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From Securities Regulation Daily, July 24, 2014

Wal-Mart must produce documents relating to alleged Mexico bribes

By Amanda Maine, J.D.

The Delaware Supreme Court affirmed a lower court ruling requiring Wal-Mart to produce to shareholders certain documents concerning alleged bribe payments made to officials in Mexico and how Wal-Mart investigated the allegations. The documents qualified for exceptions to the attorney-client privilege and the work-protection doctrine (Wal-Mart Stores, Inc. v IBEW, July 23, 2014, Holland, R.).

Background.The New York Times published an article in April 2012 about alleged bribery payments made to Mexican officials at the direction of the CEO of Wal-Mart’s Mexican subsidiary, Wal-Mart de Mexico, S.A. de C.V. (WalMex), between 2002 and 2005. The article stated that Wal-Mart executives were made aware of the alleged conduct no later than September 2005. Wal-Mart International’s general counsel initiated an investigation into the allegations, during which he kept senior Wal-Mart officials apprised in emails and memoranda. The preliminary inquiry revealed that there existed reasonable suspicion to believe that Mexico and U.S. law had been violated.

According to a complaint filed by a Wal-Mart shareholder, Indiana Electrical Workers Pension Trust Fund IBEW, Wal-Mart executives chastised the investigators for being overly aggressive and transferred the investigation to WalMex’s general counsel, himself a target of the investigation, who eventually cleared himself of any wrongdoing.

Documents sought. IBEW sent Wal-Mart a letter a few months after the publication of the Times’ report requesting inspection of broad categories of documents relating to the bribery allegations. Wal-Mart agreed to produce some of the documents but declined to produce documents it deemed either not “necessary or essential” for the demand’s purposes, or because the documents were protected by attorney-client privilege and work-product doctrine. IBEW’s counsel also received high-level documents from an anonymous Wal-Mart source pertaining to the bribery allegations. The Delaware Court of Chancery ordered Wal-Mart to produce the documents that are protected by attorney-client privilege and the work-product doctrine pursuant to legal exceptions. The court also granted Wal-Mart’s motion to prevent IBEW from using the nonpublic documents provided by the anonymous source. Both parties appealed.

Necessary and essential. IBEW’s demand was made pursuant to Title 8, Section 220 of the Delaware Code, which requires that the requestor show that the documents are “necessary and essential” to a proper purpose. Wal-Mart argued that IBEW failed to meet this burden for several different classes of documents. As one of IBEW’s stated purposes for seeking the documents was to investigate whether demand on the board of directors would be excused, certain documents relating to officers were not “necessary and essential” to that purpose. However, the court pointed out that the demand futility question was only one of IBEW’s stated purposes. The other stated purpose was to investigate the bribery allegations and how they were handled by the company, and production of the officer-level documents is “necessary and essential” to that purpose, the court stated. The court also held that the Court of Chancery did not abuse its discretion by compelling the production of other classes of documents, including those created past a specific cutoff date, disaster recovery tapes, and documents known to exist by Wal-Mart’s general counsel office.

Attorney-client privilege. According to Garner v. Wolfinbarger (5th Cir. 1970), stockholders of a corporation are allowed to invade the company’s attorney-client privilege in order to prove fiduciary breaches by those in control of the company upon a showing of “good cause.” Wal-Mart argued that the Court of Chancery erred in applying Garner because it has not been adopted in the context of a plenary proceeding or a Section 220 action. The Delaware Supreme Court decided to hold that Garner is applied to plenary stockholder and corporation proceedings, as well as Section 220 proceedings. However, it stated that the “necessary and essential” inquiry must precede any privilege inquiry to determine the scope of document production.

The court stated that the lower court properly applied the doctrine and found that IBEW had demonstrated good cause. Wal-Mart had argued that the lower court had conflated the Garner’s “good cause” standard with the “necessary and essential” standard of Section 220, but the court disagreed, noting that the lower court had indeed made the predicate “necessary and essential” finding before determining that IBEW showed good cause to qualify for the Garnerfiduciary exception to the attorney-client privilege.

Work-product doctrine. In Delaware, a party may obtain access to non-opinion work product if it can show “substantial need” and that it cannot obtain the substantial equivalent of the materials by other means without undue hardship. Wal-Mart asserted that the Court of Chancery erroneously applied the Garnerdoctrine, which applies not to work-product but to attorney-client privilege. The Delaware Supreme Court disagreed, noting that the lower court had merely recognized that there was overlap between Garner’s “good cause” analysis and the work-product doctrine’s “substantial need” analysis.

Anonymous source documents. The Court of Chancery had ordered IBEW to return the nonpublic stolen documents provided by the anonymous source to Wal-Mart, citing a conversion theory. The Delaware Supreme Court affirmed this ruling; however, it noted that IBEW may still be entitled to those documents if they fall within the scope of documents that the court is requiring Wal-Mart to produce, giving IBEW a legitimate avenue to obtain those documents.

The case is No. 614, 2013.

Attorneys: Donald J. Wolfe, Jr. (Potter Anderson & Corroon LLP) and Theodore J. Boutrous, Jr. (Gibson Dunn & Crutcher LLP) for Wal-Mart Stores, Inc. Stuart M. Grant (Grant & Eisenhoffer PA) for Indiana Electrical Workers Pension Trust Fund IBEW.

Companies: Wal-Mart Stores, Inc.; Indiana Electrical Workers Pension Trust Fund IBEW

MainStory: TopStory CorporateGovernance DirectorsOfficers DelawareNews

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