167 A.3d 513
Del. Ch.2017Background
- 2012 NYT article alleged bribery and cover-up at Wal‑Mart de Mexico; multiple derivative suits followed in Arkansas (federal) and Delaware (Chancery).
- Arkansas federal court consolidated suits and dismissed the consolidated complaint for failure to plead demand futility; the Eighth Circuit affirmed.
- Delaware plaintiffs pursued a Section 220 record demand, obtained documents, and filed a consolidated derivative complaint in Chancery after the Arkansas dismissal.
- Defendants moved to dismiss in Delaware, arguing the Arkansas dismissal collateral‑estopped the demand‑futility issue; the Chancellor granted dismissal in Wal‑Mart I applying Arkansas issue‑preclusion principles and the Restatement’s adequacy‑of‑representation test.
- The Delaware Supreme Court remanded asking whether binding subsequent stockholders by the earlier dismissal violates their Due Process rights (citing Smith v. Bayer).
- On remand the Chancellor re‑examined whether the prevailing approach (privity + Restatement/grossly‑deficient adequacy review) suffices or whether a bright‑line EZCORP rule (no preclusive effect until a plaintiff survives Rule 23.1 or the board declines to oppose suit) should be adopted to better protect due process and address “fast‑filer” concerns.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether an earlier dismissal for failure to plead demand futility in another forum can preclude later stockholders without violating Due Process | Arkansas dismissal should not bind later stockholders who did not receive personal process or whose interests were not adequately represented | Preclusion is proper: corporation is real party in interest; privity exists and the earlier plaintiffs adequately represented stockholders | Court earlier held (Wal‑Mart I) that Arkansas law governs and preclusion is permissible unless due process (inadequate representation) fails; on remand Chancellor recommends reconsidering rule and endorses EZCORP approach but leaves final decision to Supreme Court |
| Whether different shareholder plaintiffs are in “privity” for issue preclusion in derivative suits | No privity because individual shareholders sue on their own behalf when demand is not excused | Yes privity: both plaintiffs sue on behalf of the corporation so they are interchangeable; majority rule finds privity | Majority authority and Wal‑Mart I treat privity as satisfied; Chancellor found Arkansas likely would find privity but emphasized adequacy requirement protects due process |
| Standard for determining adequacy of representation (Due Process check on nonparty preclusion) | Later plaintiffs may lack notice or opportunity; adequacy must be rigorously assessed | Adequacy inquiry should be deferential; representation is inadequate only if “grossly deficient” or misaligned | Court and persuasive circuits apply Restatement §42 “grossly deficient” standard; Chancellor notes this is the prevailing constitutional check but questions whether it is sufficient in practice |
| Whether a bright‑line rule should prevent preclusion before a derivative plaintiff survives Rule 23.1 or obtains board authorization (EZCORP rule) | Plaintiffs argue such a rule better protects Due Process and limits fast‑filer abuse | Defendants argue Bayer did not decide on Due Process and that derivative suits differ from class actions | Chancellor recommends Supreme Court adopt EZCORP bright‑line rule (no preclusion pre‑Rule 23.1/board authorization) as better safeguarding Due Process, though acknowledges prevailing authority supports the contrary result |
Key Cases Cited
- Smith v. Bayer Corp., 564 U.S. 299 (2011) (distinguishes pre‑ and post‑certification preclusion in class actions; informs analogy to derivative suits)
- Taylor v. Sturgell, 553 U.S. 880 (2008) (limits nonparty preclusion; sets exceptions including adequate representation)
- Richards v. Jefferson County, Alabama, 517 U.S. 793 (1996) (state courts may shape res judicata but extreme applications can conflict with federal rights)
- Arduini v. Hart, 774 F.3d 622 (9th Cir. 2014) (applies issue preclusion to bar later derivative suit; endorses adequacy review under Restatement)
- In re Sonus Networks, Inc. Shareholder Derivative Litigation, 499 F.3d 47 (1st Cir. 2007) (adopts “grossly deficient” adequacy standard for nonparty preclusion in derivative context)
- Pyott v. Louisiana Municipal Police Employees’ Retirement System, 74 A.3d 612 (Del. 2013) (rejects irrebuttable presumption of inadequacy for fast‑filers; addresses privity and adequacy questions)
- In re EZCORP, Inc. Consulting Agreement Derivative Litigation, 130 A.3d 934 (Del. Ch. 2016) (proposes bright‑line rule that judgments before surviving Rule 23.1 or board authorization should not bind corporation or other stockholders)
- Ross v. Bernhard, 396 U.S. 531 (1970) (recognizes dual nature of derivative suits)
- Aronson v. Lewis, 473 A.2d 805 (Del. 1984) (describes two‑fold nature of derivative actions)
- Cottrell v. Duke, 829 F.3d 983 (8th Cir. 2016) (affirmed Arkansas district court dismissal in Wal‑Mart litigation)