in the united states district court western district … · fiduciary duties do not invoke the...

IN THE UNITED STATES DISTRICT COURT

WESTERN DISTRICT OF ARKANSAS

TEXARKANA DIVISION

IN RE WAL-MART STORES, INC. SHAREHOLDER DERIVATIVE LITIGATION

) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) )

Master Docket No. 4:12-cv-4041 SOH

This Document Relates To: ALL ACTIONS

MEMORANDUM IN SUPPORT OF

DEFENDANTS’ MOTION TO DISMISS

FOR FAILURE TO ESTABLISH DEMAND FUTILITY

Case 4:12-cv-04041-SOH Document 110 Filed 07/03/14 of 47 PageID #: 2003

i

TABLE OF CONTENTS

Page

I. INTRODUCTION ............................................................................................................. 1

II. BACKGROUND ............................................................................................................... 5

A. The Parties ............................................................................................................. 5

B. The Complaint ....................................................................................................... 6

C. Wal-Mart’s Charter ................................................................................................ 8

III. ARGUMENT ..................................................................................................................... 9

A. Plaintiffs’ Demand Futility Allegations Are Subject To Exacting Pleading

Standards. ............................................................................................................... 9

B. The Complaint Does Not Plead With the Requisite Particularity That

Demand Would Have Been Futile. ...................................................................... 15

1. Plaintiffs’ Allegations That The Defendants Breached Their

Fiduciary Duties Do Not Invoke The Aronson Test For Demand

Futility. ..................................................................................................... 15

2. Plaintiffs’ Allegations That The Defendants Breached Their

Fiduciary Duties Do Not Meet The Rales Test For Demand Futility. ..... 17

a. Plaintiffs Do Not Adequately Allege That A Majority Of

Wal-Mart’s Directors Lacks Independence With Respect To

The Events Alleged To Have Taken Place In 2005-06. ............... 18

b. Plaintiffs Do Not Adequately Allege That A Majority Of

Wal-Mart’s Directors Faces A Substantial Likelihood Of

Liability Based On A Failure Of Oversight In 2005-06. ............. 27

3. Plaintiffs’ Allegations That The Director Defendants Violated

Section 14(a) in 2010 And 2011 Do Not Meet Either Test For

Demand Futility. ...................................................................................... 32

IV. CONCLUSION ................................................................................................................ 37


ii

TABLE OF AUTHORITIES

Page(s)

Cases

Alabama-By-Products Corp. v. Cede & Co.,

657 A.2d 254 (Del. 1995) ...................................................................................................... 9

Aronson v. Lewis,

473 A.2d 805 (Del. 1984) ............................................................................................. passim

Ashcroft v. Iqbal,

556 U.S. 662 (2009) ............................................................................................................ 16

In re Bank of New York Mellon Corp. Forex Transactions Litig.,

2013 WL 3358028 (S.D.N.Y. July 2, 2013) ....................................................................... 36

Ballan v. Wilfred Am. Educational Corp.,

720 F. Supp. 241 (E.D.N.Y. 1989) ...................................................................................... 35

In re Baxter Int’l S’holders Litig.,

654 A.2d 1268 (Del. Ch. 1995) ............................................................................................. 8

Beam v. Stewart,

845 A.2d 1040 (Del. 2004) ................................................................................ 18, 25, 26, 33

In re Bear Stearns Cos. Inc. Sec., Deriv. & ERISA Litig.,

2011 WL 4063685 (S.D.N.Y. Sept. 13, 2011) .................................................................... 11

Bell Atl. Corp. v. Twombly,

550 U.S. 544 (2007) ............................................................................................................ 16

Berckeley Inv. Group, Ltd. v. Colkift,

455 F.3d 195 (3d Cir. 2006) ................................................................................................ 34

