halter was investigating the gestores payments. In a document
entitled “Investigation and Audit Plan,” Halter stated that he would give a progress report on the
3
The Foreign Corrupt Practices Act prohibits Unites States companies from bribing foreign officials to secure
improper business advantage. See U.S. v. King, 351 F.3d 859, 864 (8th Cir. 2003).
5
investigation to Bentonville management and the Chairman of the Audit Committee, Roland A.
Hernandez, on November 16, 2005.
In a December 2005 report, Halter stated that “[t]here is reasonable suspicion to believe
that Mexican and USA laws have been violated” and that there was “no defendable explanation”
for the millions of dollars in gestores payments. The report described hundreds of gestores
payments, mystery codes used to conceal those payments, and rewritten audits. According to
Plaintiffs, Halter’s report was presented to Wal-Mart’s top management, including the CEO
(Scott), the general counsel (Mars), and the 2005-2006 board of directors.
In February 2006, Plaintiffs allege that Scott, Mars, and these directors instituted a coverup after hearing the evidence of bribery, which included ending the investigation into Walmex
and handed control of the investigation to Rodriguezmacedo, one of the investigation’s main
suspects. In May 2006, Rodriguezmacedo concluded the investigation by compiling a six-page
report exonerating himself and his fellow Walmex employees. Rodriguezmacedo stated in the
report that there was no evidence or clear indication of bribes paid to Mexican government
authorities with the purpose of wrongfully securing any licenses or permits. In 2005, CastroWright was promoted to senior executive in charge of all Wal-Mart stores in the United States.
Plaintiffs allege that the Individual Defendants concealed violations of the Federal
Corrupt Practices Act and mislead investors concerning the bribery at Walmex with false proxy
statements filed with the United States Securities and Exchange Commission (“SEC”).
In
December 2011, after learning of The New York Times’ investigation, Wal-Mart informed the
United States Department of Justice and the SEC that Wal-Mart had begun an internal
investigation into possible violations of the Foreign Corrupt Practices Act.
6
On April 27, 2012, four days after The New York Times article was published, the first
shareholder derivative action 4 was filed in the United States District Court for the Western
District of Arkansas against current and former directors and officers of Wal-Mart. Seven
additional shareholder actions were filed in Arkansas, and these actions have been consolidated
into the present action.
Plaintiffs allege that the Individual Defendants breached their fiduciary duties of loyalty
and good faith by: (1) permitting violations of foreign and federal laws and Wal-Mart’s code of
ethics; (2) permitting the obstruction of an adequate investigation of known potential (and/or
actual) violations of foreign and federal laws; and (3) covering up (or attempting to cover up)
known potential (and/or actual) violations of foreign and federal laws. ECF No. 16, ¶ 284.
Plaintiffs also allege that Individual Defendants violated Sections 14(a) and 29(b) of the
Exchange Act by causing Wal-Mart to make false or misleading statements in its April 2010 and
April 2011 proxy materials relating to annual director elections. ECF No. 16, ¶¶ 286-296.
Defendants move to dismiss the Complaint (ECF No. 16) pursuant to Rule 23.1 of the
Federal Rules of Civil Procedure. Defendants assert that Plaintiffs have failed to adequately
allege demand futility as required by applicable Delaware law.
II. STANDARD OF REVIEW
A. Rule 23.1
Federal Rule of Civil Procedure 23.1 requires a shareholder seeking to represent the
interests of a corporation through a derivative suit to either demand that the corporation’s
directors take action or plead with particularity the futility of making such a demand. Gomes v.
4
“The derivative form of action permits an individual shareholder to bring suit to enforce a corporate cause of action
against officers, directors, and third parties.” Kamen v. Kemper Fin. Servs. Inc., 500 U.S. 90, 95, 111 S. Ct. 1711
(1991) (citations omitted) (internal quotations omitted). The purpose of the derivative action is “to place in the
hands of the individual shareholder a means to protect the interests of the corporation from the misfeasance and
malfeasance of faithless directors and managers.” Id. (citations omitted) (internal quotations omitted).
