Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-4_06-cv-03532/USCOURTS-cand-4_06-cv-03532-6/pdf.json

Parties Involved:
James W. Breyer
Defendant
M.J. Furman
Plaintiff
David D. Glass
Defendant
Roland A. Hernandez
Defendant
H. Lee Scott
Defendant
Jack C. Shewmaker
Defendant
Jose H. Villarreal
Defendant
Wal-Mart Stores, Inc.
Defendant
Jim C. Walton
Defendant
S. Robson Walton
Defendant

Document Text:

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF CALIFORNIA

OAKLAND DIVISION

M.J. FURMAN, et al.,

Plaintiffs,

 v.

S. ROBSON WALTON, et al.,

Defendants. 

No. C 06-3532 SBA

ORDER

[Docket No. 45]

Before the Court is defendants S. Robson Walton, Jim C. Walton, James W. Breyer, David D.

Glass, Roland A. Hernandez, H. Lee Scott, Jr., Jack C. Shewmaker, Jose H. Villarreal, and nominal

defendant Wal-Mart Stores, Inc.’s (collectively “defendants”), motion to dismiss pursuant to Federal

Rules of Civil Procedure 23.1 and 12(b)(6) [Docket No. 45]. After reading and considering the

arguments presented by the parties, the Court finds this matter appropriate for resolution without a

hearing. See FED. R. CIV. P. 78. For the reasons that follow, the motion to dismiss is GRANTED.

BACKGROUND

 This is a shareholder derivative action brought by plaintiff M.J. Furman. Furman is a

shareholder of Wal-Mart Stores, Inc, owning approximately 1,600 shares in the corporation. She seeks

to bring a claim on behalf of Wal-Mart against certain members of Wal-Mart’s Board of Directors and

senior officers. Furman alleges that the defendants breached their fiduciary duties to the corporation

by authorizing and encouraging the systematic violation of federal and state employment and labor laws:

By this action, plaintiff alleges that Defendants abused their fiduciary and controlling

positions at Wal-Mart by the reckless mismanagement of the Company, authorizing and

encouraging the systematic violation of federal and state civil rights, employment, and

labor laws with respect to the unlawful discrimination of Wal-Mart’s female workforce

and other unlawful or otherwise improper labor and related practices. 

Docket No. 1 (Compl. at ¶ 3). 

By failing “to properly oversee, control and govern Wal-Mart’s business and affairs” and failing

“to ensure Wal-Mart’s compliance with applicable anti-discrimination laws,” Furman maintains severe

Case 4:06-cv-03532-SBA Document 70 Filed 05/16/07 Page 1 of 8
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28 2

damage has resulted to Wal-Mart in the form of lawsuits, market losses, loss of goodwill, and a

deteriorating public image. Docket No. 1 (Compl. at ¶¶ 68, 76). Moreover, according to the plaintiff,

this has caused Wal-Mart’s stock to underperform in comparison to its competitors. 

As required by the governing law of the state of Delaware, on June 30, 2004, Furman made a

demand upon Wal-Mart’s Board of Directors that they commence action against the defendants for the

damages and injuries caused by the purported breach of fiduciary duty. Following the recommendation

of the Board’s Audit Committee, on November 22, 2004, the Board informed Furman that pursuit of this

litigation would not serve the best interests of Wal-Mart and its shareholders and that it would defer

final action on Furman’s demand until resolution of the litigation in a class action employment

discrimination case proceeding in this District---Dukes, et al. v. Walmart Stores, Inc., C-01-2252 MJJ.

See Docket No. 48, Ex. A (Refusal Letter).

In this motion to dismiss, the defendants challenge whether Furman has standing to bring a

derivative action on behalf of Wal-Mart pursuant to Rule 23.1, arguing that the plaintiff has failed to

allege with sufficient factual particularity that the board’s refusal of her demand does not fall within the

zone of the business judgment rule. 

LEGAL STANDARDS

A shareholder derivative action is one brought by a shareholder seeking “to enforce a corporate

cause of action against officers, directors, and third parties.” Kamen v. Kemper Fin. Servs., Inc. 500

U.S. 90, 95 (1991) (citation omitted) (emphasis in original). A derivative claim is one belonging to the

corporation, and it is the corporation, acting through its board of directors, which must make the

decision whether or not to assert the claim. See Grimes v. Donald, 673 A.2d 1207, 1215 (Del. 1996);

Aronson v. Lewis, 473 A.2d 805, 811-12 (Del. 1984). 