Berry ex rel. Dillard’s, Inc. v. Dillard,

382 S.W.3d 812 (Ark. App. 2011) ...................................................................... 3, 10, 11, 26

Blaustein v. Lord Baltimore Capital Corp.,

84 A.3d 954 (Del. 2014) ...................................................................................................... 13

Braddock v. Zimmerman,

906 A.2d 776 (Del. 2006) .................................................................................................... 10

Brehm v. Eisner,

746 A.2d 244 (Del. 2000) ...................................................................................... 2, 9, 17, 26

Canty v. Day,

2014 U.S. Dist. LEXIS 50506 (S.D.N.Y. Apr. 9, 2014) ..................................................... 33

In re Caremark Intern. Inc. Deriv. Litig.,

698 A.2d 959 (Del. Ch. 1996) ...................................................................................... passim

In re China Automotive Systems Inc. Derivative Litigation,

2013 WL 4672059 (Del. Ch. Aug. 30, 2013) .......................................................... 28, 31, 36


TABLE OF AUTHORITIES (cont.)

Page(s)

iii

Ciresi v. Citicorp,

782 F. Supp. 819 (S.D.N.Y. 1991) ...................................................................................... 35

In re Citigroup Inc. S’holder Deriv. Litig.,

964 A.2d 106 (Del. Ch. 2009) ...................................................................................... passim

In re Citigroup, Inc. Sec. Litig.,

330 F. Supp. 2d 367 (S.D.N.Y. 2004) ................................................................................. 35

Cottrell v. Duke,

737 F.3d 1238 (8th Cir. 2013) ............................................................................................. 10

Daily Income Fund, Inc. v. Fox,

464 U.S. 523 (1984) ............................................................................................................ 37

Data Probe Acquisition Corp. v. Datatab, Inc.,

722 F.2d 1 (2d Cir. 1983) .................................................................................................... 35

Desimone v. Barrows,

924 A.2d 908 (Del. Ch. 2007) ................................................................................. 14, 31, 32

In re Dow Chem. Co. Derivative Litig.,

2010 WL 66769 (Del. Ch. Jan. 11, 2010) ............................................................... 12, 31, 32

First Gen. Resources Co. v. Hartman & Craven,

1989 U.S. Dist. LEXIS 12966 (S.D.N.Y. Nov. 1, 1989) .................................................... 35

Freedman v. Mulva,

2014 U.S. Dist. LEXIS 31778 (D. Del. Mar. 12, 2014) ...................................................... 34

Freuler v. Parker,

803 F. Supp. 2d 630 (S.D. Tex. 2011) ................................................................................ 14

In re Goldman Sachs Grp. Inc. S’holder Litig.,

2011 WL 4826104 (Del. Ch. Oct. 12, 2011) ............................................................. 9, 13, 14

In re Goldman Sachs Mortg. Serv. S’holder Deriv. Litig.,

2012 WL 3293506 (S.D.N.Y. Aug. 14, 2012) .............................................................. 11, 12

Golub v. PPD Corp.,

576 F.2d 759 (8th Cir. 1978) ............................................................................................... 35

In re Google, Inc. S’holder Deriv. Litig.,

2012 WL 1611064 (N.D. Cal. May 8, 2012) ................................................................ 15, 16

Gulbrandsen v. Stumpf,

2013 WL 6406922 (N.D. Cal. Dec. 6, 2013) ................................................................ 22, 24

Guttman v. Huang,

823 A.2d 492 (Del. Ch. 2003) ...................................................................................... passim

Haber v. Bell,

465 A.2d 353 (Del. Ch. 1983) ............................................................................................. 12



Page(s)

iv

In re Hecla Mining Co. Deriv. S’holder Litig.,

2014 WL 689036 (D. Idaho Feb. 20, 2014) ........................................................................ 28

In re INFOUSA Inc. S’holders Litig.,

953 A.2d 963 (Del. Ch. 2007) ....................................................................................... 11, 12

In re Intel Corp. Deriv. Litig.,

621 F. Supp. 2d 165 (D. Del. 2009) .................................................................................... 31