7
Am. Century Co., Inc., 710 F.3d 811, 815 (8th Cir. 2013). The law encourages corporations to
address problems internally, and the purpose of Rule 23.1 is to “affor[d] the directors an
opportunity to exercise their reasonable business judgment and waive a legal right vested in the
corporation in the belief that its best interests will be promoted by not insisting on such right.”
Kamen v. Kemper Fin. Servs., Inc., 500 U.S. 90, 96, 111 S. Ct. 1711 (1991). Rule 23.1 does not
establish guidelines for determining whether demand would be futile; thus a court must look to
the substantive law of the state of incorporation. Id. at 108-09.
B. Delaware Law
In the present case, because Wal-Mart is a Delaware corporation, Delaware law governs
the substantive aspects of the demand requirement. See id. Plaintiffs did not demand Board
action before filing this lawsuit, and they assert that the demand requirement should be excused
by futility. Demand is required if, in view of all the particularized allegations in the Complaint
and drawing all reasonable inferences in favor of Plaintiffs, there is no reasonable doubt of the
ability of a majority, here eight of the fifteen Director Defendants, to respond to demand
appropriately. Beam ex rel. Martha Stewart Living Omnimedia, Inc. v. Stewart, 833 A.2d 961,
977 (Del. Ch. 2003). Delaware has developed two approaches to claims of demand futility. The
parties dispute which of the two should be applied to this case.
When a case alleges that the directors made a conscious business decision in breach of
their fiduciary duties, courts must apply the Aronson test to determine whether demand was
futile. Wood v. Baum, 953 A.2d 136, 140 (Del. 2008). This test requires a plaintiff to allege
particularized facts creating a reason for the Court to doubt that “(1) the directors are
disinterested and independent [or that] (2) the challenged transaction was otherwise the product
of a valid exercise of business judgment.” Id. (citing Aronson v. Lewis, 473 A.2d 805, 814 (Del.
8
1984) (overruled on other grounds)). If either prong of the Aronson test is met, demand is
excused. In re J.P. Morgan Chase & Co. S’holder Litig., 906 A.2d 808, 820 (Del. Ch. 2005).
On the other hand, “where the subject of a derivative suit is not a business decision of the
[b]oard but rather a violation of the [b]oard’s oversight duties,” courts must apply the Rales test
to determine whether demand was futile. Wood, 953 A.2d at 140. This test requires a plaintiff to
allege “particularized facts establishing a reason to doubt that ‘the board of directors could have
properly exercised its independent and disinterested business judgment in responding to a
demand.’” Id. (citing Rales v. Blasband, 634 A.2d 927, 934 (Del. 1993)). 5
Here, Defendants contend that the Aronson test does not apply because Plaintiffs do not
challenge a specific board action. Defendants also contend that, under either the Aronson or
Rales test, Plaintiffs have failed to plead particularized facts establishing demand futility.
Plaintiffs respond that their Complaint satisfies both tests; however, they assert that the Court
should apply the Aronson test to this case because the Board made a conscious decision not to
act, which is a conscious action.
In their Complaint, Plaintiffs attempt to invoke the Aronson test by referencing alleged
decisions made collectively by the Board and stating that these decisions “were not valid
exercises of business judgment.” ECF No. 16, ¶¶ 256-260. Plaintiffs conclusively allege that the
Director Defendants collectively made a “decision to violate the FCPA and Mexican law,” “to
close the investigative case into bribery in Mexico,” “to seek reelection while concealing the
wrongdoing,” “to reward wrongdoers through promotions and compensation,” and “to conceal
the wrongdoing.” ECF No. 16, ¶¶ 256-260. Plaintiffs also allege that the Board made a
5
The Rales test is essentially the first prong of Aronson. See Guttman v. Huang, 823 A.2d 492, 501 (Del. Ch. 2003).
