Court Opinion

ID: 3203305
Source: CourtListenerOpinion
Date Created: 2016-05-13 15:02:40.575691+00
Date Added: 2024-06-11T14:28:27.891910
License: Public Domain

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

IN RE WAL-MART STORES, INC.               CONSOLIDATED
DELAWARE DERIVATIVE                       C.A. No. 7455-CB
LITIGATION

                        MEMORANDUM OPINION

                      Date Submitted: February 3, 2016
                        Date Decided: May 13, 2016

Stuart M. Grant, Michael J. Barry and Nathan A. Cook, GRANT & EISENHOFER
P.A., Wilmington, Delaware; Christine S. Azar and Ryan T. Keating, LABATON
SUCHAROW LLP, Wilmington, Delaware; Daniel Girard, Amanda Steiner, Dena
Sharp and Adam Polk, GIRARD GIBBS LLP, San Francisco, California; Thomas
A. Dubbs, Louis Gottlieb and Jeffrey A. Dubbin, LABATON SUCHAROW LLP,
New York, New York; Frederic S. Fox, Hae Sung Nam, Donald R. Hall and
Jeffrey P. Campisi, KAPLAN FOX & KILSHEIMER LLP, New York, New York;
Co-Lead Attorneys for Co-Lead Plaintiffs California State Teachers’ Retirement
System, New York City Employees’ Retirement System, New York City Police
Pension Fund, Police Officers’ Variable Supplements Fund, Police Supervisor
Officers’ Variable Supplements Fund, New York City Fire Department Pension
Fund, Fire Fighters’ Variable Supplements Fund, Fire Officers’ Variable
Supplements Fund, Board of Education Retirement System of The City of New
York, Teachers’ Retirement System of The City of New York, New York City
Teachers’ Variable Annuity Program, and Indiana Electrical Workers Pension
Trust Fund IBEW.

Donald J. Wolfe, Jr., Stephen C. Norman and Tyler J. Leavengood, POTTER
ANDERSON & CORROON LLP, Wilmington, Delaware; Theodore J. Boutrous,
Jr., George H. Brown, Joshua S. Lipshutz and Alexander K. Mircheff, GIBSON,
DUNN & CRUTCHER LLP, Los Angeles, California; Jonathan C. Dickey and
Brian M. Lutz, GIBSON, DUNN & CRUTCHER LLP, New York, New York;
Mark A. Perry, GIBSON, DUNN & CRUTCHER LLP, Washington, District of
Columbia; Attorneys for Nominal Defendant Wal-Mart Stores, Inc. and Defendants
Aida M. Alvarez, James I. Cash, Roger C. Corbett, Douglas N. Daft, Michael T.
Duke, Gregory B. Penner, Steven S. Reinemund, Jim C. Walton, S. Robson Walton,
Linda S. Wolf, H. Lee Scott, Jr., Christopher J. Williams, James W. Breyer, M.
Michele Burns, David D. Glass, Roland A. Hernandez, John D. Opie, J. Paul
Reason, Arne M. Sorenson, Jose H. Villarreal, Eduardo Castro-Wright, Thomas A.
Hyde, Thomas A. Mars, John B. Menzer and Lee Stucky.

BOUCHARD, C.
      In April 2012, the New York Times published an exposé describing the

cover-up of an alleged bribery scheme at Wal-Mart de Mexico (“WalMex”), a

subsidiary of Wal-Mart Stores, Inc. (“Wal-Mart”). On the heels of this article,

Wal-Mart stockholders filed fifteen lawsuits in Arkansas and Delaware asserting

derivative claims on behalf of Wal-Mart.

      One of the stockholders in Delaware demanded access to Wal-Mart’s books

and records under Section 220 of the Delaware General Corporation Law in an

effort to bolster its case.    The Delaware actions were consolidated, and the

Delaware plaintiffs vigorously pursued the books-and-records litigation, which

took three years to resolve, including an appeal to the Delaware Supreme Court. In

May 2015, the Delaware plaintiffs filed an amended derivative complaint with

information obtained from Wal-Mart’s records.

      The Arkansas plaintiffs neither sought Wal-Mart’s records nor waited for the

outcome of the Section 220 case in Delaware. They instead proceeded with their

case, which defendants moved to dismiss. In March 2015, before plaintiffs in

Delaware had completed the Section 220 litigation and filed their amended

complaint, the district court in Arkansas granted defendants’ motion to dismiss. It

concluded that the Arkansas complaint failed to adequately allege demand futility.

Defendants now move to dismiss this action, arguing that issue preclusion prevents

the plaintiffs here from re-litigating demand futility.

                                           1
      Subject to Constitutional standards of due process, Arkansas law governs the

question of issue preclusion in this case. The basic test for issue preclusion under

Arkansas law is easily satisfied here. But Arkansas courts have not addressed

issue preclusion in the context of stockholder derivative suits.        That context

requires one to determine whether two different stockholder plaintiffs asserting

derivative claims on behalf of the same corporation in separate cases are in privity.

Thus, this case presents the challenge of having a Delaware trial court predict how

a court in Arkansas likely would resolve an open question of Arkansas law. I

conclude, consistent with the clear weight of authority from other jurisdictions, that

an Arkansas court likely would find privity in this situation.

      Another challenge of this case is determining whether an Arkansas court

would deem a stockholder plaintiff who fails to pursue books and records before

launching a derivative lawsuit to be an adequate representative of the corporation.

On that question, I conclude, consistent with Delaware Supreme Court authority,

that an Arkansas court would not presume inadequacy from failing to pursue books

and records but would conduct a case-specific inquiry of the issue with principles

of due process in mind and, based on the particular circumstances of this case,

would find the Arkansas plaintiffs to be adequate representatives.

      For these and other reasons explained below, the plaintiffs in this case are

barred from re-litigating demand futility and their complaint must be dismissed.

                                          2
I.    BACKGROUND

      Unless noted otherwise, the facts recited in this opinion are based on the

allegations of the Verified Consolidated Amended Stockholder Derivative

Complaint filed on May 1, 2015 (the “Delaware Complaint”). Although most of

these facts are not directly relevant to the analysis of issue preclusion, they are

included to provide the context.

      A.    The Parties

      Nominal defendant Wal-Mart Stores, Inc. is a Delaware corporation with

headquarters in Arkansas that operates retail stores in the United States and

internationally. The company is publicly traded on the New York Stock Exchange.

The Walton family, which founded Wal-Mart, controls 49.95% of its voting shares

through Walton Enterprises LLC. Co-lead plaintiffs are various pension funds that

have been Wal-Mart stockholders at all times relevant to this action.

      Defendants Aida M. Alvarez, James W. Breyer, M. Michele Burns, James I.

Cash, Roger C. Corbett, Douglas N. Daft, Michael T. Duke, Gregory B. Penner,

Steven S. Reinemund, H. Lee Scott, Jr., Arne M. Sorenson, Jim C. Walton, S.

Robson Walton, Christopher J. Williams, and Linda S. Wolf were the fifteen

members of Wal-Mart’s board of directors when the original complaints in

                                         3
Arkansas and Delaware were filed in 2012 (the “Demand Board”).1 They joined

Wal-Mart’s board at various times between 1978 and 2010. Plaintiffs allege that

twelve of them were on the board during some part of the alleged bribery or cover-

up conduct. In addition to being a director, Duke served as Wal-Mart’s Chief

Executive Officer from 2009 to 2014.

       Defendants David D. Glass, Roland A. Hernandez, John D. Opie, J. Paul

Reason, and Jose H. Villarreal were directors during the time of some of the

alleged misconduct but were not on the Demand Board because they had ceased

serving as directors by the time the original complaints in the Arkansas and

Delaware actions were filed. Defendants José Luis Rodriguezmacedo Rivera,

Eduardo Castro-Wright, Thomas A. Hyde, Thomas A. Mars, John B. Menzer,

Eduardo F. Solórzano Morales, and Lee Stucky are former executives of Wal-Mart

or WalMex.

       B.     The Alleged WalMex Bribery Scheme and Investigation

       In the late 1990s and early 2000s, Wal-Mart sought to expand internationally

to continue growing despite saturation in the United States. Its subsidiary in

Mexico, WalMex, was an important part of that growth. By 2004, WalMex

operated 49.6% of Wal-Mart’s international discount stores, 32.3% of its

1
 Plaintiffs assert that the relevant board for assessing demand futility should be the board
when the original Delaware complaints were filed. Compl. ¶ 209. Defendants do not
argue otherwise.

                                             4
international Supercenters, and 66% of its international Sam’s Clubs. WalMex is

Wal-Mart’s largest foreign subsidiary.

      According to the Delaware Complaint, WalMex achieved its rapid

expansion by bribing government officials in Mexico. This bribery escalated

dramatically in 2003 when Castro-Wright became Chief Executive Officer of

WalMex. Castro-Wright authorized bribes to quickly secure construction permits,

zoning approvals, and licenses with the goal of rapidly expanding WalMex’s

operations before competitors had time to react.

      A highly publicized example of this scheme was the use of more than

$200,000 in bribes to secure multiple permits that allowed WalMex to build a store

in Teotihuacán adjacent to an ancient temple and Mayan pyramids.              During

construction, it was discovered that not only was the store adjacent to these historic

sites, but it was being built atop other ancient ruins as well. This revelation

sparked protests, accusations of bribery and corruption, and international media

attention, including a New York Times article published on September 28, 2004.

      Between 1998 and 2005, Wal-Mart did not undertake a full audit of

WalMex, which enabled its officials to use bribery without interference or inquiry

from management in the United States. In late 2003 and early 2004, Wal-Mart

created a Corporate Responsibility Department and a Compliance Oversight

Committee to oversee international compliance issues and to detect and prevent

                                          5
violations of law. The Compliance Oversight Committee, which consisted of

officers from various departments, was charged with reporting compliance issues

to the audit committee of Wal-Mart’s board.

      In early 2004, drafts of new anti-corruption policies were circulating within

Wal-Mart, eventually reaching WalMex and its management, including

Castro-Wright. Shortly thereafter, WalMex began an internal investigation of

Sergio Cicero Zapata, an in-house attorney in WalMex’s Real Estate Department.

WalMex investigated payments made to two law firms Cicero used as a means to

make payments to outside agents known as “gestores” for “gestoria” services.

Plaintiffs allege that these payments constituted bribes to government officials to

help WalMex circumvent laws and regulations. 2

      WalMex also retained an outside investigation firm (Kroll, Inc.) to

determine whether Cicero had personally benefited from his relationship with the

gestores and whether he had potentially defrauded WalMex. Kroll concluded that

he had not, but it discovered that Cicero’s wife worked for one of the law firms

providing gestoria services.      After these investigations, WalMex terminated

Cicero’s employment, informing him that his position had been eliminated due to a

2
  Compl. ¶¶ 54, 71. Wal-Mart contends that such payments can be valid and not violate
the Foreign Corrupt Practices Act of 1977. Tr. Oral Arg. 121-22; Defs.’ Supp. Br. 12;
Defs.’ Further Supp. Response 3-4 (arguing that “facilitating payments” is a term of art
referring to a valid and legal payment practice).

                                           6
restructuring. WalMex did not tell him that he had been the subject of an outside

investigation or that management had found out about his wife’s employment.

      By mid-2004, Wal-Mart’s board and audit committee had formally adopted

anti-corruption policies prohibiting employees from offering anything of value to

government officials on behalf of Wal-Mart. In August 2004, Rodriguezmacedo

(WalMex’s general counsel) and Castro-Wright contacted Maritza Munich,

General Counsel for the Wal-Mart International business segment, about Cicero’s

possible wrongdoing.     They informed Munich that Cicero may have used

questionable methods for obtaining licenses and permits and provided her with the

results of the Kroll investigation and of an internal 2004 audit, which showed that

millions of dollars in illegal payments had been made to the two law firms, which

were not on WalMex’s list of authorized firms. Because Munich was a member of

the Compliance Oversight Committee, plaintiffs infer that Munich must have

reported this information to the board’s audit committee and that the audit

committee would have discussed it with the full Wal-Mart board.