J. I. Case Co. v. Borak,

377 U.S. 426 (1964) ............................................................................................................ 37

In re J.P. Morgan Chase & Co. S’holder Litig.,

906 A.2d 808 (Del. Ch. 2005) ............................................................................................. 25

In re JPMorgan Chase & Co. Deriv. Litig.,

2014 U.S. Dist. LEXIS 46363 (S.D.N.Y. Mar. 31, 2014) ....................................... 23, 31, 32

Kaltman v. Sidhu,

2004 WL 357861 (N.D. Tex. Feb. 26, 2004) ...................................................................... 26

Kamen v. Kemper Fin. Servs., Inc.,

500 U.S. 90 (1991) ........................................................................................................ 10, 11

Kaplan v. Wyatt,

499 A.2d 1184 (Del. 1985) .................................................................................................. 13

King v. Baldino,

409 F. App’x 535 (3d Cir. 2010) ......................................................................................... 31

King v. Baldino,

648 F. Supp. 2d 609 (D. Del. 2009) .............................................................................. 18, 25

Kushner v. Beverly Enter., Inc.,

317 F.3d 820 (8th Cir. 2003) ............................................................................................... 29

Louisiana Muni. Police Employees’ Retirement Sys. v. Hesse,

962 F. Supp. 2d 576 (S.D.N.Y. 2013) .......................................................................... passim

MCG Capital Corp. v. Maginn,

2010 WL 1782271 (Del. Ch. May 5, 2010) .......................................................................... 3

In re Morgan Stanley Deriv. Litig.,

542 F. Supp. 2d 317 (S.D.N.Y. 2008) ............................................................................. 2, 33

N.J. Bldg. Laborers Pension Fund v. Ball,

2014 U.S. Dist. LEXIS 32582 (D. Del. Mar. 13, 2014) ...................................................... 34

Noble Sys. Corp. v. Alorica Cent., LLC,

543 F.3d 978 (8th Cir. 2008) ................................................................................................. 9



Page(s)

v

Potter v. Hughes,

546 F.3d 1051, 1058 (9th Cir. 2008) ................................................................................... 14

Rahbari v. Oros,

732 F. Supp. 2d 367 (S.D.N.Y. 2010) ................................................................................. 15

Rales v. Blasband,

634 A.2d 927 (Del. 1993) ............................................................................................. passim

Reserve Life Ins. Co. v. Provident Life Ins. Co.,

499 F.2d 715 (8th Cir. 1974) ............................................................................................... 34

In re SAIC, Inc. Deriv. Litig.,

948 F. Supp. 2d 366 (S.D.N.Y. 2013) ................................................................................... 9

Santa Fe Indus., Inc. v. Green,

430 U.S. 462 (1977) ............................................................................................................ 35

SEC v. Shanahan,

646 F.3d 536 (8th Cir. 2011) ............................................................................................... 36

Seminaris v. Landa,

662 A.2d 1350 (Del. Ch. 1995) ..................................................................................... 16, 33

Shidler v. All Am. Life & Fin. Corp.,

775 F.2d 917 (8th Cir. 1985) ............................................................................................... 36

Siebert v. Harper & Row, Publishers, Inc.,

1984 WL 21874 (Del. Ch. Dec. 5, 1984) ............................................................................ 25

South v. Baker,

62 A.3d 1 (Del. Ch. 2012) ............................................................................................ passim

In re Sotheby’s Holdings, Inc.,

2000 WL 1234601 (S.D.N.Y. Aug. 31, 2000) .................................................................... 24

Stanley v. Arnold,

2012 WL 5269147 (S.D. Ohio Oct. 23, 2012) .................................................................... 32

Stone v. Ritter,

911 A.2d 362 (Del. 2006) ............................................................................................. passim

