Cal. State Teachers' Ret. Sys. v. Alvarez

• Decision Date: 25 January 2018
• Docket Number: No. 295, 2016,295, 2016
• Parties: CALIFORNIA STATE TEACHERS' RETIREMENT SYSTEM, New York City Employees' Retirement System, New York City Police Pension Fund, Police Officers' Variable Supplements Fund, Police Supervisor Officers' Variable Supplements Fund, New York City Fire Department Pension Fund, Fire Fighters' Variable Supplements Fund, Fire Officers' Variable Supplements Fund, Board of Education Retirement System of the City of New York, Teachers' Retirement System of the City of New York, New York City Teachers' Variable Annuity Program, and Indiana Electrical Workers Pension Trust Fund IBEW, Plaintiffs Below, Appellants, v. Aida M. ALVAREZ, James I. Cash, Jr., Roger C. Corbett, Douglas N. Daft, Michael T. Duke, Gregory B. Penner, Steven S. Reinemund, Jim C. Walton, S. Robson Walton, Linda S. Wolf, H. Lee Scott, Jr., Christopher J. Williams, James W. Breyer, M. Michele Burns, David D. Glass, Roland A. Hernandez, John D. Opie, J. Paul Reason, Arne M. Sorenson, Jose H. Villarreal, Jose Luis Rodriguezmacedo Rivera, Eduardo Castro–wright, Thomas A. Hyde, Thomas A. Mars, John B. Menzer, Eduardo F. Solorzano Morales, and Lee Stucky, Defendants Below, Appellees, Wal–Mart Stores, Inc., Nominal Defendant Below, Appellee.
• Court: United States State Supreme Court of Delaware

179 A.3d 824

CALIFORNIA STATE TEACHERS' RETIREMENT SYSTEM, New York City Employees' Retirement System, New York City Police Pension Fund, Police Officers' Variable Supplements Fund, Police Supervisor Officers' Variable Supplements Fund, New York City Fire Department Pension Fund, Fire Fighters' Variable Supplements Fund, Fire Officers' Variable Supplements Fund, Board of Education Retirement System of the City of New York, Teachers' Retirement System of the City of New York, New York City Teachers' Variable Annuity Program, and Indiana Electrical Workers Pension Trust Fund IBEW, Plaintiffs Below, Appellants,

v. Aida M. ALVAREZ, James I. Cash, Jr., Roger C. Corbett, Douglas N. Daft, Michael T. Duke, Gregory B. Penner, Steven S. Reinemund, Jim C. Walton, S. Robson Walton, Linda S. Wolf, H. Lee Scott, Jr., Christopher J. Williams, James W. Breyer, M. Michele Burns, David D. Glass, Roland A. Hernandez, John D. Opie, J. Paul Reason, Arne M. Sorenson, Jose H. Villarreal, Jose Luis Rodriguezmacedo Rivera, Eduardo Castro–wright, Thomas A. Hyde, Thomas A. Mars, John B. Menzer, Eduardo F. Solorzano Morales, and Lee Stucky, Defendants Below, Appellees,Wal–Mart Stores, Inc., Nominal Defendant Below, Appellee.

No. 295, 2016

Supreme Court of Delaware.

Submitted: November 1, 2017

Decided: January 25, 2018

Stuart M. Grant, Esquire, (argued), Michael J. Barry, Esquire, and Nathan A. Cook, Esquire, Grant & Eisenhofer, P.A., Wilmington, Delaware; Christine S. Azar, Esquire, Ryan T. Keating, Esquire, and Ned Weinberger, Esquire, Labaton Sucharow LLP, Wilmington, Delaware. Of Counsel: Daniel Girard, Esquire, Amanda Steiner, Esquire, Dena Sharp, Esquire, Adam Polk, Esquire, and Jordan Elias, Esquire, Girard Gibbs LLP, San Francisco, California; Thomas A. Dubbs, Esquire, Louis Gottlieb, Esquire, and Jeffrey A. Dubbin, Esquire, Labaton Sucharow LLP, New York, New York; Frederic S. Fox, Esquire, Hae Sung Nam, Esquire, Donald R. Hall, Esquire and Jeffrey P. Campisi, Esquire, Kaplan Fox & Kilsheimer LLP, New York, New York, for Appellants.