Federal Rule of Civil Procedure 23.1 addresses derivative actions by shareholders. This rule

states that

The complaint shall also allege with particularity the efforts, if any, made by the plaintiff

to obtain the action the plaintiff desires from the directors or comparable authority and,

Case 4:06-cv-03532-SBA Document 70 Filed 05/16/07 Page 2 of 8
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

1 In her response Furman correctly notes, and the defendants have not disputed, that “In

their motion to dismiss, defendants now ask the Court to evaluate their decision under the

‘demand refused’ line of case law, effectively conceding that their letter constituted a refusal of

plaintiff’s demand.” Docket No. 55. For instance, in their motion the defendants state that “the

shareholder’s standing to assert a derivative claim ‘hinges upon his ability to establish that the

Board’s rejection of his demand was wrongful.’” Docket No. 46. 

Moreover, under Delaware law, a corporation may not stand neutral in the face of a

shareholder’s demand; it must affirmatively object to or support the continuation of the

litigation. See, e.g., Kaplan v. Peat, Marwick, Mitchell & Co., 540 A.2d 726, 731 (Del. 1988).

Because the defendants certainly did not support Furman’s demand, their “deferral” is

effectively an objection or rejection. In any event, the defendants have in no way suggested that

their “deferral” is not effectively a rejection of Furman’s demand. 

3

if necessary, from the shareholders or members, and the reasons for the plaintiff’s failure

to obtain the action or for not making the effort. 

FED. R. CIV. P. 23.1. 

In assessing particularity as required by Rule 23.1, the court looks to the law of the state of

incorporation of the company. See In re Silicon Graphics Inc. Sec. Litig., 183 F.3d 970, 989-90 (9th

Cir. 1999). Because Wal-Mart is a Delaware corporation, the parties agree that Delaware law controls

whether Furman’s complaint is factually sufficient. 

A stockholder filing a derivative suit must allege either that the board of directors rejected her

pre-suit demand that the board assert the corporation’s claim or allege with particularity why the

stockholder was justified in not having made the effort to obtain board action. See Grimes, 673 A.2d

at 1216. “[T]he demand requirement is a recognition of the fundamental precept that directors manage

the business and affairs of the corporation.” Aronson, 473 A.2d at 812. In this case, Furman made a

demand on the board and the board had deferred making a final decision until after the completion of

the Dukes litigation. Both parties have effectively construed this deferral as being a rejection.1

If a demand is made and rejected, the board rejecting the demand is entitled to the presumption

of the business judgment rule unless the stockholder can allege facts with particularity creating a

reasonable doubt that the board is not entitled to the benefit of the presumption. See Grimes, 673 A.2d

at 1220; see also Levine v. Smith, 591 A.2d 194, 212 (Del. 1991) (the board’s refusal of the demand to

pursue the action is subject to judicial review according to the traditional business judgment rule). 

Under the business judgment rule, a court will not substitute its judgment for that of the board,

Case 4:06-cv-03532-SBA Document 70 Filed 05/16/07 Page 3 of 8
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28 4

and the board’s decision will be upheld unless it cannot be attributed to any rational business purpose.

See In re Walt Disney Co. Derivative Litig., 906 A.2d 27, 74 (Del. 2006) (en banc); Levine, 591 A.2d

at 207. A board of directors’ decision will be respected by the courts unless the directors are interested

or lack independence relative to the decision, do not act in good faith, act in a manner that cannot be

attributed to a rational business purpose, or reach their decision by a grossly negligent process that

includes the failure to consider all material facts reasonably available. Brehm v. Eisner, 746 A.2d 244,

264 n.66 (Del. 2000) (en banc). A shareholder who makes a demand concedes the disinterestedness and

independence of a majority of the board to respond to the demand and waives any claim that demand

is excused. See Grimes, 673 A.2d at 1219-20; Rales v. Blasband, 634 A.2d 927, 935 n.12 (Del. 1993)

(“Where a demand has actually been made, the stockholder making the demand concedes the

independence and disinterestedness of a majority of the board to respond”). 

Where a shareholder’s complaint is predicated on the wrongful refusal of her demand, the only

issue for a trial court to determine is the application of the business judgment rule to the board’s refusal

of the shareholder’s demand. See Levine, 591 A.2d at 212-13 (Del. 1991). The only relevant question

is whether the directors acted in an informed manner and with due care, and in a good faith belief that

their action was in the best interest of the corporation. See id. at 198. 