Strickland v. Hongjun,

2011 U.S. Dist. LEXIS 73944 (S.D.N.Y. July 8, 2011) ...................................................... 25

Strong v. Taylor,

877 F. Supp. 2d 433 (E.D. La. 2012) ............................................................................ 17, 26

Strugala v. Riggio,

817 F. Supp. 2d 378 (S.D.N.Y. 2011) ............................................................................. 2, 34

United States v. Kozeny,

667 F.3d 122 (2d. Cir. 2011) ............................................................................................... 20



Page(s)

vi

United States v. Matthews,

787 F.2d 38 (2d Cir. 1986) .................................................................................................. 35

Virginia Bankshares v. Sandberg,

501 U.S. 1083 (1991) .......................................................................................................... 37

Waber v. Dorman,

2011 WL 814992 (N.D. Ill. Feb. 23, 2011) ......................................................................... 27

In re Walt Disney Co. Deriv. Litig.,

825 A.2d 275 (Del. Ch. 2003) ............................................................................................. 17

Weinberger v. Am. Composting, Inc.,

2012 U.S. Dist. LEXIS 49932 (E.D. Ark. Apr. 9, 2012) .................................................... 10

Welch v. Havenstein,

553 F. App’x 54 (2d Cir. 2014) ................................................................................. 9, 16, 31

White v. Panic,

783 A.2d 543 (Del. 2001) .................................................................................................... 11

Wood v. Baum,

953 A.2d 136 (Del. 2008) ............................................................................................. passim

Statutes

8 Del. C. § 102(b)(7) ................................................................................................................. 8, 13

Securities Exchange Act of 1934, § 14(a) ............................................................................. passim

Securities Exchange Act of 1934, § 29(b) ............................................................................ 2, 8, 34

Other Authorities

Principles of Corp. Governance § 3.01 (Am. L. Inst. 1994) ......................................................... 27

Rules

Chancery Ct. R. 23.1 .............................................................................................................. passim

Chancery Ct. R. 8(a) ..................................................................................................................... 11

Fed. R. Civ. P. 12(b)(6)................................................................................................................. 11


1

Nominal defendant Wal-Mart Stores, Inc. (“Wal-Mart”), together with individual

defendants Aida M. Alvarez, James W. Breyer, M. Michele Burns, James I. Cash, Jr., 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, Linda

S. Wolf, Eduardo Castro-Wright, Thomas A. Mars, Thomas D. Hyde, and Roland Hernandez,

respectfully submit this memorandum in support of their motion to dismiss the Consolidated

Verified Shareholder Derivative Complaint (“Complaint”), pursuant to Federal Rule of Civil

Procedure 23.1, for failure to adequately allege demand futility as required by applicable

Delaware law.1

I. INTRODUCTION

The two named Plaintiffs, who purport to be Wal-Mart shareholders, seek to force

Wal-Mart to sue certain of its current and former directors and officers. Such litigation decisions

are vested in the Company’s Board of Directors unless and until a court of competent jurisdiction

transfers that authority to a shareholder under the very narrow exceptions to Board primacy

recognized by Delaware law. Because Plaintiffs did not even attempt a pre-suit demand on the

Board as required by Delaware law, they must plead particularized facts showing that such

demand would have been futile. To meet that high hurdle, the Complaint must affirmatively

show that a majority of the fifteen directors who served on Wal-Mart’s Board of Directors at the

1 In accordance with this Court’s consolidation order (Dkt. No. 12 at 5), this motion is limited

to the absence of demand futility under Rule 23.1. In the event this motion is denied,

defendants reserve the right to move to dismiss on any other ground provided by applicable

substantive or procedural law. (See also Dkt. No. 108 (Court order confirming that

“Defendants’ initial Motion to Dismiss shall address only the demand futility issue without

prejudice to any Defendant later filing a motion to dismiss on other grounds”).)


2

time the Complaint was filed in May 2012 were incapable of exercising independent business

judgment regarding the subject of the proposed suit. This Plaintiffs cannot do.