Donald J. Wolfe, Jr., Esquire, Steven C. Norman, Esquire and Tyler J. Leavengood, Esquire, Potter Anderson & Corroon LLP, Wilmington, Delaware. Of Counsel: Theodore J. Boutrous, Jr., Esquire (argued), and Alexander K. Mircheff, Esquire, Gibson Dunn & Crutcher LLP, Los Angeles, California; Mark A. Perry, Esquire, Gibson Dunn & Crutcher LLP, Washington, D.C., for Appellees.

David C. McBride, Esquire, and Nicholas J. Rohrer, Esquire, Young Conaway Stargatt & Taylor, LLP, Wilmington, Delaware. Of Counsel: Theodore N. Mirvis, Esquire, and Joshua J. Card, Esquire, Wachtell, Lipton, Rosen & Katz, New York, New York; Liz Dougherty, Esquire, Business Roundtable, Washington, D.C., for Amicus Curiae, the Business Roundtable.

Kathaleen St. J. McCormick, Esquire, and Nicholas J. Rohrer, Esquire, Young Conaway Stargatt & Taylor, LLP, Wilmington, Delaware. Of Counsel: Amanda F. Davidoff, Esquire, Judson O. Littleton, Esquire, and Lee J.F. Deppermann, Esquire, Sullivan & Cromwell LLP, Washington, D.C.; Steven P. Lehotsky, Esquire, and Janet Galeria, Esquire, U.S. Chamber Litigation Center, Inc., Washington, D.C.; Deborah R. White, Esquire, Retail Litigation Center, Inc., Arlington, Virginia, for Amici Curiae, the Chamber of Commerce of the United States of America and Retail Litigation Center, Inc.

Before VALIHURA, VAUGHN and TRAYNOR, Justices; WHARTON and CLARK, Judges^* constituting the Court en Banc.

VALIHURA, Justice:

The Court of Chancery initially found that Wal–Mart stockholders who were attempting to prosecute derivative claims in Delaware could no longer do so because another court, a federal court in Arkansas, had reached a final judgment on the issue of demand futility first, and the stockholders were adequately represented in that action. But the derivative plaintiffs in Delaware assert that applying issue preclusion in this context violates their Due Process rights.

This dispute implicates complex questions of law and policy, including: the relationship among competing derivative plaintiffs (and whether they may be said to be in "privity" with one another); whether failure to seek board-level company documents renders a derivative plaintiff's representation inadequate; policies underlying issue preclusion, such as preventing duplicative litigation and promoting judicial economy; and our obligation to respect the judgments of other jurisdictions.

The Chancellor's Original Opinion¹ granting Defendants'² motion to dismiss, issued May 13, 2016, did not expressly focus on the Delaware Plaintiffs'³ Due Process arguments as a separate issue. We asked the Chancellor to supplement his opinion by focusing on the Due Process concerns. In his Supplemental Opinion,⁴ issued July 25, 2017, the Chancellor reiterated that, under the present state of the law, the subsequent plaintiffs' Due Process rights were not violated. Nevertheless, he advocates a different approach. Though acknowledging that no federal court has reached the same conclusion, the Chancellor suggested that we adopt a rule that a judgment in a derivative action cannot bind a corporation or other stockholders until the suit has survived a Rule 23.1 motion to dismiss. The Chancellor believes that such a rule would better protect derivative plaintiffs' Due Process rights, even when they were adequately represented in the first action.

We decline to adopt the Chancellor's recommendation that we refuse to give preclusive effect to other courts' decisions on demand futility and, instead, AFFIRM the Original Opinion granting Defendants' motion to dismiss for the reasons discussed below, including because, under the governing federal law, there is no Due Process violation.