      In late 2004, WalMex’s internal audit department drafted a report showing

that WalMex had expenses in the form of contributions to government entities and

payments to outside agents to expedite government paperwork. Certain Wal-Mart

managers, including Munich, received this report. Plaintiffs infer that management

would have raised this issue with the Compliance Oversight Committee and that

                                        7
the board’s audit committee and the full board would have discussed these issues at

a meeting in March 2005.

      In September 2005, Munich heard from Cicero, who had not been employed

at WalMex since sometime around March 2004. Cicero informed Munich that he

had information regarding payments WalMex made to complete 300 projects,

including the store in Teotihuacán. Munich shared this communication with Mars,

Wal-Mart’s general counsel. Plaintiffs infer that Mars and other members of

management discussed Cicero’s allegations of bribery at an audit committee

meeting, and that the audit committee reported the allegations to the full board.

      In October 2005, Munich hired an attorney in Mexico City to interview

Cicero.   During multiple interviews, Cicero explained WalMex’s practice of

bribing officials to remove regulatory obstacles and WalMex’s use of gestores to

carry out the plan. Cicero provided examples of bribes and noted that he had

several binders of documents relating to WalMex’s bribery of public officials.

Munich provided Mars and Hyde, Wal-Mart’s corporate secretary, with copies of

the interview summaries. Mars forwarded this information to Duke and Stucky,

among others.     In mid-October, Munich and Mars retained Willkie Farr &

Gallagher LLP to represent Wal-Mart in connection with the matter.

      On November 2, 2005, Willkie Farr recommended that Wal-Mart undertake

a thorough external investigation of Cicero’s bribery allegations. Wal-Mart opted

                                          8
instead for a less extensive in-house investigation led by the Corporate

Investigations Department.      Plaintiffs allege that this decision reflects the

beginning of a corporate cover-up of the WalMex bribery scheme, noting that

Wal-Mart’s in-house teams were ill-equipped for the task and were vulnerable to

interference from management.      Wal-Mart carried out its investigation during

November 2005, and the investigators expressed concern over their preliminary

findings.   On November 18, Munich, Mars, Stucky, and others discussed the

results of the investigators’ preliminary inquiry, including a number of

“facilitating” payments to clear regulatory hurdles and expedite construction of

stores. Plaintiffs infer that this information was shared with the audit committee

and the Wal-Mart board.

      On December 2, 2005, after reviewing the preliminary results with others,

Stucky and Mars decided that WalMex would handle the next phase of the

investigation, a decision that plaintiffs infer was made with the consent of

Hernandez and the other members of the audit committee.             Soon after, the

Corporate Investigations Department and Internal Audit Services issued separate

reports summarizing the evidence surrounding Cicero’s bribery allegations. The

Corporate Investigations report stated that “there is reasonable suspicion to believe

that Mexican and USA laws may have been violated” and recommended further

                                         9
investigation relating to payments for gestoria services to the two unauthorized law

firms.

         In mid-December 2005, Mars and Stucky carried out their decision to have

WalMex handle the investigation by tasking Rodriguezmacedo and other WalMex

officials with a follow-up investigation to complete the inquiry. Shortly thereafter,

Rodriguezmacedo and WalMex management responded that they had found

information supporting the hypothesis that Cicero was attempting to benefit

personally from the transactions at issue. Plaintiffs allege that transferring the

investigation to WalMex reflects a decision to cover up the bribery scheme.

Shortly before quitting her job at Wal-Mart, Munich expressed concerns over the

decision to assign the investigation to WalMex, since WalMex and its employees

were the subject of the investigation.

         On December 20, 2005, Internal Audit Services issued its final report, which

concluded that WalMex had provided payments through gestores to government

agencies to expedite licenses and permits, and that WalMex senior management

was aware of this practice and had used secret accounting codes to obscure it. The

report recommended further investigation.

         Beginning in February 2006, Rodriguezmacedo took full charge of the

WalMex follow-up investigation. In March 2006, he issued a report concluding

that no evidence substantiated the existence of unlawful payments to government

                                          10
authorities.   To the contrary, according to the report, Cicero had defrauded

WalMex by making payments to gestores for services never rendered.

Rodriguezmacedo’s conclusions were largely based on WalMex management’s

denial that any bribery had taken place. Wal-Mart and WalMex management

agreed that a successful legal or financial pursuit of Cicero was unlikely.

      In May 2006, with Rodriguezmacedo’s final report in hand, Wal-Mart

management considered the investigation closed. Plaintiffs infer that the audit

committee and the board also reviewed the final report in May and allege that the

board should have known the report was unreliable because of Rodriguezmacedo’s

potential involvement in the alleged bribery scheme and the conclusions the report

reached, which were at odds with previous investigations.

      The New York Times undertook its own investigation of Wal-Mart’s

response to Cicero’s allegations of bribery. In late 2011, Wal-Mart found out

about the New York Times investigation and alerted the United States Department

of Justice and the United States Securities and Exchange Commission that Wal-

Mart had begun to investigate possible violations of the Foreign Corrupt Practices

Act of 1977 (“FCPA”). In response to reporting by the New York Times, Wal-Mart

denied that any executives knew about alleged corruption in the company. In May

2012, Wal-Mart reported that its internal investigation would extend beyond

                                         11
WalMex and include potential FCPA violations in other jurisdictions, including

Brazil, China, and India.

      Plaintiffs allege that Wal-Mart incurred over $500 million in expenses in

connection with its FCPA investigations and compliance reviews, and may face

significant additional costs if it is fined for FCPA violations.

      C.     The Arkansas Litigation

      On April 21, 2012, the New York Times published an article detailing the

alleged WalMex bribery scheme and cover-up. 3 Shortly after the article went to

press, Wal-Mart stockholders filed numerous derivative suits in Delaware and

Arkansas.

      The United States District Court for the Western District of Arkansas

consolidated the federal actions in Arkansas, and the Arkansas plaintiffs filed a

consolidated complaint on May 31, 2012 (the “Arkansas Complaint”). 4             The

Arkansas Complaint asserted claims against Wal-Mart’s directors and executives

for breach of fiduciary duty primarily based on intentional wrongdoing as well as a

secondary Caremark theory for allowing Wal-Mart to violate laws, for violations

3
 See David Barstow, Vast Mexico Bribery Case Hushed Up by Wal-Mart After Top-Level
Struggle, N.Y. Times (Apr. 21, 2012), http://www.nytimes.com/2012/04/22/business/at-
wal-mart-in-mexico-a-bribe-inquiry-silenced.html.
4
  Consolidated Verified Shareholder Derivative Complaint, In re Wal-Mart Stores, Inc.
S’holder Deriv. Litig., C.A. No. 4:12-CV-4041-SOH (W.D. Ark. May 31, 2012).

                                          12
of Sections 14(a) and 29(b) of the Securities Exchange Act of 1934, and for

contribution and indemnity. 5          The Arkansas plaintiffs challenge the same

misconduct regarding the bribery scheme at WalMex and the efforts to cover it up

that the Delaware plaintiffs challenge in this case.6

         On July 6, 2012, defendants in the Arkansas action moved to stay the

litigation pending resolution of the proceedings in this Court. On November 20,

2012, the district court granted the stay. 7 On December 18, 2013, however, the

Eighth Circuit vacated the stay order in light of the Section 14(a) claim that was

present in the Arkansas action but not in the Delaware litigation, and remanded the

case to the district court, stating that the district court “may impose a more finite

and less comprehensive stay.” 8

         On January 10, 2014, defendants in the Arkansas action moved for a more

limited stay pending this Court’s decision on demand futility but not its resolution

of the entire action. In June 2014, the district court denied the motion. In doing

5
  Arkansas Complaint ¶¶ 282-300; see also In re Wal-Mart Stores, Inc. S’holder Deriv.
Litig., 4:12-CV-4041, at 16 (W.D. Ark. Apr. 3, 2015) (ORDER) (noting plaintiffs’
argument that they pled Caremark theory in the alternative to theory of intentional
wrongdoing).
6
    Arkansas Complaint ¶¶ 77-192.
7
  In re Wal-Mart Stores, Inc. S’holder Deriv. Litig., 2012 WL 5935340, at *1 (W.D. Ark.
Nov. 27, 2012) (ORDER) (revising initial order of Nov. 20, 2012), vacated and
remanded sub nom. Cottrell v. Duke, 737 F.3d 1238 (8th Cir. 2013).
8
    Cottrell v. Duke, 737 F.3d at 1247-49.

                                             13
so, the district court noted that “it is likely that the first decision on demand futility

will be entitled to collateral estoppel effect” and that if the district court “decides

the issue first, then the issue will not have to be relitigated in Delaware state

court.”9

         Defendants moved to dismiss the Arkansas Complaint under Federal Rule of

Civil Procedure 23.1 for failing to adequately allege demand futility. On March

31, 2015, the district court granted their motion. 10 The district court applied

Delaware law to the substantive aspects of the demand requirement and assessed

whether to apply the Aronson 11 test or the Rales12 test to determine demand futility.

The court noted that there is only a blurry distinction between Aronson and Rales,

but determined that Rales must apply because the complaint lacked “any

particularized facts that link a majority of the Director Defendants to any actual

decision,”13 as would be required for Aronson to apply.

9
 In re Wal-Mart Stores, Inc. S’holder Deriv. Litig., C.A. No. 4:12-CV-4041, at 3-4
(W.D. Ark. June 4, 2014) (ORDER).
10
  In re Wal-Mart Stores, Inc. S’holder Deriv. Litig., 2015 WL 1470184, at *1 (W.D. Ark.
Mar. 31, 2015) (ORDER). The order was amended to correct typographical errors on
April 3, 2015. See Leavengood Aff. Ex. 6, In re Wal-Mart Stores, Inc. S’holder Deriv.
Litig., 4:12-CV-4041 (W.D. Ark. Apr. 3, 2015) (the “Arkansas Order”). The remainder
of this opinion cites the amended version.
11
     Aronson v. Lewis, 473 A.2d 805 (Del. 1984).
12
     Rales v. Blasband, 634 A.2d 927 (Del. 1993).
13
     Arkansas Order at 11 & n.6.

                                            14
          Applying Rales, the district court determined that the Arkansas Complaint

failed to suggest any particularized basis to infer that a majority of Wal-Mart’s

fifteen-member board (as defined above, the Demand Board) had actual or

constructive knowledge of the bribery scheme or the cover-up. The district court

opined that “[p]laintiffs’ allegations do not provide the particulars for what each

Director Defendant knew, how he or she learned of the information, or when he or

she learned of the information.”14       Instead, the Arkansas plaintiffs relied on

“group-wide conclusory allegations about what the Board must have known based

on an imputation of knowledge theory.” 15       The court found these allegations

insufficient to establish demand futility, noting that courts may not impute

knowledge of wrongdoing based on directors’ board service, their membership on

board committees, or because the corporate governance structure of the company

requires that information about misconduct must be brought to the board.16

          Finding that the Arkansas Complaint lacked specific allegations of

knowledge, the district court rejected the theory that the board consciously chose to

cover up the bribery scheme. Consequently, the court concluded that the directors

did not face a substantial likelihood of personal liability. The court also found that

14
     Id. at 13-14.
15
     Id. at 14.
16
     Id. at 14-15.

                                          15
defendants would not be at risk of liability for the Caremark claim or the Section

14(a) claims for similar reasons—namely, that the Arkansas Complaint did not

allege with particularity what the defendants were told but instead charged them

with constructive notice of red flags.          The district court concluded that the

Arkansas plaintiffs had failed to adequately allege demand futility.

      On April 7, 2015, the district court entered a final judgment dismissing the

case with prejudice. Appeal of this decision is pending before the United States

Court of Appeals for the Eighth Circuit.