The Complaint relies almost exclusively on a New York Times article published on April

21, 2012, in which a reporter levels allegations about events that supposedly transpired nearly ten

years ago. Echoing that article, the Complaint alleges that, in 2005, a whistleblower claimed that

certain employees at Wal-Mart’s Mexican subsidiary (“Wal-Mex”) had made improper payments

to government officials and that, in 2005-06, an internal Wal-Mart investigation into this conduct

was mishandled. The Complaint also alleges that Wal-Mart’s April 2010 and April 2011 proxy

materials (relating to annual director elections) were false and misleading because they did not

describe certain directors as unethical and lacking integrity.

The Complaint should be dismissed because Plaintiffs do not come close to satisfying the

“stringent requirements of factual particularity” necessary to excuse a pre-suit demand on the

Board. Brehm v. Eisner, 746 A.2d 244, 254 (Del. 2000). This threshold burden is a prerequisite

to suit on the proposed causes of action under Delaware common law, see id. at 248-49, 254, as

well as to the derivative claims they propose to bring under Sections 14(a) and 29(b) of the

Exchange Act. See Strugala v. Riggio, 817 F. Supp. 2d 378, 385 (S.D.N.Y. 2011) (“Because

plaintiff brings his section 14(a) claim derivatively, he is required to” plead demand futility

pursuant to Rule 23.1 and the Delaware substantive requirements); see also, e.g., In re Morgan

Stanley Deriv. Litig., 542 F. Supp. 2d 317, 322 (S.D.N.Y. 2008).

Plaintiffs bear the heavy burden of pleading particularized facts that, if proved, would

allow a trier of fact to conclude that a majority of the fifteen directors lack independence and

disinterest in the proposed litigation—for example, because the directors face a “substantial

likelihood” of personal liability as a result of bad-faith conduct or intentional violations of law.


3

In re Citigroup Inc. S’holder Deriv. Litig., 964 A.2d 106, 121 (Del. Ch. 2009) (emphasis added).

Demand futility allegations must be pleaded claim by claim (see MCG Capital Corp. v. Maginn,

2010 WL 1782271, at *7 (Del. Ch. May 5, 2010)) and director by director (see Citigroup, 964

A.2d at 121 n.36; Berry ex rel. Dillard’s, Inc. v. Dillard, 382 S.W.3d 812, 818 (Ark. App.

2011)). Collective or group pleading is not sufficient to meet the heightened standard.

Citigroup, 964 A.2d at 121 n.36.

The Complaint is bereft of particularized allegations that a majority of the individual

directors knew about, much less participated in, any misconduct whatsoever, or took any

conscious actions to approve any alleged misconduct. The Complaint identifies only two of the

May 2012 directors as having been even remotely involved with the alleged events of 2005-06:

Michael T. Duke and H. Lee Scott. Defendants vigorously dispute the allegations as to those

two individuals, but even accepting them as true, the May 2012 Board included thirteen

additional directors as to whom the Complaint fails to set forth any individualized allegations of

actual knowledge or participation, and contains no allegations that the Board of Directors took

any particular action or made any particular decision in connection with the alleged misconduct.

As to those thirteen directors, the Complaint alleges only that they, collectively, and solely by

virtue of their positions at the Company, should have or must have known about the alleged

improper payments and the supposedly deficient internal investigation. (Compl. ¶¶ 135, 219,

261, 265.) Those are precisely the sort of conclusory allegations of imputed knowledge that are

insufficient to excuse demand under Delaware law. See Guttman v. Huang, 823 A.2d 492, 504

(Del. Ch. 2003) (“Nothing in the complaint provides any particularized basis to infer that . . .

[each of the] directors had any idea about the [alleged misconduct.] This is fatal to the plaintiffs’

effort to show demand excusal.”).