Both Aronson and Rales call upon courts to ascertain whether directors were disinterested and independent. In re
SAIC Inc. Derivative Litig., 948 F. Supp. 2d 366, 377 (S.D.N.Y. 2013) (applying Delaware law).
9
conscious decision not to take action in response to clear evidence of criminal conduct and that
this is a decision reviewable under Aronson. ECF No. 114, p. 21.
The Complaint alleges Defendants breached their fiduciary duties to Wal-Mart and are
personally liable to it for alleged losses. ECF No. 16, ¶¶ 282-285. The Complaint further alleges
that the Director Defendants caused Wal-Mart to disseminate false and misleading proxy
statements. ECF No. 16, ¶¶ 286-292. According to Plaintiffs, Defendant Scott was obligated to
report any material violation of laws by Wal-Mart directly to the Audit Committee of the Board.
ECF No. 16, ¶ 57. The Complaint identifies Defendants Burns and Williams as members of the
Audit Committee and alleges that they had a duty to report to the Board any instances of WalMart’s non-compliance with the FCPA. ECF No. 16, ¶¶ 28-29. The Complaint consistently
implies that Defendants should have or must have known about the alleged misconduct by virtue
of their positions and the supposed reporting structure at Wal-Mart. ECF No. 16, ¶¶ 135, 219,
261, 265. According to Plaintiffs, “senior executives … knew about” the alleged misconduct,
those “executives [were] required to regularly report to the Audit Committee of Wal-Mart’s
Board,” and the Audit Committee, in turn, “was obligated to report on [this] to Wal-Mart’s full
Board.” ECF No. 114, p. 30. Plaintiffs allege that, given the “inference” that information
concerning bribery was reported to Wal-Mart’s Board, Wal-Mart made a conscious decision not
to act on this information.
Plaintiffs reference vague “decisions” made by Defendants but do not plead with
particularity who made these decisions, how these decisions were made, or when the decisions
were made. 6 See La. Mun. Police Employees’ Retirement Sys. v. Hesse, 962 F. Supp. 2d 576,
6
Plaintiffs conclusively refer to “decisions” by the Board to “conceal the wrongdoing” (ECF No. 16, ¶ 260), “to let
Walmex ‘self-investigate’” (ECF No. 114, p. 19), “to violate the FCPA and Mexican law” (ECF No. 16, ¶ 256), and
“to allow then-CEO Scott to quash the investigation … and to cover up the criminal enterprise” (ECF No. 114, p.
26).
10
584 (S.D.N.Y. 2013) (relying on Delaware law and stating that Aronson does not apply when a
plaintiff offers no facts to show that a defendant made a conscious decision to act, such as when
the decision was made and the contours of the decision). Plaintiffs generally allege that the
Board made a decision not to act in response to evidence of criminal conduct. ECF No. 114, p.
27. Missing from the Complaint are any particularized facts that link a majority of the Director
Defendants to any actual decision. Plaintiffs point to no alleged meeting, discussion, or vote
where the Board allegedly made one of these decisions. This lack of such particularized facts
regarding a conscious decision about how or whether to respond to the alleged misconduct
indicates that an analysis under Aronson is inappropriate. 7 See South v. Baker, 62 A.3d 1, 14
(Del. Ch. 2012) (stating that absent an allegation “that any particular director in office at the time
of the filing of the complaint made a specific decision challenged in the complaint, so the more
specialized two-part Aronson test does not apply”); Seminaris v. Landa, 662 A.2d 1350, 1354
(Del. Ch. 1995) (“Plaintiff does not challenge any specific board action that approved or ratified
these alleged wrongdoings.
Plaintiff must satisfy the one step test announced in Rales to
demonstrate that he was excused from making a demand.”).