      D.     The Delaware Litigation and Procedural Posture

      Between April 25, 2012 and June 18, 2012, around the time the Arkansas

litigation was getting started, seven derivative actions were filed in this Court. On

June 6, 2012, plaintiff Indiana Electrical Workers Pension Trust Fund IBEW sent

Wal-Mart a demand for books and records under 8 Del. C. § 220. On August 13,

2012, after Wal-Mart produced certain documents, IBEW filed a Section 220

complaint alleging deficiencies in Wal-Mart’s document production.17              On

September 5, 2012, the Court of Chancery consolidated the seven then-pending

derivative cases, appointed co-lead plaintiffs and co-lead counsel, and ordered

17
  Verified Complaint, Ind. Elec. Workers Pension Trust Fund IBEW v. Wal-Mart Stores,
Inc., C.A. No. 7779-CS (Del. Ch. Aug. 13, 2012).

                                           16
plaintiffs to file a consolidated amended complaint after completion of the Section

220 action. 18

       The Section 220 action and related disputes over document production are

described in detail elsewhere. To summarize, they involved a trial on the papers,

an appeal to the Delaware Supreme Court,19 and a subsequent motion for

contempt. 20 The Section 220 action eventually reached a final resolution on May

7, 2015. 21 In the meantime, on May 1, 2015, about one month after dismissal of

the Arkansas Complaint, plaintiffs filed the pending Delaware Complaint.          It

asserts a single claim for breach of fiduciary duty.

       On June 1, 2015, defendants moved to dismiss, arguing that the Arkansas

decision collaterally estopped plaintiffs from alleging demand futility, and that

even if they were not collaterally estopped, plaintiffs failed to adequately plead

demand futility under Court of Chancery Rule 23.1. Defendants also filed a

18
  In re Wal-Mart Stores, Inc. Del. Deriv. Litig., C.A. No. 7455-CS (Del. Ch. Sep. 5,
2012) (ORDER).
19
  See Wal-Mart Stores, Inc. v. Ind. Elec. Workers Pension Trust Fund IBEW, 95 A.3d
126 (Del. 2014).
20
  See Ind. Elec. Workers Pension Trust Fund IBEW v. Wal-Mart Stores, Inc., C.A. No.
7779-CB (Del. Ch. May 7, 2015) (TRANSCRIPT).
21
  Ind. Elec. Workers Pension Trust Fund IBEW v. Wal-Mart Stores, Inc., C.A. No.
7779-CB, 2015 WL 2150668 (Del. Ch. May 7, 2015) (ORDER).

                                          17
motion to stay discovery, which I granted on June 24, 2015.22 I heard argument on

defendants’ motion to dismiss on November 12, 2015. The parties later filed

supplemental submissions, with the last filing occurring on February 3, 2016.23

II.      LEGAL ANALYSIS

         A.     Legal Standard

         “In considering a motion to dismiss under Chancery Court Rule 23.1 for

failure to make a presuit demand, as is true in the case of a motion to dismiss under

Court of Chancery Rule 12(b)(6), the Court confines its attention to the face of the

complaint.”24 Strict application of this rule would deprive defendants of the ability

to argue for preclusion if, for example, a plaintiff does not plead facts regarding the

potentially preclusive litigation or incorporate documents from that litigation into

the complaint. For this reason, “it is axiomatic that a court must still consider the

prior adjudication in order to determine whether issue preclusion bars that

22
  In re Wal-Mart Stores, Inc. Del. Deriv. Litig., C.A. No. 7455-CB (Del. Ch. June 24,
2015) (TRANSCRIPT).
23
   The supplemental submissions were prompted by a “demonstrative” plaintiffs handed
out at oral argument. That document included 40 single-spaced pages of text providing
significant amounts of detail plaintiffs had not included in their brief concerning 95
documents obtained in the Section 220 litigation. As a consequence of these new
materials and arguments, the parties filed over 50 additional pages of briefing and letters.
The plaintiffs’ “handout” was not an appropriate demonstrative but instead was an
improper attempt to submit a sur-reply brief.
24
     White v. Panic, 793 A.2d 356, 363 (Del. Ch. 2000), aff’d, 783 A.2d 543 (Del. 2001).

                                             18
plaintiff’s claims.” 25 Consequently, courts will take judicial notice of the prior

adjudication and resulting opinions, but “only to establish the existence of the

opinion, and not for the truth of the facts asserted in the opinion.”26 This is the

approach I use in deciding the present motion to dismiss.27

         In assessing a motion to dismiss a derivative action based on issue

preclusion, the Court should look exclusively to the elements of issue preclusion

and not to the merits of the underlying issue.28             I therefore need to address

defendants’ demand futility arguments under Court of Chancery Rule 23.1 only if

plaintiffs’ claim is not barred by issue preclusion.29 Because issue preclusion

applies and requires dismissal of this case for the reasons explained below, I do not

decide the question of demand futility.

25
     M & M Stone Co. v. Pennsylvania, 388 F. App’x 156, 162 (3d Cir. 2010).
26
   Id.; see also United Access Techs., LLC v. Centurytel Broadband Servs., LLC, 6 F.
Supp. 3d 537, 545 (D. Del. 2013) (rejecting argument that reliance on prior opinion for
issue preclusion converted motion into one for summary judgment, because materials
were used “only to show that the identical issue was actually and necessarily litigated,
and not for the truth of facts averred in those proceedings”), rev’d and remanded on other
grounds, 778 F.3d 1327 (Fed. Cir. 2015).
27
   See Yucaipa Am. All. Fund I, LP v. SBDRE LLC, 2014 WL 5509787, at *8 & n.33
(Del. Ch. Oct. 31, 2014) (taking judicial notice of opinions from related litigation in order
to assess application of issue preclusion in context of motion to dismiss); see also D.R.E.
201-202 (establishing rules for judicial notice).
28
     See Pyott v. La. Mun. Police Emps.’ Ret. Sys. (Pyott II), 74 A.3d 612, 616 (Del. 2013).
29
  Asbestos Workers Local 42 Pension Fund v. Bammann, 2015 WL 2455469, at *15
(Del. Ch. May 22, 2015), aff’d, 132 A.3d 749 (Del. 2016) (TABLE).

                                              19
         B.     Plaintiffs’ Claim Is Barred by Issue Preclusion

         Issue preclusion “prevents a party who litigated an issue in one forum from

later re-litigating that issue in another forum.” 30 Delaware courts will give a

judgment from another jurisdiction the same force and effect that the court

rendering the judgment would give, whether the rendering court is a state court or a

federal court.31 Under federal common law, a federal court sitting in diversity

jurisdiction will apply the preclusion law of the state in which it sits.32 The issue

requiring preclusion analysis here is the Arkansas district court’s decision

concerning demand futility relating to the Arkansas plaintiffs’ fiduciary duty claim,

which was brought under the district court’s diversity jurisdiction. 33 A federal

court would therefore apply the preclusion law of the state of Arkansas. The

parties agree on this choice of law. 34

30
     Yucaipa, 2014 WL 5509787, at *11.
31
     Pyott II, 74 A.3d at 615-16.
32
     Semtek Int’l Inc. v. Lockheed Martin Corp., 531 U.S. 497, 508-09 (2001).
33
   Arkansas Complaint ¶ 16. The Arkansas Complaint also invoked the district court’s
supplemental jurisdiction, but the parties do not argue that this alters the analysis. See
Fresh Del Monte Produce Inc. v. Del Monte Foods, Inc., 2016 WL 236249, at *3 n.4
(S.D.N.Y. Jan. 20, 2016) (“This Court would, therefore, apply federal rules of preclusion
to judgments on claims premised on federal question jurisdiction, and New York rules of
preclusion to judgments on claims premised upon diversity or supplemental
jurisdiction.”).
34
  Tr. Oral Arg. 6, 76. Although plaintiffs argue in their opening brief that federal
common law also applies and both standards must be met, the federal common law rule
                                             20
         The judgment of the district court in the Arkansas litigation determined that

the Arkansas Plaintiffs had failed to adequately plead demand futility. Defendants

argue that this determination collaterally estops plaintiffs from alleging demand

futility in this case.

         Under Arkansas law, for issue preclusion to apply, (1) the issue sought to be

precluded must be the same as the issue in the prior litigation; (2) the issue must

have been actually litigated; (3) the issue must have been determined by a valid

and final judgment; and (4) the determination must have been essential to the

judgment. 35 In addition, the parties to be precluded must have been parties in the

prior litigation 36 or been in privity with those parties.37 Finally, the precluded

party must have been adequately represented in the previous litigation.

         Plaintiffs do not dispute that the third and fourth elements required to

establish issue preclusion under Arkansas law have been satisfied, because the

in diversity cases is to apply the preclusion law of the state in which the court sits, as
explained above. See Semtek, 531 U.S. at 508-09.
35
     Riverdale Dev. Co., LLC v. Ruffin Bldg. Sys., Inc., 146 S.W.3d 852, 855 (Ark. 2004).
36
  See Morgan v. Turner, 368 S.W.3d 888, 895 (Ark. 2010) (citing Craven v. Fulton
Sanitation Serv., Inc., 206 S.W.3d 842, 844 (Ark. 2005)).
37
  Ark. Dep’t of Human Servs. v. Dearman, 842 S.W.2d 449, 452 (Ark. Ct. App. 1992)
(en banc).

                                             21
issue of demand futility was determined by a valid and final judgment 38 and the

determination of demand futility was essential to that judgment. Thus, there are

four issues I must decide to resolve the present motion: (1) whether the issue is the

same as the issue in the Arkansas litigation, (2) whether the issue was actually

litigated in the Arkansas litigation, (3) whether privity exists, and (4) whether

representation was adequate. These issues are addressed in turn.

      1.     The Issue to Be Precluded Is the Same

      Under Arkansas law, an issue to be precluded must be the same as the

previously litigated issue. To make such a determination, a court will examine the

complaints to determine whether the issue at stake is the same. 39

      In the Arkansas Complaint, plaintiffs allege that making a demand on the

Demand Board would be futile because reasonable doubts exist concerning (1)

whether the directors’ actions were the product of a valid exercise of business

judgment, and (2) whether the directors were capable of making an independent

38
   In Arkansas, a judgment is generally considered final for issue preclusion purposes
even if the judgment has been appealed, as is the case here. See John Cheeseman
Trucking, Inc. v. Pinson, 855 S.W.2d 941, 943 (Ark. 1993) (“Arkansas follows the
majority rule that a judgment is final for purposes of issue preclusion, despite a pending
appeal for a review of the judgment, unless the appeal actually consists of a trial de
novo.”). But see id. at 944-45 (Gibson, J., concurring) (expressing concerns about using
lower court judgments on appeal for collateral estoppel purposes, including risk of
inconsistent judgments and danger of irreparable harm to litigants).
39
  See Harben v. Dillard, 2010 WL 3893980, at *5 (E.D. Ark. Sept. 30, 2010) (comparing
assertions made under claims to be precluded and noting that they were “almost
identical” to claims in the other suit).

                                           22
and disinterested decision about initiating and prosecuting the litigation.40 The

Arkansas Complaint identifies certain alleged actions that were not the product of a

valid exercise of business judgment, including the board’s decisions to close the

bribery investigation after a deficient in-house process and to conceal the

wrongdoing until the New York Times published the results of its investigation.41

Regarding the board’s ability to make an independent and disinterested decision to

pursue litigation, the Arkansas Complaint asserts (1) that nine directors were

exposed to substantial liability to stockholders and federal agencies because they

knew about the WalMex bribery scheme and the cover-up,42 (2) that nine directors

faced potential liability for violating Section 14(a) of the Exchange Act, 43 and (3)

other facts, such as familial ties, calling into question the independence or

disinterestedness of specific directors.44

         In the Delaware Complaint, plaintiffs allege that making a demand on the

same Demand Board would be futile because (1) twelve of its members face a

40
     Arkansas Complaint ¶¶ 254-55.
41
   See id. ¶¶ 256-60. Other alleged decisions of the board that are challenged in the
Arkansas Complaint include the decision to violate the FCPA and Mexican law through
the bribery scheme, to seek re-election to the board while concealing wrongdoing, and to
reward wrongdoers through promotions and compensation. Id.
42
     Id. ¶¶ 261-68.
43
     Id. ¶ 269.
44
     Id. ¶¶ 270-81.

