Saturday, May 21, 2016
Last week, Chancellor Andre Bouchard dismissed the derivative complaint filed against Walmart concerning the WalMex bribery scandal, on the grounds of issue preclusion: Earlier, a federal court in Arkansas had dismissed identical claims filed by a different set of plaintiffs.
The reason that the Arkansas decision came so much earlier than the Delaware decision was, of course, that the Arkansas plaintiffs filed their complaint without first exercising their inspection rights under Section 220. The Delaware plaintiffs did exercise their rights, as Delaware has repeatedly counseled plaintiffs should do, and fought Walmart for years over it – taking a trip to the Delaware Supreme Court as a result.
Standing alone, then, this case stands for the proposition that Delaware has no way of enforcing its own guidance to plaintiffs that they seek books and records before filing a derivative claim.
But there’s hope – because this is exactly the kind of destructive competition among plaintiffs’ firms that forum selection bylaws were meant to address. Had such a bylaw been in place, all of the plaintiffs could have been shunted into a Delaware forum.
Unfortunately, no. Because defendants have the freedom to ignore a forum selection bylaw if their interests are served by dealing with a weaker set of plaintiffs in a foreign forum.
I’ve expressed concern about this issue before, and my fears came to fruition in Gordon Niedermayer, et al. v. Steven A. Kriegsman, et al. and CytRx Corp., C.A. No. 11800-VCMR, tr. ruling (Del. Ch. May 2, 2016). There, the company waived its forum selection bylaw just in time to choose which group of plaintiffs with which to settle. When the Delaware plaintiffs challenged the waiver, the court upheld it: though the court warned directors against forum selection “gamesmanship,” it found no such gamesmanship here.
Though I'm not expressing an opinion on the particular ruling in CytRx, the situation stands as a warning of how Delaware procedural law - which is becoming as much a part of its corporate jurisprudence as its substantive standards - may be threatened. For example, in cases like In re Trulia Stockholder Litigation, 2016 WL 325008 (Del. Ch. Jan. 22, 2016), Delaware has declared a new war on “intergalactic releases” for meaningless disclosures in merger litigation – a move largely applauded by many commenters. But Trulia and cases like it will be reduced to rubble if plaintiffs can simply file in other jurisdictions, while defendants – seeking certainty that their deal is insulated from further challenge – waive forum selection bylaws as it suits them.
Indeed, according to a study by C. N. V. Krishnan, Steven Davidoff Solomon, & Randall S. Thomas, experienced defense counsel take advantage of the fact that doubtful merger agreements tend to result in challenges in multiple fora, reaching sweetheart settlements with the most amenable group of plaintiffs. In other words, the very weakness of the merger is what neuters the plaintiffs’ challenge: Lower premiums invite litigation by multiple firms, whom defendants can then play off each other.
If Delaware doesn’t come up with a way to manage this situation, the market will – and not to Delaware’s benefit.