California State Teachers’ Retirement System v. Alvarez

After the New York Times reported an alleged bribery scheme and cover-up at Wal-Mart de Mexico, multiple shareholders, including California State Teachers’ Retirement System (plaintiffs) sued Wal-Mart Inc. (Wal-Mart) and its executives and directors, including Aida Alvarez (defendants) in Delaware state court, while other shareholders sued in Arkansas federal court. Initially, the Arkansas federal court stayed its proceedings pending the outcome of the Delaware litigation. Delaware chancellor Strine urged the claimants to make a books-and-records demand to prepare the strongest complaint possible. When the Delaware shareholders claimed Wal-Mart’s response was deficient, a three-year discovery dispute including a trial and appeal ensued. Meanwhile, more than a dozen attorneys from several firms represented the Arkansas shareholders, including lead counsel who had successfully prosecuted Delaware books-and-records litigation before. Those attorneys knew about Strine’s warning and that implicating a board usually required internal documents showing board-level knowledge but decided to rely instead on internal memoranda linked in the Times article that they thought proved board knowledge years beforehand. Those memoranda turned out to show officers but not directors involved in the scandal, such that once the stay lifted, the Arkansas federal court dismissed the complaint for failure to plead demand futility. Wal-Mart’s executives and directors moved to dismiss the Delaware litigation, arguing the Arkansas decision collaterally estopped the Delaware shareholders from relitigating the demand-futility issue. The Delaware court agreed and dismissed the Delaware litigation based on issue preclusion. The shareholders appealed.