I.

The facts of this case follow the familiar pattern when news reports expose scandal at a corporation.⁵ After the New York Times reported in April 2012 on an alleged bribery scheme and cover-up perpetrated by executives at Wal–Mart's Mexican unit,⁶ Wal–Mart de Mexico ("WalMex"), derivative suits followed. The Arkansas Plaintiffs⁷ filed eight derivative complaints in the United States District Court for the Western District of Arkansas, and seven derivative actions were filed in the Delaware Court of Chancery.⁸ The claims in Arkansas and Delaware were similar: they were primarily for breaches of fiduciary duty related to the Wal–Mart board's oversight of WalMex, though the litigation in Arkansas included additional claims under Sections 14(a) and 29(b) of the Securities Exchange Act of 1934, and a claim for contribution and indemnity.⁹ The Defendants filed motions seeking to have all litigation proceed in one forum¹⁰ and to stay the Arkansas litigation.¹¹ The Arkansas court initially stayed its proceedings pending the litigation in Delaware.¹²

But the situation took a turn from the ordinary when the litigation over a books-and-records demand filed pursuant to 8 Del. C. § 220 (" Section 220") became unusually contentious after the plaintiff alleged deficiencies in the Company's first production, received August 1, 2012.¹³ This dispute included a trial,¹⁴ an appeal to this Court,¹⁵ and a subsequent motion for contempt against Wal–Mart.¹⁶ In all, the Section 220 litigation lasted nearly three years.

The Delaware Plaintiffs attempted to obtain the Company's books and records because then-Chancellor Strine had commented, "I don't know why the plaintiffs would ever wish to proceed" without first obtaining additional documentary evidence.¹⁷ He added, "[t]here is everything about the context of this case which requires great care and pleading,"¹⁸ and he urged the Delaware Plaintiffs to "take a sincere look at the books and records and file the strongest possible complaint that [they] could."¹⁹ The Arkansas Plaintiffs were aware of the Chancellor's warning.²⁰

In the meantime, as the litigation over Wal–Mart's document production dragged on, the Eighth Circuit vacated the Arkansas federal district court's stay out of concern for the stalled Section 14(a) claim.²¹ The Eighth Circuit concluded that the district court's continued, blanket abstention was not proper under the Colorado River doctrine because the "Delaware and Federal Proceedings are not parallel" given that "Delaware courts have no jurisdiction to directly address the merits of the [Arkansas] Plaintiffs' Securities Act claims."²² But the Eighth Circuit noted that, on remand, the district court "may impose a more finite and less comprehensive stay, if it concludes that such a stay properly balances the rights of the parties and serves the interests of judicial economy."²³

Back at the Arkansas district court, the Defendants modified their stay request and asked for a stay that would expire upon the Delaware court's ruling on demand futility. They argued that this more limited stay would thus satisfy the Eighth Circuit's directive.²⁴ But the Arkansas court denied the Defendants' motion.²⁵ The Defendants then moved to dismiss the Arkansas Complaint for failure to plead demand futility under Federal Rule of Civil Procedure 23.1.²⁶

The Delaware Plaintiffs had expressed concern that, if the Arkansas court ruled first and found demand futility lacking, the Defendants were likely to argue in Delaware that the Arkansas court's ruling on demand futility should have preclusive effect through the doctrine of "collateral estoppel," also known as "issue preclusion" (used here interchangeably).²⁷ The Delaware Plaintiffs also knew that the Arkansas court had warned in its June 4, 2014, order denying Defendants' stay that "[i]t is likely that the first decision on demand futility will be entitled to collateral estoppel effect."²⁸ Yet the Delaware Plaintiffs refrained from intervening or otherwise expressing their concerns to the Arkansas court.²⁹ On March 31, 2015, the Arkansas court granted Defendants' motion to dismiss, with prejudice.³⁰

On May 1, 2015, nearly a month after the Arkansas dismissal, the Delaware Plaintiffs amended the operative Delaware Complaint,...