                                             23
substantial likelihood of personal liability stemming from their alleged roles in the

WalMex bribery scheme cover-up, 45 (2) eight of its members face a substantial

likelihood of personal liability because they consciously failed to monitor and

oversee systems and controls to prevent corruption and violations of law at Wal-

Mart,46 (3) six of the directors lack independence from S. Robson Walton, an

allegedly interested director,47 and (4) there is a reasonable doubt as to whether the

investigation and cover-up were valid exercises of the board’s business judgment.48

The Delaware Complaint goes on to explore these issues in detail.

         Although certain factual details surface in one complaint and not the other,49

the core demand futility issue in the Arkansas and Delaware Complaints is the

same. They both focus on whether the Demand Board is disabled from deciding

whether to initiate litigation against defendants for their involvement in the

WalMex bribery scheme and cover-up because the Demand Board’s actions were

45
     Compl. ¶ 212.
46
     Compl. ¶ 213.
47
     Compl. ¶ 214.
48
     Compl. ¶ 272.
49
   For instance, the Delaware Complaint focuses more on allegations that the directors
lack disinterestedness because of potential Caremark liability for consciously failing to
monitor Wal-Mart, while the Arkansas Complaint focuses more on the directors’
affirmative involvement in the alleged bribery scheme and cover-up.

                                           24
not the product of valid business judgment and because its members lack

independence and disinterestedness.

       Plaintiffs assert that the two complaints are not identical on the theory that

that the demand futility allegations in the Delaware Complaint are more detailed,

specific, and extensive than those in the Arkansas Complaint. Under Arkansas

law, however, differences between allegations in the complaints will not prevent

issue preclusion from applying if the underlying issue is the same. 50 In other

words, the inclusion of additional factual details does not affect whether an

underlying issue is identical.51 As this Court explained in a similar case, “whether

50
   See Harben, 2010 WL 3893980, at *5 (issue of demand futility found to be identical
under Arkansas law where the plaintiff in the action to be precluded had access to more
documents, but the “claims for breach of fiduciary duties” and “assertions made under
those claims [were] almost identical in the two suits.”). Notably, however, the Harben
court did not consider the precluded claims to be more detailed, despite plaintiff’s access
to additional documents. Cf. Hardy v. Hardy, 380 S.W.3d 354, 358 (Ark. 2011)
(addressing claim preclusion rather than issue preclusion) (“Where a case is based on the
same events as the subject matter of a previous lawsuit, res judicata will apply even if the
subsequent lawsuit raises new legal issues and seeks additional remedies.”); Zinger v.
Terrell, 985 S.W.2d 737, 741 (Ark. 1999) (holding that issue preclusion can bar
relitigation of criminal murder conviction in related civil case regarding victim’s
property). In contrast, Arkansas will not apply issue preclusion when the legal issues in
the two cases are different. See, e.g., Haile v. Johnston, 482 S.W.3d 323, 329 (Ark.
2016) (Brill, C.J., concurring) (explaining that issue preclusion did not apply because first
case addressed whether an open conviction record prevented candidate from holding
public office, while second case addressed different issue of whether a conviction record
that was sealed under Arkansas statute prevented same candidate from holding office);
Skallerup v. City of Hot Springs, 309 S.W.3d 196, 200 (Ark. 2009) (declining to apply
issue preclusion when first case dealt with annexation and second case dealt with sewer
usage rates and debt service charges).
51
  Arkansas courts have not extensively addressed this topic in the context of derivative
suits, but other jurisdictions provide guidance. See Arduini v. Hart, 774 F.3d 622, 630
                                             25
the Complaint raises additional facts, or a more compelling characterization of

those facts, regarding the same conduct previously at issue” is irrelevant for

purposes of issue preclusion.52        “To hold otherwise would mean that issue

preclusion would almost never apply—subsequent plaintiffs could simply add

more allegations (or more specific allegations) of corporate malfeasance, and then

claim there was no identity of issues.”53

         For these reasons, I reject plaintiffs’ assertion that the demand futility issue

raised in both complaints is not the same based on the theory that the Delaware

Complaint contains additional factual details. To the contrary, because Arkansas

law requires only that the issue to be decided is the same, rather than that all facts

and arguments are identical, this element of preclusion is satisfied.

(9th Cir. 2014) (“[Offering] some additional allegations in support of [plaintiff’s]
contention that demand is futile does not make this a different issue under Nevada law.”);
In re Bed Bath & Beyond Inc. Deriv. Litig., 2007 WL 4165389, at *6 (D.N.J. Nov. 19,
2007) (finding that additions to complaint did not prevent issue preclusion because “they
still derive from the same gravamen of wrong” and did not negate the identicality of the
issues); Bammann, 2015 WL 2455469, at *17-18 (applying New York law); Fuchs
Family Trust v. Parker Drilling Co., 2015 WL 1036106, at *5 (Del. Ch. Mar. 4, 2015)
(applying Texas law while focusing primarily on adequacy of representation); cf. United
States v. Karlen, 645 F.2d 635, 638 (8th Cir. 1981) (noting that introduction of new facts
or claims into second case does not make issue preclusion inappropriate, because issue
preclusion merely bars re-litigation of the relevant issue).
52
     Bammann, 2015 WL 2455469, at *18 (applying New York Law).
53
     Arduini, 774 F.3d at 630.

                                            26
         2.     The Issue of Demand Futility Was Actually Litigated

         The next element of issue preclusion requires that the issue sought to be

precluded was actually litigated in the previous action. The Arkansas Supreme

Court has stated that, “[i]n the context of collateral estoppel, ‘actually litigated’

means that the issue was raised in pleadings, or otherwise, that the defendant had a

full and fair opportunity to be heard, and that a decision was rendered on the

issue.” 54 Whether an issue was “actually litigated” for issue preclusion purposes

must be examined on a case-by-case basis.55

         Plaintiffs argue that certain demand futility issues they raise in Delaware

were not properly litigated in the Arkansas action. They contend that deficiencies

in the Arkansas Complaint led the district court to apply the Rales test when

Aronson should have applied. 56 Consequently, the district court explicitly declined

to consider the second prong of Aronson, namely “whether the Board’s actions, or

conscious inaction, were a valid exercise of business judgment.” 57 Plaintiffs argue

that, because the Delaware Complaint makes particularized allegations of board

54
     Powell v. Lane, 289 S.W.3d 440, 445 (Ark. 2008).
55
   Id. at 447 (holding that a default judgment was a valid basis for issue preclusion)
(“There is no bright-line rule. Each judgment, taken by default, or otherwise, must be
examined to determine what was finally decided and whether it meets the requirements of
collateral estoppel.”).
56
     Pls.’ Ans. Br. 22-24.
57
     Arkansas Order at 12.

                                            27
actions that would call for the application of Aronson, a key issue of demand

futility was not fully litigated in Arkansas.

         This argument fails for two reasons. First, even if plaintiffs are correct that

the Arkansas Complaint was missing facts that, if alleged, would have caused the

district court to apply Aronson rather than Rales, the question of which test to

apply was fully litigated and decided in the Arkansas action.              The Arkansas

Complaint raised the issue of demand futility, and the Arkansas plaintiffs had the

opportunity to be heard on the issue. 58 In particular, before the district court stated

that it would not consider the second prong of Aronson, it provided a full analysis

of which test applied based on the allegations in the Arkansas Complaint and

decided that the complaint supported an application of Rales rather than Aronson.59

Neither deficiencies in the Arkansas Complaint, nor the addition of new facts or

arguments to the complaint in this subsequent action, alter the fact that the issue

already has been litigated.

         Second, the district court’s decision to apply Rales instead of Aronson had

no effect on whether the issue of demand futility was litigated because, in my

view, the Rales test encompasses all relevant aspects of the Aronson test. “As

58
    See Harben, 2010 WL 3893980, at *5 (holding that demand futility had actually been
litigated because it was raised in pleadings, was argued at a hearing, and court had issued
an order deciding whether demand was futile) (citing Powell, 289 S.W.3d at 445).
59
     Arkansas Order 9-11.

                                            28
many members of this Court have recognized, the Rales test functionally covers

the same ground as the Aronson test in determining the impartiality of directors.”60

The district court itself pointed out the overlap between the two tests, suggesting

that the choice of test would not have been likely to affect its analysis.61 Because

the Rales test “folds the two-pronged Aronson test into one broader

examination,”62 it is of no substantive consequence that the district court used

Rales instead of Aronson.

                                         *****

       For the reasons explained above, the Arkansas Complaint and the Delaware

Complaint present the same issue of demand futility, and the issue was actually

litigated in Arkansas even though the district court used the Rales test. Plaintiffs

concede that the demand futility issue was determined by a valid and final

60
   Sandys v. Pincus, 2016 WL 769999, at *12-13 & n.59 (Del. Ch. Feb. 29, 2016)
(compiling authorities and noting that Rales is the “cleaner, more straightforward” test
for demand futility).
61
   Arkansas Order at 12 n.7 (“The Court notes that the difference between Rales and
Aronson may blur in cases like this one, because the particularized allegations essential to
creating reasonable doubt as to the substantial likelihood of personal liability for breach
of fiduciary duties may also implicate the question whether the Board can avail itself of
business judgment protections.”) (citing Guttman v. Huang, 823 A.2d 492, 501 (Del Ch.
2003)).
62
   David B. Shaev Profit Sharing Account v. Armstrong, 2006 WL 391931, at *4 (Del.
Ch. Feb. 13, 2006), aff’d, 911 A.2d 802 (Del. 2006) (TABLE); see also Guttman, 823
A.2d at 501 (noting that although the “Rales test looks somewhat different from Aronson,
in that [it] involves a singular inquiry[,] . . . that singular inquiry makes germane all of
the concerns relevant to both the first and second prongs of Aronson”) (Strine, V.C.).

                                            29
judgment, and that this determination was essential to the judgment. Accordingly,

the four elements generally necessary for preclusion to apply under Arkansas law

have been established.

         3.    The Privity Requirement Is Satisfied

         In addition to the four elements discussed above, Arkansas preclusion law

requires that the party to be precluded be the same as, or in privity with, the party

in the action having preclusive effect. 63       Applying the privity requirement to

derivative actions involving two different stockholder plaintiffs raises the question

whether the required privity is between the two stockholders, or between each

stockholder and the corporation. Further complicating matters here, Arkansas

courts have not yet explicitly addressed this privity question.64

63
     See Dearman, 842 S.W.2d at 452.
64
   A federal court applying Arkansas law has held a subsequent derivative stockholder
plaintiff to be collaterally estopped from alleging demand futility based on the preclusive
effect of a previous demand futility ruling, but the parties did not raise and the court did
not explicitly address the question of privity. See Harben, 2010 WL 3893980, at *1. The
plaintiff in Harben instead attempted to distinguish other derivative cases by arguing that
issue preclusion should not apply to the first-filed case if the second-filed case was
decided first. See Plaintiff’s Memorandum of Points and Authorities in Opposition to
Defendants’ Opening Supplemental Brief in Support of Defendants’ Motion to Dismiss
the Complaint, Harben v. Dillard, 4:09-CV-00395-BSM, 2010 WL 3229629 (E.D. Ark.
Apr. 2, 2010). The federal judge in the Arkansas Wal-Mart litigation similarly opined
that issue preclusion would be likely to apply to subsequent suits without explicitly
addressing privity. See In re Wal-Mart Stores, Inc. S’holder Deriv. Litig., C.A. No. 4:12-
CV-4041, at 3 (W.D. Ark. June 4, 2014) (ORDER) (citing Harben, 2010 WL 3893980, at
*6). These cases suggest that federal judges applying Arkansas law believe that privity
would exist in derivative actions, although it is unclear to what, if any, extent they
analyzed the issue.

                                            30
         Courts in Delaware may address unsettled questions of law in another state

by examining the present status of the law in that state to determine what rule its

courts would be likely to follow. 65 I will therefore examine the status of Arkansas

preclusion law to determine whether or not Arkansas courts would conclude that

privity exists between derivative stockholder plaintiffs for purposes of issue

preclusion. In determining unsettled questions of issue preclusion law, Arkansas

courts look to decisions from courts in other jurisdictions, 66 the Restatement of

Judgments, 67 and principles of public policy regarding issue preclusion.68                I

consider each category below.