III. DISCUSSION
Plaintiffs set forth their reasons for failing to make a demand on the Board in paragraph
255 of the Complaint. These reasons include: “(1) the Board’s actions which damaged [WalMart] were the product of a valid exercise of business judgment; and/or (2) a majority of the
Board is incapable of making an independent and disinterested decision about whether to
7
The Court notes, however, that the difference between Rales and Aronson may blur in cases like this one, since the
particularized allegations essential to creating reasonable doubt as to the substantial likelihood of personal liability
for breach of fiduciary duties may also implicate the question whether the Board can avail itself of business
judgment protections. See Guttman v. Huang, 823 A.2d 492, 501 (Del Ch. 2003) (recognizing this overlap and
stating that when “there are allegations that a majority of the board that must consider a demand acted wrongfully,
the Rales test sensibly addresses concerns similar to the second prong of Aronson”).
11
institute and vigorously prosecute this action.” Because the Court has determined that the Rales
test applies to this case, the Court will not consider whether the Board’s actions, or conscious
inaction, were a valid exercise of business judgment. 8
Under Rales, these allegations must establish a reason to doubt that the Board could have
properly exercised its independent and disinterested business judgment in responding to a
demand. Rales, 634 A.2d at 934. A reasonable doubt of disinterestedness can be shown if
Plaintiffs’ particularized allegations, construed as true, demonstrate a “substantial likelihood” of
Defendants’ personal liability. Id. at 936 (finding a reasonable doubt of disinterestedness where
the potential for liability is not a mere threat but instead may rise to a substantial likelihood).
Wal-Mart’s charter immunizes its directors from liability for breaches of fiduciary duty to
the fullest extend allowed by § 102(b)(7) of the Delaware General Corporation Law. ECF No.
111-1, p. 13.
Thus, Wal-Mart’s charter exculpates its directors from personal liability for
monetary damages except “breaches of the duty of loyalty or actions or omissions not in good
faith or that involve intentional misconduct or a knowing violation of law.” In re SAIC, Inc.
Deriv. Litig., 948 F. Supp. 2d 366, 378 (S.D.N.Y. 2013) (applying Delaware law). Where
directors are contractually or otherwise exculpated from liability except for claims based on
fraudulent, illegal, or bad faith conduct, a plaintiff must plead particularized facts that
demonstrate the directors acted with scienter, meaning that they had actual or constructive
knowledge that their conduct was legally improper. Wood, 953 A.2d at141.
8
The Court notes that the difference between Rales and Aronson may blur in cases like this one, because the
particularized allegations essential to creating reasonable doubt as to the substantial likelihood of personal liability
for breach of fiduciary duties may also implicate the question whether the Board can avail itself of business
judgment protections. See Guttman, 823 A.2d at 501 (recognizing the overlap and stating that when “there are
allegations that a majority of the board that must consider a demand acted wrongfully, the Rales test sensibly
addresses concerns similar to the second prong of Aronson”).
12
A. Substantial Likelihood of Liability for Participation in the 2005-2006 Events
Plaintiffs allege that Defendants breached their fiduciary duties to Wal-Mart by
permitting its directors and officers to violate foreign and federal laws, by permitting the
obstruction of an adequate investigation of these violations, and by covering up these violations.
Plaintiffs further allege that a majority of the Director Defendants have a strong interest in
refusing to bring the claims asserted by Plaintiffs because a majority of the Director Defendants
face a substantial likelihood of personal liability stemming from a majority of the Director
Defendants’ active participation in the 2005-2006 events. According to Plaintiffs, nine Director
Defendants 9 knew about the wrongful conduct in 2005-2006 (the alleged bribery in Mexico and
the internal investigation that allegedly concealed the wrongdoing) and either actively
participated in it or acquiesced in it. Defendants argue that Plaintiffs have failed to sufficiently
plead that a majority of the Board knew about or consciously ignored the alleged wrongful
conduct in 2005-2006 and therefore cannot show that a majority of the Director Defendants face
a substantial likelihood of personal liability. The Court agrees.
