There are certain topics in the FCPA space that are over-hyped.
The document request dispute in connection with a Wal-Mart derivative action is certainly one example.
By way of background, in the aftermath of Wal-Mart’s Foreign Corrupt Practices Act scrutiny, shareholders (as is fairly typical in instances of FCPA scrutiny) filed derivative actions against the company and various current or former officers and directors alleging, among other things, breach of fiduciary duties. Derivative actions are subject to specific pleading rules and in connection with its filed complaint the Indiana Electrical Workers Pension Trust Fund (“Plaintiff”) made certain demands on Wal-Mart under Section 220 of the Delaware General Corporation Law. Titled ”Inspection of Books and Records,,” Section 220 governs a stockholder’s right to inspect certain corporate books and records.
In response to Plaintiff’s Section 220 Demand, Wal-Mart agreed to make certain documents available, but declined to provide documents that it determined were not necessary and essential to the stated purposes in the Demand or that were protected by the attorney-client privilege or work-product doctrine. To resolve the disputed document request issues, the Delaware Court of Chancery (a trial court) ordered Wal-Mart to produce certain additional documents.
Wal-Mart disagreed with the Court of Chancery’s order and filed an appeal with the Delaware Supreme Court arguing that the trial court erred in ordering Wal-Mart to produce documents that far exceeded the proper scope of Section 220 requests.
Despite the rather pedestrian nature of the document request dispute, some saw (or perhaps were hoping to see) monumental issues.
This FCPA Blog post sought to explain “why the issues before the Delaware Supreme Court are important to all compliance officers and corporate stakeholders, and how the outcome could influence compliance programs globally for decades to come.” Why was the Wal-Mart dispute, according to the FCPA Blog commentator, so important?
“Because at the heart of the appeal is the question of what misconduct by directors so taints them that shareholders are allowed to proceed with a civil complaint. When can directors be absolved from directing an internal FCPA investigation? And when can they ignore red flags of overseas misconduct and conduct business as usual?”
As highlighted below, none of these issues were on appeal to the Delaware Supreme Court.
Further, this FCPA Blog post stated that Wal-Mart’s appeal “could be the right forum for landmark changes to guide executives, directors, and compliance professionals for decades” and the commentator was hoping for the Delaware Supreme Court to “seize the opportunity to paint on the largest canvas possible, to illuminate new roles for those we’ve put in charge of compliance.”
As highlighted below, this did not happen either.
Hype aside, as framed by the Delaware Supreme Court in its decision, ”the sole issue presented for judicial determination was whether Wal-Mart produced all of the documents that were responsive to [Plaintiff's] Demand.” Under the “necessary and essential” test applicable to Section 220 proceedings, and reviewing the Court of Chancery’s order under the abuse of discretion standard, the Supreme Court determined that all issues on appeal (both issues raised by Wal-Mart as well as Plaintiffs) were without merit and therefore affirmed the Court of Chancery order.
Specifically, as to the Plaintiff’s demand for officer-level documents, the court concluded that “officer-level documents are necessary and essential to determining whether and to what extent mismanagement occurred and what information was transmitted to Wal-Mart’s directors and officers.”
In its decision, the Supreme Court also addressed certain pedestrian issues such as the relevant dates of production, disaster recovery tapes for two document custodians, and the precision and specificity of certain document requests.
The Delaware Supreme Court also addressed an issue on appeal not presented to the Court of Chancery concerning the so-called Garner doctrine (a fiduciary exception to the attorney-client privilege in which stockholders are allowed to invade the corporation’s attorney-client privilege in order to prove fiduciary breaches by those in control of the corporation upon showing good cause).
In its decision, the Supreme Court acknowledged its previous dicta statements in which it endorsed the Garner doctrine in a Section 220 proceeding and agreed with previous Court of Chancery decisions applying the Garner doctrine in a Section 220 proceeding.
Applying the Garner doctrine to the Plaintiffs’ Section 220 demand, the Supreme Court agreed with the Court of Chancery that the Plaintiffs established good cause to order the privileged documents be produced because the Plaintiffs “had demonstrated a colorable claim against Wal-Mart” and that the information sought was not available via other means. In short, the Supreme Court stated:
“The record supports the Court of Chancery’s conclusion that the documentary information sought in the Demand should be produced by Wal-Mart pursuant to the Garner fiduciary exception to the attorney-client privilege.”
The Supreme Court further found that the Court of Chancery properly ruled that Plaintiffs’ demands for certain work-product documents were legitimate under a relevant Court of Chancery rule because the relevant Garner factors overlapped with the required showings necessary under the rule.
In short, the issues presented to the Delaware Supreme Court, and the Court’s decision, merely concerned document issues relevant to pre-trial pleading requirements in a derivative action – hardly the momentous issues some had reported or predicted.
Moreover, although the Delaware Supreme Court appeal was viewed as Wal-Mart’s appeal, as a matter of fact, the Plaintiff also filed cross-appeals which the Supreme Court also deemed to be without merit. The Supreme Court denied the Plaintiffs request that Wal-Mart should collect documents from additional custodians and also denied the Plaintiffs’ challenge to the Court of Chancery’s order requiring it to return to Wal-Mart certain privileged documents that were delivered to its counsel by an anonymous source.
For oral argument of the Delaware Supreme Court hearing, see here.