65
  See, e.g., Monsanto Co. v. C.E. Heath Comp. & Liab. Ins. Co., 652 A.2d 30, 35 (Del.
1994); see also Taylor v. LSI Logic Corp., 689 A.2d 1196, 1200 (Del. 1997) (“It is not
unusual for courts to wrestle with open questions of the law of sister states or foreign
countries.”).
66
 See, e.g., Dearman, 842 S.W.2d at 452 (citing Third Circuit, Colorado, New York, and
New Jersey opinions in privity analysis).
67
   See, e.g., Estate of Goston v. Ford Motor Co., 898 S.W.2d 471, 473 (Ark. 1995) (using
definition of issue preclusion from Restatement (Second) of Judgments § 27 (1982));
Smith v. Roane, 683 S.W.2d 935, 936 (Ark. 1985) (following comment to Restatement
(Second) of Judgments § 27 regarding issue preclusion); Dearman, 842 S.W.2d at 452-55
(referencing Restatement (Second) of Judgments §§ 28, 39, and 62 in analyzing collateral
estoppel issues in majority and dissenting opinions); cf. B & B Hardware, Inc. v. Hargis
Indus., Inc., 135 S. Ct. 1293, 1303 (2015) (noting that the United States Supreme Court
regularly relies on the Restatement for guidance regarding elements of issue preclusion).
68
     See, e.g., Beaver v. John Q. Hammons Hotels, L.P., 138 S.W.3d 664, 670 (Ark. 2003).

                                            31
              a.     Other Jurisdictions

       The vast majority of other jurisdictions that have decided the issue have

concluded that privity exists between different stockholder plaintiffs who file

separate derivative actions.69 The common theme in the opinions where privity has

69
   See Arduini, 774 F.3d at 633-34 (holding that derivative plaintiffs are in privity under
Nevada law, based on assessment of the holdings of “the majority of courts that have
addressed this issue” outside of Nevada, where issue had not been addressed); In re
Sonus Networks, Inc., S’holder Deriv. Litig., 499 F.3d 47, 64 (1st Cir. 2007) (holding the
same as a matter of Massachusetts law); Nathan v. Rowan, 651 F.2d 1223, 1226 (6th Cir.
1981) (finding privity for purposes of res judicata in stockholder derivative actions
arising under Federal Rule of Civil Procedure 23.1, prior to Semtek); Goldman v.
Northrop Corp., 603 F.2d 106, 109 (9th Cir. 1979) (finding subsequent action barred
under res judicata because real party in both actions was corporation); Hanson v. Odyssey
Healthcare, Inc., 2007 WL 5186795, at *5 (N.D. Tex. Sept. 21, 2007) (finding privity
under Texas law because “the unique nature of derivative litigation logically leads to a
finding of privity between all shareholder plaintiffs”); LeBoyer v. Greenspan, 2007 WL
4287646, at *3 (C.D. Cal. June 13, 2007) (finding privity under California law); In re Bed
Bath & Beyond, 2007 WL 4165389, at *8 (finding privity under New York law when
first derivative plaintiff was an adequate representative); Henik ex rel. LaBranche & Co.,
Inc. v. LaBranche, 433 F. Supp. 2d 372, 380 (S.D.N.Y. 2006) (noting that “privity among
shareholder plaintiffs in the derivative litigation context presents an atypical situation”
that allows issue preclusion because in both actions the corporation is the real party in
interest); Bammann, 2015 WL 2455469, at *16 (applying New York law and noting that
stockholders are effectively interchangeable members of a class because claims belong to
corporation); Fuchs Family Trust, 2015 WL 1036106, at *5 (finding privity between
derivative plaintiffs under Texas law to dismiss a Section 220 action); In re Career Educ.
Corp. Deriv. Litig., 2007 WL 2875203, at *10 & n.56 (Del. Ch. Sept. 28, 2007)
(appearing to apply Illinois law) (“Because the corporation is the true party in interest in
a derivative suit, courts have precluded different derivative plaintiffs in subsequent suits.
This commonality lends itself to the application of collateral estoppel or issue
preclusion.”). But see Kaplan v. Bennett, 465 F. Supp. 555, 561-62 (S.D.N.Y. 1979)
(holding no issue preclusion regarding demand futility by distinguishing a failure to make
demand in first case from a successful argument in second case that demand would be
futile, without addressing the fact that plaintiff in first case, Cramer v. Gen. Tel. & Elecs.
Corp., 582 F.2d 259, 265 (3d Cir. 1978), had also argued demand futility) (“[The
preclusive opinion] affirmed the district court’s dismissal of the claim because [first
plaintiff] had failed to make a demand upon the board of directors as required by Fed. R.
                                             32
been found is that the corporation is the real party in interest in both the first

derivative action and the subsequent suit.70          Viewed in this fashion, the first

stockholder plaintiff does not represent the second stockholder plaintiff. Instead,

both plaintiffs sue on behalf of the corporation and are essentially

interchangeable.71 Based on this logic, most courts addressing the issue have

Civ. P. 23.1. A decision based upon a failure to satisfy a procedural requirement is not to
be given preclusive effect. However, in the instant case, the Kaplans did not make a
demand on the board of directors, but asserted the futility of such a gesture.”) (citations
omitted); La. Mun. Police Emps.’ Ret. Sys. v. Pyott (Pyott I), 46 A.3d 313, 334 (Del. Ch.
2012) (“[A]n earlier Rule 23.1 dismissal does not have preclusive effect on a subsequent
derivative action brought by a different plaintiff because, as the earlier Rule 23.1 decision
itself established, the prior plaintiff lacked authority to sue on behalf of the corporation
and therefore was not in privity with the corporation or other stockholders.”), rev’d on
other grounds, 74 A.3d 612 (Del. 2013) (reversing Court of Chancery because California
preclusion law applied rather than Delaware law, without opining on issue under
Delaware law); Ex parte Capstone Dev. Corp., 779 So. 2d 1216, 1218-19 (Ala. 2000)
(declining to apply res judicata based on interpretation of failure to make a demand as a
procedural defect).
70
   See, e.g., Ross v. Bernhard, 396 U.S. 531, 538 (1970) (“The corporation is a necessary
party to the action; without it the case cannot proceed. Although named a defendant, it is
the real party in interest, the stockholder being at best the nominal plaintiff.”); Goldman
v. Northrop Corp., 603 F.2d at 109 (“The parties are the same, although represented by
different shareholders. . . . The corporation was the sole real party in interest in both
cases.”); Dana v. Morgan, 232 F. 85, 90-91 (2d Cir. 1916) (“[The stockholder] sues, not
primarily in his own rights, but in the right of the corporation. The wrongs of which he
complains are wrongs to the corporation. . . . [T]he corporation whose interest he seeks to
represent in this suit was a party to [the previous] action and is concluded by it and . . .
that concludes him.”); LeBoyer, 2007 WL 4287646, at *3 (“[I]n both suits the plaintiff is
the corporation itself.”); In re Career Educ. Corp., 2007 WL 2875203, at *10.
71
   See 7C Charles Alan Wright & Arthur R. Miller, Federal Practice and Procedure
§ 1840 (3d ed. 1998) (“Determining the effect to be given a judgment in an action under
Rule 23.1 generally does not pose any unusual problems because the shareholder-plaintiff
in a stockholder-derivative action is seeking to enforce the right of the corporation and
the corporation is present as a defendant.”)

                                             33
concluded that the corporation is bound by the results of the first judgment in

subsequent litigation, even if the result is to preclude a different stockholder’s

subsequent derivative claim. These rulings include three federal appellate court

decisions and two decisions of this Court. 72

         Pyott I, an opinion from this Court, reached a different conclusion under

Delaware law. The Court in Pyott I reflected upon the dual nature of a derivative

suit, noting that it is first a suit by a stockholder plaintiff to compel the corporation

to sue, and it is second a suit by the corporation, asserted by stockholders on its

behalf, against defendants.73      The Court reasoned that, at the stage when

defendants challenge demand futility, the stockholder does not yet represent the

corporation, nor does the suit yet belong to the corporation.              Instead, the

stockholder is merely asserting a claim for equitable authority to sue on the

corporation’s behalf.74 The Court opined that at that stage the corporation is not

yet the real party in interest, and consequently privity between subsequent

derivative stockholders is not yet established. Defendants point out that Pyott I

was reversed, but they overlook the fact that the Supreme Court reversed Pyott I

for applying Delaware law rather than California law, while explicitly stating that
72
     See supra note 69.
73
  Pyott I, 46 A.3d at 328-29 (citing Aronson, 473 A.2d at 811 and Cantor v. Sachs, 162
A. 73, 76 (Del. Ch. 1932)).
74
     See id. at 330.

                                           34
it did not reach the privity question under Delaware law.75 This issue thus remains

unresolved in Delaware.

      Although Pyott I gives thoughtful consideration to important issues

regarding privity and the point at which a derivative action should begin to belong

to the corporation, I am not persuaded that an Arkansas court would apply Pyott I’s

reasoning as a matter of Arkansas law given that the clear weight of authority in

other jurisdictions falls on the side of finding privity and given that the reasoning

of that authority appears to comport with Arkansas law. In particular, though not

in the context of privity, the Arkansas Supreme Court has stated that it is “inherent

in the nature of the [derivative] suit itself that it is the corporation whose rights are

being redressed rather than those of the individual plaintiff. It follows that the

corporation is regarded as the real party in interest.” 76 My review of Arkansas law

also has not revealed any indication that the interest of the corporation in the suit

would only be deemed to begin after demand futility is established, as suggested in

Pyott I. Accordingly, I believe it is likely that the Arkansas Supreme Court would

follow the majority rule that privity attaches to subsequent derivative stockholders.

75
   Pyott II, 74 A.3d at 618 (“Although the Court of Chancery is divided on the privity
issue as a matter of Delaware law, we cannot address the merits of that issue in this
case.”).
76
  Brandon v. Brandon Constr. Co. Inc., 776 S.W.2d 349, 352 (Ark. 1989) (quoting
Morgan v. Robertson, 609 S.W.2d 662, 663 (Ark. Ct. App. 1980)).

                                           35
                b.     The Restatement of Judgments

         Plaintiffs argue that Section 41 of the Restatement (Second) of Judgments

(the “Restatement”) suggests that there is no privity between different derivative

stockholder plaintiffs. 77 That provision lists five categories of persons who can

establish privity with a subsequent plaintiff and bind that plaintiff through issue

preclusion.      According to plaintiffs, only one of those categories is remotely

analogous to a derivative plaintiff, namely category (e), which concerns class

action representatives. The relevant part of Section 41 states as follows:

         (1) A person who is not a party to an action but who is represented by
         a party is bound by and entitled to the benefits of a judgment as
         though he were a party. A person is represented by a party who is:

                                         *****

                (e) The representative of a class of persons similarly situated,
                designated as such with the approval of the court, of which the
                person is a member.

         (2) A person represented by a party to an action is bound by the
         judgment even though the person himself does not have notice of the
         action, is not served with process, or is not subject to service of
         process.

         Exceptions to this general rule are stated in § 42.78

77
     Pls.’ Ans. Br. 25-28.
78
   Restatement (Second) of Judgments § 41 (1982). The exceptions in Section 42
regarding adequacy of representation are addressed later in this opinion.

                                            36
         Relying on Section 41’s requirement that the class representative must be

“designated as such with the approval of the court” or by contract, 79 plaintiffs

argue that, by the same logic, a derivative plaintiff should not be able to gain

representative authority as required to establish privity merely by filing a

complaint. For additional support, plaintiffs note a comment to Section 59 of the

Restatement, which states in relevant part:

         The stockholder’s or member’s derivative action is usually though not
         invariably in the form of a suit by some of the stockholders or
         members as representatives of all of them. Whether the judgment in
         such a representative suit is binding upon all stockholders or members
         is determined by the rules stated in §§ 41 and 42. If it is binding
         under those rules, it precludes a subsequent derivative action by
         stockholders or members who were not individually parties to the
         original action. 80

Plaintiffs argue that because derivative actions only preclude subsequent actions if

they meet the requirements of Sections 41 and 42, and because Section 41 requires

an adjudicative or contractual designation of a representative, dismissals of

derivative actions for lack of demand futility are not preclusive upon future

derivative plaintiffs. This argument tracks the reasoning of Pyott I that a derivative

plaintiff should not be able to speak for the corporation until demand futility has

been established.