Nothing in the Complaint suggests any particularized basis to infer that a majority of the
Board had actual or constructive knowledge of the alleged misconduct, let alone that they acted
improperly with scienter. See Guttman, 823 A.2d at 504. Plaintiffs’ allegations do not provide
the particulars for what each Director Defendant knew, how he or she learned of the information,
or when he or she learned of the information. Thus, as discussed below, Plaintiffs have failed to
plead with particularity that at least eight Director Defendants face a substantial likelihood of
personal liability so that their ability to consider a demand impartially would be compromised.
9
Plaintiffs identify these nine Director Defendants as Scott, Duke, S. Robson Walton, Jim Walton, Breyer, Burns,
Daft, Williams, and Wolf.
13
1. Director Defendants Breyer, Burns, Daft, Williams, and Wolf
Breyer, Burns, Daft, Williams, and Wolf were on the Board during the alleged 2005-2006
misconduct. Plaintiffs allege in a conclusory fashion that these five Director Defendants must
have had knowledge because they were “either directly informed of the wrongdoing or were
informed through the proper operation of the Board’s governance and [Wal-Mart’s] reporting
systems.” ECF No. 16, ¶ 278. According to Plaintiffs, these five Director Defendants must have
known about the alleged Walmex events merely because “Scott had an obligation to report” them
to the Audit Committee and, in turn, “the Audit Committee was required … to report” them “to
the full Board of Directors.” ECF No. 114, p. 17.
Notably, Plaintiffs do not allege that Scott actually reported the Walmex events to the
Audit Committee. Plaintiffs have alleged no facts to support the allegation that this group of five
Director Defendants were “directly informed” of any wrongdoing. Instead, Plaintiffs rely on
group-wide conclusory allegations about what the Board must have known based on an
imputation of knowledge theory. This theory, however, is flawed.
First, Plaintiffs’ allegations that these five Director Defendants should have been
informed of the wrongdoing “through the proper operation of the Board’s governance and [WalMart’s] reporting systems” are not sufficiently particular to show that these Director Defendants
had constructive knowledge of wrongdoing. Courts may not impute knowledge of wrongdoing
to directors simply because they serve on the board or because the corporate governance
structure requires that notice of the wrongdoing reach the board. Gulbrandsen v. Stumpf, 2013
WL 6406922, at *6 (N.D. Cal. Dec. 6, 2013) (applying Delaware law); In re Citigroup Inc. v.
S’holder Derivative Litig., 964 A.2d 106, 135 (Del. Ch. 2009) (“[D]irector liability is not
measured by the aspirational standards established by the internal documents detailing a
14
company’s oversight system.”); Wood, 953 A.2d at 142; Desimone v. Barrows, 924 A.2d 908,
943, n.121 (Del. Ch. 2007) (Directors cannot be charged with knowledge of information simply
because they served on a board with a director who may have known such information).
Second, Plaintiffs allege that, because these five Director Defendants served on various
committees during 2005-2006, they should be presumed to have been aware of the allegedly
illegal conduct in Mexico and the alleged cover-up. 10 Delaware law, however, does not allow
plaintiffs to presume a director’s knowledge based on his or her committee membership. See
South, 62 A.3d at 17 & n.6 (“As numerous Delaware decisions make clear, an allegation that the
underlying cause of a corporate trauma falls within the delegated authority of a board committee
does not support an inference that the directors on that committee knew of and consciously
disregarded the problem for purposes of Rule 23.1.”); Wood, 953 A.2d at 16 (“[T]he assert[ion]
that membership on the Audit Committee is a sufficient basis to infer the requisite scienter … is
contrary to well-settled Delaware law.”).
The Complaint is devoid of particularized facts on a director-by-director basis that would
support that these five Director Defendants had knowledge of the alleged misconduct. Thus,
Plaintiffs’ allegation that the Board made a conscious “decision to condone and cover up
criminal activity at the company” (ECF No. 114, p. 8) must fail because a conscious decision
requires knowledge.
Without showing knowledge, Plaintiffs cannot show that these five
Director Defendants face a substantial likelihood of personal liability stemming from the 20052006 events.
10
Plaintiffs allege that Breyer served on the Committee on Strategic Planning, and therefore that he “would have
inquired whether Wal-Mart’s exponential growth in Mexico was being accomplished in compliance with the law.”