ANALYSIS

To withstand a motion to dismiss under Rule 23.1, the plaintiff must allege particular facts which

support a reasonable doubt that the board’s refusal of demand is entitled to the presumption of the

business judgment rule and that the board’s refusal of the shareholder’s demand was not made in an

informed manner, with due care, and in a good faith belief that refusing to pursue the litigation

demanded was in the best interest of the corporation. Furman’s complaint fails to allege any such facts.

See Scattered Corp. v. Chicago Stock Exch., Inc., 701 A.2d 70, 77 (Del. 1997) (“A plaintiff’s standing

to sue in a derivative suit . . . must be determined on the basis of the well-pleaded allegations of the

complaint”). In her complaint, Furman makes the following allegations regarding the rejection of her

Case 4:06-cv-03532-SBA Document 70 Filed 05/16/07 Page 4 of 8
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28 5

demand:

81. The Board’s failure to act on Plaintiff’s demand, and its implicit rejection of

Plaintiff’s demand, was not the subject of reasonable business judgment nor in

the best interests of the Company. Instead, the demand was wrongfully refused,

in bad faith and in an uninformed manner, without adequate investigation and

analysis.

82. Furthermore, despite the Board’s actual knowledge of the claims asserted by

Plaintiff since at least 2001 when the Board reported the financial impact of

adjudicated claims against the Company, the Board has failed to seek to recover

on behalf of Wal-Mart for any of the wrongdoing alleged. There is no rational

business purpose for the Board’s failure to take any action on behalf of the

Company for such a long period of time.

83. Moreover, the Board lacked independence and impartiality to fairly consider the

demand since the entire Wal-Mart Board either participated in or approved the

wrongful act and omissions or recklessly disregarded the wrongs which are

complained of herein or benefitted from the compensation received during the

time the conduct took place. This is especially true for directors who joined the

Wal-Mart Board with full knowledge of the Company’s alleged pattern and

practice of discrimination against female employees in promotions. Yet, rather

than cause Wal-Mart to investigate and take action against the directors and

executives responsible for Wal-Mart’s policy of gender discrimination as

described herein, they consciously failed to act in exchange for their

appointments to the Wal-mart Board and the power, prestige and perquisites

resulting therefrom. 

Docket No. 1 (Compl.). 

Furman merely offers the conclusions that the demand was wrongfully refused due to bad faith

and without adequate investigation and analysis, and that the Board lacked independence and

impartiality to fairly consider the demand. A review of the complaint shows that it is wholly absent of

any particular factual allegations buttressing these conclusions. 

Examining first the allegations of paragraph 83 of the complaint, it is settled law in Delaware

that a shareholder who makes a demand concedes the disinterestedness and independence of a majority

of the board to respond to the demand and waives any claim that demand is excused. See Grimes v.

Donald, 673 A.2d 1207, 1219-20 (Del. 1996); Rales v. Blasband, 634 A.2d 927, 935 n.12 (Del. 1993).

Thus the allegations in paragraph 83 and the similar allegations in the succeeding paragraphs of

Furman’s complaint are insufficient to withstand a Rule 23.1 motion to dismiss. 

With respect to the assertions of paragraphs 81 and 82 of the complaint that the demand was

Case 4:06-cv-03532-SBA Document 70 Filed 05/16/07 Page 5 of 8
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

2 This letter may be considered without converting this motion to dismiss into a motion for

summary judgment under the “incorporation by reference” doctrine. Under this doctrine, a court

may consider documents “whose contents are alleged in a complaint and whose authenticity no

party questions, but which are not physically attached to the pleading.” In re Silicon Graphics

Inc. Sec. Litig., 183 F.3d 970, 986 (9th Cir. 1999) (citation omitted). The contents of this letter

are alleged in Furman’s complaint, and neither party questions its authenticity. Moreover,

Furman has not objected to the Court’s consideration of this document.

6

wrongfully refused, in bad faith, and in an uninformed manner, Furman simply offers no particularized

facts in her complaint supporting these contentions. Nonetheless, in her opposition to the present

motion, she makes three arguments that these allegations are sufficiently particular to withstand a

motion to dismiss under Rule 23.1.