79
  Id. § 41 cmt. a (“The method of designating the representative may be adjudicative or
contractual . . . .”).
80
     Id. § 59 cmt. c.

                                          37
         Although plaintiffs’ argument is plausible, the Restatement is ambiguous on

the privity question in the derivative context. Another comment in Section 59

casts doubt on the concept of privity as being between the two derivative

stockholders. The comment notes that a stockholder derivative action “is one on

behalf of the corporation as such,”81 although it does not specify whether a

derivative plaintiff acts on behalf of the corporation from the outset or only after

demand futility is established. Reflective of the Restatement’s lack of clarity

concerning privity in the derivative context, cases citing Section 41(1)(e) have

come out in both directions: some have held that privity exists between derivative

stockholders even when demand futility has not been established,82 but others,

81
     Id. § 59 cmt. e.
82
   See, e.g., Arduini, 774 F.3d at 634 n.11 (relying on Section 41’s list of representative
relationships in establishing privity) (“These examples of representation are analogous to
that of shareholder derivative suits, where a shareholder is acting on behalf of the
corporation and also other shareholders.”); see also In re MGM Mirage Deriv. Litig.,
2014 WL 2960449, at *6 (D. Nev. June 30, 2014) (noting that Restatement’s list of
relationships that establish privity are examples but that the list is non-exhaustive and can
include subsequent derivative stockholders); In re Sonus Networks, Inc. S’holder Deriv.
Litig., 422 F. Supp. 2d 281, 291 (D. Mass. 2006) (citing Sections 41 and 42 in privity
analysis, although without explicitly stating that they support derivative stockholder
privity), aff’d, 499 F.3d 47 (1st Cir. 2007); cf. Slocum ex rel. Nathan A v. Joseph B, 588
N.Y.S.2d 930, 931 (N.Y. App. Div. 1992) (declining in family law case to strictly adhere
to list of categories in Section 41) (“We think the better rule, however, and that which is
actually applied in this State as well as in a number of other jurisdictions, eschews strict
reliance on formal representative relationships in favor of a more flexible consideration
of whether all of the facts and circumstances of the party’s and nonparty’s actual
relationship, their mutuality of interests and the manner in which the nonparty’s interests
were represented in the prior litigation establishes a functional representation such that
                                             38
including Pyott I, reached the opposite conclusion.83

      In short, the Restatement is inconclusive as a predictor of how an Arkansas

court would decide the privity question. One plausible reading suggests that

privity would not exist between derivative plaintiffs unless the plaintiff in the first

judgment had been authorized in some fashion by a court or the corporation. On

the other hand, the Restatement’s lack of differentiation between pre-futility and

post-futility plaintiffs instead could indicate that all derivative actions are in a

category similar to post-certification class actions. The Restatement does not

meaningfully analyze whether the corporation’s status as the real party in interest

makes privity a foregone conclusion for subsequent representative stockholders.

Such a reading, however, would comport with the weight of authority discussed

above, which finds privity between derivative plaintiffs, regardless of the stage of

the proceeding, because the real party in interest is the corporation.

the nonparty may be thought to have had a vicarious day in court.”) (internal quotation
marks omitted).
83
  See Pyott I, 46 A.3d at 333; see also Weinfeld v. Minor, 2016 WL 951352, at *4 (D.
Nev. Mar. 9, 2016) (finding no privity between derivative stockholders for res judicata
purposes because none of the categories in Section 41 applied).

                                          39
              c.       Public Policy

       In Arkansas, the doctrine of issue preclusion is “based upon the policy of

limiting litigation to one fair trial on an issue . . . .” 84 Issue preclusion should apply

“only when the party against whom the earlier decision is being asserted had a full

and fair opportunity to litigate the issue in question.”85 To the extent a certain

application of issue preclusion is anathema to public policy, courts will not apply

the rule rigidly. 86       Regarding privity, Arkansas appears to take a practical

approach. “The underlying purpose of the modern [privity] rule is fundamental

fairness and common sense.”87 Arkansas courts have opined that the practical goal

of preventing re-litigation by substantially identical parties trumps the need for

precise identicality. 88

84
  Dearman, 842 S.W.2d at 451; accord Beaver, 138 S.W.3d at 670; see also Crockett v.
C.A.G. Invs., Inc., 381 S.W.3d 793, 799 (Ark. 2011) (noting that collateral estoppel
applies to a plaintiff or his privies when attempting to re-litigate an issue against a
defendant or his privies) (“The true reason for holding an issue to be barred is not
necessarily the identity or privity of the parties, but instead to put an end to litigation by
preventing a party who has had one fair trial on a matter from relitigating the matter a
second time.”).
85
   Dearman, 842 S.W.2d at 451; see also E. Tex. Motor Freight Lines, Inc. v. Freeman,
713 S.W.2d 456, 459 (Ark. 1986) (“But we have never extended the concept of collateral
estoppel to the point that claimants who have had no trial at all, nor any opportunity to
present their claims, are precluded by the outcome of litigation to which they were not
privy. We believe justice preserves to everyone the right to his ‘day in court.’”).
86
   See United States v. Stauffer Chem. Co., 464 U.S. 165, 176 (1984) (White, J.,
concurring) (“[T]here is no justification for applying collateral estoppel, which is a
flexible, judge-made doctrine, in situations where the policy concerns underlying it are
                                             40
       It is useful to compare these policy rationales with the rationales other states

have given for applying issue preclusion against derivative plaintiffs.                 Some

jurisdictions have concluded that establishing privity over subsequent derivative

stockholders is sound public policy because it prevents the perpetual re-litigation

of the demand futility question.89 On the other hand, courts in other jurisdictions

have expressed concern that finding privity may allow fast-filing derivative

plaintiffs who do not make an adequate effort to allege demand futility to preclude

more diligent plaintiffs who bring subsequent litigation that could have been more

successful even though neither the court nor the corporation ever authorized the

fast-filing plaintiffs to represent the corporation. 90

absent. . . . Preclusion must be evaluated in light of the policy concerns underlying the
doctrine.”).
87
  Dearman, 842 S.W.2d 449, 452 (quoting Moore v. Hafeeza, 515 A.2d 271, 274 (N.J.
Super. Ct. Ch. Div. 1986)).
88
  See Wells v. Ark. Pub. Serv. Comm’n, 616 S.W.2d 718, 719 (Ark. 1981) (applying res
judicata) (“The exact same parties are not required as it is sufficient if there is substantial
identity of the parties.”); Rose v. Jacobs, 329 S.W.2d 170, 172 (Ark. 1959).
89
   In re Sonus Networks, 499 F.3d at 64 (“The defendants have already been put to the
trouble of litigating the very question at issue, and the policy of repose strongly militates
in favor of preclusion.”); Henik, 433 F. Supp. 2d at 380 (“In addition, as Defendants point
out, if [derivative stockholder privity] were not the rule, shareholder plaintiffs could
indefinitely relitigate the demand futility question in an unlimited number of state and
federal courts, a result the preclusion doctrine specifically is aimed at avoiding.”). But
see Pyott I, 46 A.3d at 335 (noting that original judgment could still serve as persuasive
authority to second court and could bind original plaintiff through stare decisis).
90
  Bammann, 2015 WL 2455469, at *18 n.147 (“A specter of unfairness appears,
however, in the derivative context, where a derivative plaintiff with a viable claim may
                                              41
         In my view, the policy rationales for finding subsequent derivative plaintiffs

to be in privity would resonate with courts in Arkansas in light of the state’s policy

of using preclusion to ensure issues are litigated only once and its recognition that

the corporation is the real party in interest in a derivative action. 91 At the same

time, concerns about fast filers precluding future plaintiffs align with the state’s

policy of ensuring that parties to be precluded have received a full and fair

opportunity to be heard. These competing policy interests may be balanced by

requiring that a derivative plaintiff be an adequate representative in order for a

judgment to have a preclusive effect on subsequent actions. 92             That issue is

addressed in the next section.

                                        *****

         To summarize, the overwhelming majority of decisions in other jurisdictions

have found privity between different stockholder plaintiffs in derivative actions on

the premise that the corporation is the real party in interest both actions, a premise

that the Arkansas Supreme Court has recognized expressly. The Restatement is

be estopped from proceeding based on the inadequate efforts of a fellow stockholder in
privity, a feckless fast filer.”).
91
     See Dearman, 842 S.W.2d at 451; Brandon, 776 S.W.2d at 352.
92
   Wright & Miller, supra note 71, § 1840 (“The justification for binding nonparty
stockholders to a judgment in a Rule 23.1 action is that their interests were adequately
represented in the litigation. . . . Of course, as is discussed more fully elsewhere, there
must be a sufficient showing of procedural fairness and adequate representation to satisfy
due process.”).

                                            42
inconclusive, and public policy arguments exist on both sides of the privity

question. Taking all these points into consideration, it is my opinion that Arkansas

courts likely would find that the privity requirement is satisfied here because that

result accords with the clear weight of authority and resonates with the policy in

Arkansas of using preclusion to ensure that issues are litigated only once.

         4.      The Arkansas Plaintiffs Were Adequate Representatives

         The final disputed issue is whether the Arkansas plaintiffs were inadequate

representatives such that issue preclusion cannot apply. Due process under the

United States Constitution requires that a judicial procedure “fairly insures the

protection of the interests of absent parties who are to be bound by it.” 93 One

requirement for such procedures is that the absent parties “are in fact adequately

represented by parties who are present.”94 The Federal Rules of Civil Procedure

embrace the principle of due process. Federal Rule 23.1 states that a “derivative

action may not be maintained if it appears that the plaintiff does not fairly and

adequately represent the interests of shareholders . . . who are similarly situated in

enforcing the right of the corporation . . . .” 95

93
     Hansberry v. Lee, 311 U.S. 32, 42 (1940).
94
     Id. at 42-43.
95
   Fed. R. Civ. P. 23.1. It bears noting that assessing adequacy of representation under
Rule 23.1 (which typically occurs in the context of a motion to dismiss) arises in a
different posture than assessing adequacy of representation for purposes of issue
preclusion, which arises in a second case after a judgment has been entered in the first.
                                             43
         Citing a single pre-Semtek district court opinion, plaintiffs argue that federal

law applies to the issue because the Arkansas action is governed by Federal Rule

23.1. 96 Plaintiffs acknowledge, however, that “even if Arkansas law applied, the

analysis would not differ.”97 This is because Arkansas Rule of Civil Procedure

23.1 is substantively identical to Federal Rule 23.1.98

         In addressing adequacy of representation, defendants focus on Arkansas law

and, because there is little authority in Arkansas regarding the adequacy of

representation requirement for issue preclusion, they point to the Restatement to

provide an analytical framework. Numerous courts similarly have relied on the

Restatement to consider the issue of adequacy of representation for purposes of

issue preclusion.99

Although plaintiffs’ authorities tend to fall in the former category, this case falls into the
latter. That being said, the requirements for adequate representation may be similar in
these postures, if not the same. Cf. William B. Rubenstein, Finality in Class Action
Litigation: Lessons from Habeas, 82 N.Y.U. L. Rev. 790, 810 (2007) (noting in class
action context that the requirements of Rule 23 must be at least as stringent as the
requirements of the Constitution, but could be even stricter).
96
  Pls.’ Ans. Br. 8 (citing Recchion ex rel. Westinghouse Elec. Corp. v. Kirby, 637 F.
Supp. 284, 289 (W.D. Pa. 1985)).
97
     Id. n.21 (citing Ark. R. Civ. P. 23.1).
98
  Ark. R. Civ. P. 23.1 (“The derivative action may not be maintained if it appears that the
plaintiff does not fairly and adequately represent the interests of the shareholders . . .
similarly situated in enforcing the right of the corporation . . . .”).
99
  See, e.g., Arduini, 774 F.3d at 635-36 (using Restatement to decide issue under Nevada
law) (“[I]ssue preclusion does not apply where the first shareholder did not adequately
represent the corporation, minimizing the risk of unfairness to shareholders.”); In re
                                               44
            Because Arkansas and numerous other courts look to the Restatement to

determine unsettled questions of issue preclusion law, 100 and because

Constitutional principles of due process are embedded in the pertinent provisions

of the Restatement,101 I will look to the analytical framework provided in the

Restatement to evaluate the issue of adequacy of representation.