ECF No. 16, ¶ 224. Plaintiffs allege that Burns and Williams served on the Audit Committee, and therefore they
must have received reports regarding the investigation. ECF No. 16, ¶ 28-29 and 135.
15
2. Directors Alvarez, Cash, Corbett, Reinemund, and Sorenson
Alvarez, Cash, Corbett, Reinemund, and Sorenson joined the Board in recent years and
were not on the Board during the alleged misconduct in 2005-2006. They are each mentioned by
name in the lengthy Complaint only three times. ECF No. 16, ¶¶ 33-37, 254, and 269. Plaintiffs
offer no reason why these five Director Defendants would face a substantial likelihood of
personal liability stemming from the 2005-2006 conduct. Accordingly, Plaintiffs have not given
the Court a reason to doubt that the ten Director Defendants discussed above—a majority of the
Board—are capable of exercising a disinterested and independent business judgment.
B. Substantial Likelihood of Liability for Plaintiffs’ Caremark Claim
Plaintiffs allege that certain Director Defendants breached their fiduciary duty of loyalty
by not acting in good faith to ensure Wal-Mart’s compliance with the law. 11 This special type
of breach of loyalty claim is known as a Caremark claim, 12 and it is “possibly the most difficult
theory in corporation law upon which a plaintiff might hope to win a judgment.” Stone ex rel.
AmSouth Bancorporation v. Ritter, 911 A.2d 362,372 (Del. 2006). “The essence of a Caremark
claim is a breach of the duty of loyalty arising from a director’s bad-faith failure to exercise
oversight over the company.” Rich ex rel. Fuqi Int’l, Inc. v. Yu Kwai Chong, 66 A.3d 963, 98082 (Del Ch. 2013). Bad faith “in the corporate fiduciary of loyalty context” includes “a failure to
act in the face of a known duty to act, which demonstrates a conscious disregard of one’s duties.”
Gatz Properties, LLC v. Auriga Capital Corp., 59 A.3d 1206, 1216-17 (Del. 2012). “Under
Caremark and its progeny, liability for such a failure to oversee requires a showing that the
11
Plaintiffs state that they “have pled this theory of liability as an alternative to their theory that Defendants
deliberately violated the law.” ECF No. 114, p. 39.
12
In re Caremark Int’l Inc. Derivative Litig. held that a “sustained or systematic failure of the board to exercise
oversight—such as an utter failure to attempt to assure a reasonable information and reporting system exists—will
establish the lack of good faith that is a necessary condition to liability.” 698 A.2d 959, 971 (Del. Ch. 1996).
16
directors knew they were not discharging their fiduciary obligations or that they demonstrated a
conscious disregard for their duties.” In re Intel Corp. Derivative Litig., 621 F. Supp. 2d 165,
174 (D. Del. 2008). Here, Plaintiffs have not alleged particularized facts sufficient to show a
substantial likelihood of liability under this high standard. See Rales, 634 A.2d at 936.
According to Plaintiffs, demand is excused under Rales, because at least nine Director
Defendants face a substantial likelihood of liability arising out of their conscious disregard of
evidence of illegality. 13 Plaintiffs allege that certain Director Defendants received evidence of
the alleged Walmex bribery scheme, and faced with this “red flag,” consciously chose to ignore
it. ECF No. 16, ¶ 228. Although the Complaint alleges that the Director Defendants knew of
and ignored evidence of wrongdoing, the Complaint nowhere alleges with particularity what
exactly the Director Defendants were told about the alleged misconduct or when they were told.
Again, Plaintiffs charge most of the Director Defendants with constructive notice of the alleged
red flag. The Court, however, has already rejected this theory and determined that Plaintiffs
have not pled with particularity that a majority of the Board were put on notice of the alleged
2005-2006 misconduct. If a Director Defendant has no knowledge of the alleged misconduct (or
“red flag”), he or she could not have consciously ignored it and disregarded any duty to act on it.