First, Furman contends the defendants failed to consider all the claims articulated in her demand

by limiting their consideration to the Dukes litigation. Furman argues that her demand letter covered

not only alleged discrimination against female employees, as is being contested in Dukes, but also

violations of the Fair Labor Standards Act and state law for forcing employees to work off the clock and

miss meal breaks. By limiting the analysis to Dukes, Furman maintains the response to her demand

failed to account for the potential liabilities of actions being pursued on these other grounds.

An examination of the response letter to Furman’s demand does not bear this out.2

 Both the

demand letter and the response letter focus on the potential exposure of liability Wal-Mart faces in the

Dukes litigation. In the epistolatory exchanges concerning Furman’s demand, the Dukes case is the only

action mentioned by name. However, the response letter repeatedly relates that the Audit Committee

and the Board of Directors contemplated the Dukes litigation and other proceedings. In fact, six times

the letter uses the phrase “the Dukes case and other proceedings” or similar locution. See Docket No.

48, Ex. A. For instance, the letter tells that the “Audit Committee takes . . . and has actively been

monitoring – and continues to monitor on an on-going basis – Wal-Mart’s compliance with employment

law obligations and Wal-Mart’s defense in the Dukes litigation and other proceedings against Wal-Mart

involving the allegations in your letter.” Docket No. 48, Ex. A. It also states that 

The remedial action that the Audit Committee would recommend at this time, if it

believed that the allegations in the Dukes case and other proceedings and in your

demand had merit, would not include commencing a public litigation because that action

Case 4:06-cv-03532-SBA Document 70 Filed 05/16/07 Page 6 of 8
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28 7

likely would be deemed an admission of the allegations in the Dukes case and in other

proceedings. 

Docket No. 48, Ex. A. 

Second, Furman further contends that even if her demand letter is construed as focusing solely

on discrimination against female employees, it was not a reasonable exercise of business judgment to

defer investigating this practice until the completion of the Dukes litigation. Because the Dukes action

may take years to resolve, its is Furman’s position that deferring potential claims against the defendants

risks running the statute of limitations on potential claims Wal-Mart may have against its directors. To

address this concern, “the defendants on whose behalf this brief is submitted represent that, for one year

following the Wal-Mart Board’s final determination concerning plaintiff’s demand, they will not assert

any statute of limitations defense that did not exist on the date this action was filed in any action

asserting the claims stated in plaintiff’s demand.” Docket No. 66, at 13. Therefore, the potential

expiration of Wal-Mart’s claims against the defendants is no longer an extant consideration. 

As a final matter, Furman argues that one of the main reasons cited by the board for not acting

on her demand is now moot. The refusal letter speaks of deferring action on Furman’s request until

appellate review of the class certification order in Dukes. Since the Ninth Circuit affirmed the decision

to allow class certification, this reason for deferral no longer exists.

The defendants respond that the Dukes appeal is not over: Wal-Mart has filed a motion for

rehearing en banc of the class certification issue, and will seek Supreme Court review if the Ninth

Circuit’s panel decision is not reversed. Moreover, the defendants maintain that the class certification

issue was only one of many reasons for deferring a final determination on Furman’s demand. The Audit

Committee and the Board also expressed concern that Wal-Mart pursuing legal action against its

directors for failing to abide by employment and labor laws would in effect be an admission in the

Dukes case and in other actions. This would expose Wal-Mart to substantial liabilities for damages in

those cases and would not be in the best interests of the corporation. 

Thus, none of the three arguments proffered by Furman does anything to ameliorate the lack of

facts supporting her contention that the board’s decision to reject her demand was not a rational business

Case 4:06-cv-03532-SBA Document 70 Filed 05/16/07 Page 7 of 8
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28 8

decision. And unless particularized facts are alleged showing that the business judgment rule does not

protect the board’s decision not to sue pursuant to a shareholder’s demand, which has not been done

here, a motion to dismiss an action filed by a shareholder whose demand has been rejected, must be

granted. See Speigel v. Buntrock, 571 A.2d 767, 777 (Del. 1990). The factual allegations of the

complaint are insufficient to overcome the presumption of the business judgment rule. 

CONCLUSION

Accordingly, the defendants’ motion to dismiss [Docket No. 45] is GRANTED and the

plaintiff’s complaint is DISMISSED. The Clerk of Court is directed to close the case file and any

pending matters related to it. 

IT IS SO ORDERED.

May16, 2007 _________________________________

Saundra Brown Armstrong 

United States District Judge

Case 4:06-cv-03532-SBA Document 70 Filed 05/16/07 Page 8 of 8