            Section 42 of the Restatement outlines certain scenarios in which a person

will not be bound to a prior judgment. 102 Relevant here are two questions bearing

on adequacy of representation: whether the interests of the representative and the

represented person are aligned, and whether the representation was grossly

Sonus Networks, 499 F.3d at 64-66 (using Restatement to decide issue under
Massachusetts law) (“[T]o bind the corporation, the shareholder plaintiff must have
adequately represented the interests of the corporation.”); Hanson, 2007 WL 5186795, at
*6; Henik, 433 F. Supp. 2d at 381 (noting that issue preclusion in derivative case could be
challenged in cases where inadequate representation is alleged); Pyott II, 74 A.3d at 618
& nn.21 & 25 (noting use of Restatement to determine adequacy and citing Sonus’
quotation of Restatement in determining adequacy); South v. Baker, 62 A.3d 1, 12-13
(Del. Ch. 2012) (“Decisions that give preclusive effect to a Rule 23.1 dismissal
universally recognize that another stockholder still can sue if the first plaintiff provided
inadequate representation.”).
100
      See supra note 67.
101
    Restatement § 42 & Reporter’s Note (listing representation requirements to bind a
represented party and noting that “[t]he provisions of this section are thus closely related
to, if indeed they are not particularized expressions of, the requirements of due process”).
102
      Id.

                                            45
deficient. 103 Keeping in mind that Wal-Mart is the real party in interest and thus

the party that must be adequately represented, I address these questions in turn.

                a.     The Arkansas Plaintiffs’ Interests Were Not Misaligned

         Adequate representation for preclusion purposes requires that the interests of

the party to be precluded and the representative be aligned. 104 The Restatement

does not explicitly address conflicts of interest in derivative suits, but it notes that a

judgment against one class member will not bind another if a substantial

divergence in their interests prevented the first class member from representing the

other adequately. 105 Similarly, derivative cases in other jurisdictions have noted

that an adequate representative stockholder must “be free from economic interests

that are antagonistic to the interests of the class.”106

103
    Id. § 42(d)-(e). Plaintiffs do not argue that one of the Restatement’s other major
grounds for inadequacy, collusion between the representative plaintiff and the defendant,
exists here. See id. cmt. f.
104
      See Taylor v. Sturgell, 553 U.S. 880, 900-01 (2008).
105
   Restatement § 42(1)(d) (“With respect to the representative of a class, there was such
a substantial divergence of interest between him and the members of the class, or a group
within the class, that he could not fairly represent them with respect to the matters as to
which the judgment is subsequently invoked[.]”). A comment goes on to state that “a
judgment is not binding on the represented person . . . where, to the knowledge of the
opposing party, the representative seeks to further his own interest at the expense of the
represented person.” Id. cmt. f.
106
      See Arduini, 774 F.3d at 635.

                                              46
       Plaintiffs argue that, by seeking to control the case in order to earn

attorneys’ fees, Arkansas counsel put their personal economic interests ahead of

the interests of Wal-Mart and its stockholders, who instead would have benefited

from litigating demand futility with the strongest complaint possible. To support

this argument, plaintiffs’ lead counsel submitted an affidavit in which he contends

that Arkansas counsel recognized that Section 220 documents would help establish

demand futility but refused to discontinue the Arkansas litigation in favor of the

Delaware litigation unless they were offered a substantial share of any Delaware

fee award. 107 Plaintiffs allege no other conflict of interest between the Arkansas

plaintiffs and Wal-Mart.

       In my view, plaintiffs misapprehend the types of conflict that will make a

derivative plaintiff an inadequate representative. Representatives have been found

inadequate when their interests are directly opposed to the interests of the person

being represented, which in this case is Wal-Mart.108 In contrast, plaintiffs here

107
    Affidavit of Stuart M. Grant, ¶ 13, June 30, 2015. Counsel for the Arkansas plaintiffs
submitted an affidavit vigorously denying these assertions and providing a very different
account of the strategy pursued in the Arkansas action. See Affidavit of Judith S.
Scolnick (“Scolnick Aff.”), ¶¶ 22, 25-26, July 16, 2015. Whether I may consider the
contents of these affidavits in deciding the pending motion to dismiss is unclear but
ultimately of no moment since they are not necessary to my analysis.
108
    See, e.g., Hansberry, 311 U.S. at 44-46 (holding that plaintiffs in first action did not
adequately represent defendants in second action where first plaintiffs appeared to seek
enforcement of a racially restrictive covenant and defendants in second action sought to
resist it); Hoxworth v. Blinder, 74 F.3d 205, 208 (10th Cir. 1996) (holding no privity for
res judicata purposes because “the class was an adversary to the trustee,” rendering
                                            47
contend only that counsel for the Arkansas plaintiffs had a personal financial

interest in maintaining the litigation in a particular forum—a reality that counsel

for any set of plaintiffs involved in multi-jurisdictional litigation would face. They

do not allege that the Arkansas plaintiffs had an interest adverse to Wal-Mart or

that they would benefit from bringing harm upon the company. To the contrary, it

appears that the Arkansas plaintiffs, as stockholders of Wal-Mart, would benefit

from any recovery Wal-Mart received through a judgment or settlement in their

derivative action. In my view, their counsel’s preference to litigate in a certain

jurisdiction and to maintain control of the case does not create a misalignment of

interests between the Arkansas plaintiffs and Wal-Mart sufficient to impugn their

adequacy as Wal-Mart’s representatives, especially when their interests otherwise

appear to be closely aligned.

              b.     The Arkansas Plaintiffs Were Not Grossly Deficient
                     Representatives

       The second aspect of inadequacy relevant here involves deficient or

incompetent representation.       Under the Restatement, issue preclusion will not

apply if “[t]he representative failed to prosecute or defend the action with due

diligence and reasonable prudence, and the opposing party was on notice of facts

trustee an inadequate representative) (“As a judgment creditor of Meyer Blinder, the
Hoxworth Class was in direct opposition with the trustee. Every dollar of Meyer
Blinder’s assets the Hoxworth Class reached by imposition of its secured lien would
leave one dollar less in the Blinder Robinson estate for the trustee to satisfy creditors.”).

                                             48
making that failure apparent.”109 A comment goes on to distinguish between

imperfect legal strategies, which would not warrant a finding of inadequacy, and

“grossly deficient” management of the litigation that would be apparent to the

opposing party so as to undermine that party’s reliance on the prior adjudication:

         The failure of a representative to invoke all possible legal theories or
         to develop all possible resources of proof does not make his
         representation legally ineffective, any more than such circumstances
         overcome the binding effect of a judgment on a party himself. . . .
         Where the representative’s management of the litigation is so grossly
         deficient as to be apparent to the opposing party, it likewise creates
         no justifiable reliance interest in the adjudication on the part of the
         opposing party. Tactical mistakes or negligence on the part of the
         representative are not as such sufficient to render the judgment
         vulnerable. 110

         Plaintiffs argue, in essence, that the Arkansas plaintiffs were grossly

deficient because they failed to pursue books and records from Wal-Mart before

pursuing their case.111 They point out that their counsel failed to heed the warnings

109
      Restatement § 42(1)(e).
110
    Restatement § 42 cmt. f (emphasis added). Courts have applied the Restatement and
its commentary when determining whether representation was deficient in derivative
actions. See, e.g., Arduini, 774 F.3d at 635-36 (applying issue preclusion because
plaintiffs “adequately litigated their case” even though they did not succeed in alleging
demand futility or amend their complaint); In re Sonus Networks, 499 F.3d at 65-66
(applying issue preclusion because differences in the two derivative complaints did not
support a finding of grossly deficient representation); cf. In re Bed Bath & Beyond, 2007
WL 4165389, at *8 n.7 (focusing test on adequacy of representative’s counsel rather than
representative and concluding that differences between the complaints did not
demonstrate counsel was “grossly deficient” or an inadequate representative).
111
   Plaintiffs also argue that “there is no evidence that the actual Arkansas plaintiffs had
any input in, or knowledge of,” the decision to press on with the litigation rather than
                                            49
of then-Chancellor Strine, who admonished plaintiffs’ counsel in Delaware not to

proceed on a complaint allegedly similar to the Arkansas Complaint without first

pursuing books and records to bolster their allegations.112 They further note that

even the defendants criticized the Arkansas plaintiffs’ strategy when seeking to

stay the Arkansas action.

       Taken to its logical extreme, plaintiffs’ argument would mean that any

stockholder representative in a derivative action who did not first pursue books and

records would be inadequate, or at least presumptively inadequate. In Pyott II,

however, the Delaware Supreme Court rejected a “fast filer” rule that deems

plaintiffs presumptively inadequate if they fail to pursue books and records before

litigating derivative claims. 113 Arkansas law controls here, but I have no reason to

pursue books and records, and they submit affidavits from three stockholders who testify
that they were not actively informed about the litigation. Pls.’ Ans. Br. 9-10. The
authorities that plaintiffs rely on, however, involve determining adequacy to serve as a
class or derivative representative under Rule 23 or 23.1, and not for purposes of issue
preclusion after the fact. See Bodner v. Oreck Direct, LLC, 2007 WL 1223777, at *1-2
(N.D. Cal. Apr. 25, 2007); Rothenberg v. Sec. Mgmt. Co., Inc., 667 F.2d 958, 962 (11th
Cir. 1982). The gravamen of plaintiffs’ inadequacy argument for issue preclusion
purposes ultimately boils down to the decision of Arkansas counsel not to seek books and
records from Wal-Mart as part of their litigation strategy. As discussed below, I conclude
that this decision does not demonstrate that the Arkansas plaintiffs were grossly deficient.
112
    Oral Argument, Klein v. Walton, C.A. No. 7455-CS, at 9-12, 19-21 (Del. Ch. July 16,
2012) (TRANSCRIPT). Then-Chancellor Strine gave this warning before the Delaware
Supreme Court decided in Pyott II that there was no presumption of inadequacy for fast-
filing plaintiffs. See infra note 113.
113
    See Pyott II, 74 A.3d at 618 (rejecting irrebutable presumption of inadequacy for
derivative stockholders who file before undertaking a Section 220 action, and also noting
                                            50
think that Arkansas would reach a different conclusion than Pyott II on this

issue. 114 Of course, even absent a presumption of “fast filer” inadequacy, the

failure to pursue a Section 220 action could serve as meaningful evidence of

inadequate representation in some cases. 115 But it does not follow that plaintiffs

are necessarily inadequate representatives because their counsel chose not to

follow a recommended strategy in a different action, even one suggested by a

preeminent corporate jurist, particularly when they are litigating in a different

jurisdiction before a different judiciary.

         Here, the Arkansas plaintiffs have been represented by more than a dozen

attorneys from several different law firms. 116 No contention is made that they are

not experienced counsel, and the record reflects they have litigated the Arkansas

that without such a presumption, “there was no basis on which to conclude that the [first]
plaintiffs were inadequate”).
114
   In dismissing the Arkansas Complaint, the district court did not find that the Arkansas
plaintiffs were inadequate representatives under Rule 23.1, or even raise the issue of
adequate representation in its order, notwithstanding the Arkansas plaintiffs’ decision not
to pursue a books and records action. See generally Arkansas Order. The requirement of
adequate representation under Rule 23.1 may share similarities with the requirement of
adequate representation for issue preclusion. See supra note 95.
115
    Cf. Bammann, 2015 WL 2455469, at *18 n.147 (“Pyott [II] makes clear that a
presumption of inadequacy does not arise upon a showing that the prior plaintiff failed to
use a section 220 request to develop its case; how a demonstration of inadequacy may be
made in the Rule 23.1 context, and the complex issues of comity, efficiency and fairness
which would arise therewith, must be addressed through litigation where the issue is
fairly presented.”).
116
      See Arkansas Complaint at 73-75.