Plaintiffs’ allegations, therefore, are not sufficient to establish a substantial likelihood of liability
giving rise to demand futility.
C. Substantial Likelihood of Liability for Filing False Proxy Statements
Plaintiffs allege that the Director Defendants “allow[ed] Wal-Mart to file false proxy
statements in April 2010 and April 2011 in violation of Section 14 of the Exchange Act.” ECF
13
Plaintiffs allege that certain Director Defendants “learned that Wal-Mart internal investigators had confirmed the
existence of widespread criminal bribery, but they allowed the investigation to be turned over to a culpable
participant, Rodriguezmacedo, and buried it for six years.” ECF No. 114, p. 40-41.
17
No. 114, p. 33. According to Plaintiffs, demand is excused under Rales, 14 because a majority of
the Board face a substantial likelihood of liability arising out of their alleged filing of false proxy
statements. See Rales, 634 A.2d at 936. Plaintiffs allege that the Director Defendants materially
represented the effectiveness of the Board’s oversight of compliance issues at Wal-Mart. ECF
No. 16, ¶ 288. This claim, however, fails because it rests on the same impermissible and
unsupported inferences as Plaintiffs’ other theories: the inference that the Board allowed the
filing of the proxy statements despite knowing they were false. See SEC v. Shanahan, 646 F.3d
536, 546 (8th Cir. 2011) (holding that knowledge is the requisite state of mind for Section 14(a)
claims, at least as to outside directors).
Plaintiffs again rely on the same imputation of
knowledge theory that the Court has discussed above, and the Court again rejects this imputation
theory as it relates to the Section 14(a) claims.
Further, the Complaint does not contain specific factual allegations that reasonably
suggest that a majority of the Director Defendants were involved in the preparation or approval
of the proxy statements. See In re Bank of N.Y. Mellon Corp. Forex Transactions Litig., 991 F.
Supp. 2d 457, 463 (S.D.N.Y. 2013) (applying Delaware law).
There are no allegations
explaining any process by which the Board actively or purposefully made a decision to omit the
allegedly missing information. Other than pointing to language appearing on the notices of the
annual shareholders’ meetings declaring that the notices were issued “By the Order of the Board
of Directors,” Plaintiffs do not allege what specific actions any Defendant Director took to
approve or ratify the alleged wrongdoings. Instead, Plaintiffs conclusively state that the Board
“caused Wal-Mart to disseminate” the proxy statements. ECF No. 16, ¶ 269. The Court,
14
The Court finds that the Rales standard is applicable here, because the conclusory references to the Board’s failure
to disclose are insufficiently particularized to allege a specific board decision to omit the information from the proxy
statement. See In re Morgan Stanley Der. Litig., 542 F. Supp. 2d 317, 322 (S.D.N.Y. 2008) (applying Delaware
law).
18
therefore, cannot conclude that demand is excused based on the theory that a majority of the
Board face a substantial likelihood of liability arising out of their filing false proxy statements.
IV. CONCLUSION
For the reasons discussed above, the Court finds that Plaintiffs’ conclusory allegations
fail to satisfy the requirements for pleading demand futility. Accordingly, Defendants’ Motion
to Dismiss Case for Failure to Establish Demand Futility (ECF No. 109) is GRANTED, and this
case is DISMISSED. 15
IT IS SO ORDERED, this 31st day of March, 2015.
/s/ Susan O. Hickey
Susan O. Hickey
United States District Judge
15
In their response (ECF No. 114, p. 41), Plaintiffs request leave to address any pleading deficiencies in an amended
complaint, in the event the Court finds the Complaint deficient. Plaintiffs, however, fail to advise the Court of how
an amendment would cure the defects in the Complaint. Thus, the Court has no idea of what Plaintiffs’ amendment
might look like or what additional facts may entitle them to relief. Accordingly, the Court concludes that granting
leave to amend is inappropriate and Plaintiffs’ request for leave to amend is denied.
19
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