                                             51
action with apparent vigor, including by seeking an appeal of the district court’s

dismissal of the case, which is pending before the Eighth Circuit.

       Turning to the substance of the Arkansas plaintiffs’ strategic decision,

perhaps it would have been advantageous for the Arkansas plaintiffs to seek

additional factual support through a books-and-records action.               But, as their

counsel attests, crucial excerpts from a number of key documents underlying the

New York Times article were available on the article’s webpage. In her view, these

underlying documents “provided sufficient particularized allegations to surmount

the demand futility hurdle.”117        Several of the documents from the article’s

webpage were featured in both complaints, including one of the most crucial

excerpts from Wal-Mart’s internal reports—the statement that “there is reasonable

suspicion to believe that Mexican and USA laws may have been violated.”

Plaintiffs found that statement important enough to quote it nine times in the

117
    Scolnick Aff. ¶ 8. Plaintiffs have sought to strike this affidavit from the record, but I
use it only to provide context. It can be independently verified from the internet and the
Arkansas Complaint that the excerpts the Arkansas plaintiffs used in their complaint were
available from the New York Times website. See Arkansas Complaint Exs. A-I (internal
Wal-Mart document excerpts attached to Arkansas Complaint); Barstow, supra note 3
(providing links to excerpts of documents). A web archive search indicates that the
relevant document excerpts available now were also available when the article was first
published. See Internet Archive Wayback Machine, https://web.archive.org/web/
20120422013641/http://www.nytimes.com/2012/04/22/business/at-wal-mart-in-mexico-
a-bribe-inquiry-silenced.html?_r=1 (preserving webpage as of April 22, 2012). Counsel
for Arkansas plaintiffs also stated the same views on the New York Times documents at
the hearing on the motion to stay the Arkansas action. See Leavengood Aff. Ex. 29,
Transcript of Hearing on Motion to Stay at 47, 64, In re Wal-Mart Stores, Inc. S’holder
Deriv. Litig., 4:12-CV-4041-SOH (W.D. Ark. Sept. 6, 2012).

                                             52
Delaware Complaint and to feature it in their supplemental briefing as well.118

This key phrase was included in the excerpts on the New York Times website and

was relied upon extensively in the Arkansas Complaint. 119

         It is certainly better practice for stockholder plaintiffs to use “the tools at

hand” to investigate their claims thoroughly before launching derivative suits,120

and I share the concerns Delaware courts have expressed regarding the risk of

diligent derivative plaintiffs being collaterally estopped by fast filers. Indeed, it

may turn out (depending on the outcome of the appeal to the Eighth Circuit) that

the Arkansas plaintiffs’ assessment of their ability to establish demand futility

118
    Compl. ¶¶ 6, 136, 158, 277, 279, 295, 332, 336, 339; Pls.’ Resp. to Defs.’
Supplemental Br. 7. Other important passages supporting the complaints also were
available on the New York Times website and used by Arkansas plaintiffs. See, e.g.,
Compl. ¶¶ 7, 172, 278, 334, 344; Arkansas Complaint ¶ 191 (quote from internal e-mail
opining that WalMex’s investigation was “truly lacking”); Compl. ¶¶ 7, 148, 358;
Arkansas Complaint ¶ 170 (statement by Munich questioning the wisdom of entrusting
investigation to WalMex).
119
      Arkansas Complaint ¶¶ 2, 9, 152, 275.
120
   See Seinfeld v. Verizon Commc’ns, Inc., 909 A.2d 117, 120 (Del. 2006) (“The rise in
books and records litigation is directly attributable to this Court’s encouragement of
stockholders, who can show a proper purpose, to use the ‘tools at hand’ to obtain the
necessary information before filing a derivative action. Section 220 is now recognized as
‘an important part of the corporate governance landscape.’”); White v. Panic, 783 A.2d
543, 557 (Del. 2001) (“[T]his case demonstrates the salutary effects of a rule encouraging
plaintiffs to conduct a thorough investigation, using the ‘tools at hand’ including the use
of actions under 8 Del. C. § 220 for books and records, before filing a complaint.”); Stone
v. Ritter, 2006 WL 302558, at *1 (Del. Ch. Jan. 26, 2006) (“On numerous previous
occasions, this Court and the Delaware Supreme Court have urged would-be derivative
plaintiffs to use the so-called ‘tools at hand’ before filing complaints.”), aff’d, 911 A.2d
362 (Del. 2006).

                                              53
without pursuing books and records from Wal-Mart was ill-advised. But, in my

opinion, that decision falls into the category of an imperfect legal strategy and does

not rise to the level of litigation management that was so grossly deficient as to

render them inadequate representatives.

      The only remaining question involves the contents of the books and records

that plaintiffs here eventually secured through their Section 220 litigation. At oral

argument and in supplemental submissions, the parties vigorously disputed the

extent to which certain documents the Delaware plaintiffs obtained in the Section

220 action might help to establish demand futility. That dispute is relevant to the

issue of demand futility itself, but what is its relevance to the issue of inadequate

representation?    In other cases, after finding that the outcome of a first-filed

derivative action should be given preclusive effect, courts have gone on to compare

the allegations in the two derivative complaints, seemingly to provide reassurance

that no harm was done in precluding the second action because it would not have

passed muster under Rule 23.1 even with the benefit of the corporate records.121

121
    See In re Sonus Networks, 499 F.3d at 71 (“In sum, we cannot conclude that the
allegations in the Second Amended Complaint add material allegations that would pass
the test for pleading demand futility under Delaware law. It follows that the state
plaintiffs were not grossly deficient in failing to include such allegations in the state
complaint.”); In re Career Educ. Corp., 2007 WL 2875203, at *10 n.58 (noting that issue
preclusion would not reduce the efficacy of Section 220 in that case because “even
though the [first plaintiffs] did not pursue a Section 220 demand, the [first] Complaint
contained all of the key factual allegations that Plaintiffs rely on in this action”).

                                           54
      I have reservations about this approach because it encourages hindsight

review of conduct that should be judged based on the circumstances as they exist

in real time. 122 In my view, whether a representative litigated with sufficient

diligence necessarily depends on her knowledge and expectations at the time,

rather than on what happened later. Taking a real-time approach to evaluating

adequacy could mean, hypothetically, that a grossly deficient or conflicted decision

not to pursue books and records would render a representative inadequate even

when a subsequent Section 220 action unearthed no meaningful new information.

Alternatively, it could mean that a good faith decision not to pursue books and

records would not demonstrate inadequacy even if a later Section 220 action found

122
    My review of relevant case law suggests that this concern—whether the substance of
documents obtained in a Section 220 action that are used in a second derivative action
should be considered in determining adequacy of representation in a first derivative
action for purposes of issue preclusion—has not been discussed in depth. For literature
that may shed light on somewhat related concerns, see Kevin R. Bernier, Note, The
Inadequacy of the Broad Collateral Attack: Stephenson v. Dow Chemical Company and
Its Effect on Class Action Settlements, 84 B.U. L. Rev. 1023, 1041 (2004) (criticizing an
opinion that found inadequate representation based on certain class members’ ex post
dissatisfaction with outcome of a settlement); see also Rubenstein, supra note 95, at 813
(noting that the second court “might be tempted to ask . . . knowing what we know now
[as opposed to at the moment of settlement], was the class adequately represented? . . .
[The second court] is not truly revisiting the wisdom of [the first court’s] adequacy
determination. It is remaking that decision in light of subsequent developments and/or
changed circumstances.”). But see David A. Dana, Adequacy of Representation After
Stephenson: A Rawlsian/Behavioral Economics Approach to Class Action Settlements, 55
Emory L.J. 279, 281 (2006) (suggesting that the adequacy of representation analysis in
class action cases should have some relation to ex post substantive outcomes because
“[a]dequacy or inadequacy of representation, as a practical matter, sometimes unfolds
only over time”).

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a “smoking gun.” But if I were to evaluate adequacy of representation using

materials uncovered later, I would be at risk of second-guessing the Arkansas

plaintiffs’ decision-making based on information that was unavailable to them at

the time, and of addressing the merits of demand futility even though principles of

comity logically would restrict me to assessing issue preclusion only.

      For these reasons, I decline to specifically address the documents that

plaintiffs obtained in their Section 220 action in assessing whether they were

adequately represented by the Arkansas plaintiffs. I will say only this much:

defendants have made legitimate arguments that the Section 220 materials,

including some of the best documents (as identified by plaintiffs) supporting the

allegations of demand futility, would not have affected the outcome of the demand

futility analysis.123     In particular, defendants have proffered plausible

interpretations of these documents suggesting that members of management or

directors who may have read them would not necessarily have been put on notice

of the bribery scheme. I will not address these arguments further for the reasons

explained above.

123
     See Tr. Oral Arg. 102, 109-11, 135-36 (plaintiffs identifying Fung memo,
Rodriguezmacedo report, and Halter report as being among their best documents, while
cautioning that the Section 220 documents should be viewed in their totality because no
single document represents a “smoking gun”); Defs.’ Supplemental Br. 4-7 (Dec. 4,
2015) (noting that two of these reports were used in New York Times article and among
the excerpted materials upon which Arkansas Complaint relied; and that the third memo
is exculpatory and renders the two complaints substantively indistinguishable).

                                          56
                                          *****

       In sum, for the reasons explained above, all four elements required under

Arkansas law for issue preclusion have been established, and an Arkansas court

likely would conclude, consistent with the clear weight of authority from other

jurisdictions, that issue preclusion would apply to different stockholder plaintiffs in

the context of a derivative suit. The Arkansas plaintiffs were not inadequate

representatives of Wal-Mart, whether due to a conflict of interest, gross

deficiencies in their representation, or otherwise.           Accordingly, the Arkansas

district court’s holding that demand was not futile precludes re-litigation of the

issue in this case.124

124
   Plaintiffs make two other arguments against issue preclusion that do not warrant in-
depth discussion. First, they argue that issue preclusion cannot apply as a matter of
federal common law because there is no “pre-existing substantive legal relationship”
between the Arkansas plaintiffs and plaintiffs here. Pls.’ Ans. Br. 14-15 (quoting Taylor
v. Sturgell, 553 U.S. at 894). This argument is unavailing because the relevant
substantive legal relationship is between Wal-Mart and the Arkansas plaintiffs, not
between plaintiffs and the Arkansas plaintiffs, and because I have concluded that Wal-
Mart was adequately represented by the Arkansas plaintiffs.

Second, plaintiffs argue that this case falls into one of two special exceptions to issue
preclusion outlined in Section 28 of the Restatement. Pls.’ Ans. Br. 28-30. The first
exception is that re-litigation can be warranted “by differences in the quality or
extensiveness of the procedures followed in the two courts.” Restatement § 28(3). This
exception generally addresses differences in the courts’ competencies, such as using a
finding from a summary proceeding in a small claims court to preclude an issue in a
larger case. Id. cmt. d. Plaintiffs argue that the use of Section 220 differentiates the
proceedings in this case. The use of Section 220 is not a difference in the quality of the
two courts’ procedures, but a difference in the parties’ litigation decisions. Thus, the first
exception is inapplicable.

                                             57
III.   CONCLUSION

       For the foregoing reasons, defendants’ motion to dismiss is GRANTED.

       IT IS SO ORDERED.

The second exception arises from a “clear and convincing need for a new determination”
based on a risk to the public interest, adversarial conduct, or other special reasons.
Id. § 28(5). Plaintiffs argue that, as a policy matter, issue preclusion should not apply in
cases such as this in order to ensure the usefulness of Section 220. A desire for Section
220 to be effective, however, is not the sort of urgent public need that justifies an
exception to issue preclusion. Plaintiffs also argue that issue preclusion should not apply
because defendants’ litigation conduct in the Section 220 case delayed plaintiffs’
prosecution of the Delaware action. This argument fails because Wal-Mart is the real
party in interest being precluded, not the individual plaintiffs, and a full and fair
opportunity to litigate Wal-Mart’s interests was provided in Arkansas.

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