4

Plaintiffs’ conclusory allegations that the directors “should have known” or “must have

known” about mismanagement or other corporate errors—the language not of intent, but of

negligence, which is the most that is alleged here—are insufficient as a matter of law to excuse

demand under either test for determining demand futility under Delaware law: (1) the Aronson

test (for affirmative Board actions) or (2) the Rales test (for Board inaction). See Guttman, 823

A.2d at 500-01 (summarizing and harmonizing those two standards). As discussed below, the

Complaint’s allegations utterly fail to allege any facts showing any affirmative Board actions,

and therefore the Aronson test has no applicability here. Rather, the Complaint at best can be

read to allege mere Board inaction under the Rales standard. The Complaint fails that test,

however, because Plaintiffs’ conclusory allegations fail to show that “the [Wal-Mart] board in

place at the time of this suit could [not] impartially consider a demand.” Id. at 502.

The Complaint is also bereft of particularized allegations that a majority of the individual

directors “fail[ed] . . . to exercise reasonable oversight” to prevent the alleged events of 2005-06

in Mexico—a theory of liability known as a “Caremark claim.” In re Caremark Intern. Inc.

Deriv. Litig., 698 A.2d 959, 971 (Del. Ch. 1996). Plaintiffs make conclusory allegations of “lax

oversight” by the Board (Compl. ¶ 205), but where, as here, the company’s charter limits the

liability of its directors, Caremark liability requires bad faith and an intentional dereliction of

duty by the directors. See Stone v. Ritter, 911 A.2d 362, 370 (Del. 2006) (“[I]mposition of

liability [under Caremark] requires a showing that the directors knew that they were not

discharging their fiduciary obligations . . . , thereby demonstrating a conscious disregard for their

responsibilities.”). For this reason, a Caremark claim is “possibly the most difficult theory in

corporation law” to plead. Stone, 911 A.2d at 372. Plaintiffs have failed to plead it adequately

here. To the contrary, Plaintiffs acknowledge that the Company had reporting and anticorruption


5

systems in place, including “Corporate Governance Guidelines,” a “Code of Ethics,” a

“Statement of Ethics,” an “Audit Committee Charter,” and ethical guidelines for the “CEO and

Senior Financial Officials.” (Compl. ¶¶ 50-58.) Even if “there ultimately may have been

failures by employees to report deficiencies to the Board, there is no basis for an oversight claim

seeking to hold the directors personally liable for such failures by the employees.” Stone, 911

A.2d at 373. Plaintiffs merely “seek[ ] to equate a[n allegedly] bad outcome with bad faith,”

which is impermissible under Delaware law. Id.

Because the Complaint does not assert particularized allegations that, if proved, would

allow a reasonable factfinder to conclude that eight or more of the fifteen directors on Wal-

Mart’s Board of Directors on the date that suit was filed were incapable of impartially

considering a demand, Plaintiffs have failed to comply with the strict requirements of Rule 23.1

and lack standing to bring suit on behalf of Wal-Mart. The Complaint should be dismissed on

that basis.

II. BACKGROUND

A. The Parties

Plaintiffs John Cottrell, a Texas resident, and the Louisiana Municipal Police Employee’s

Retirement System, a Louisiana-based pension fund, purport to be Wal-Mart shareholders.

(Compl. ¶¶ 20-21.) Because this is a shareholder derivative action, Plaintiffs purport to bring

their complaint on behalf of Wal-Mart, the nominal defendant in this action. Wal-Mart is a

multinational retail company incorporated in Delaware (Id. ¶ 22) and headquartered in Arkansas.

At the time the Complaint was filed in May 2012, there were fifteen members of the

Wal-Mart Board of Directors. Plaintiffs refer to these fifteen directors as the “Director

Defendants.” (Id. ¶ 42.) Only eight of the fifteen Director Defendants were Wal-Mart directors

at the time of the alleged Wal-Mex conduct in 2005-2006: S. Robson (“Rob”) Walton, H. Lee


6

Scott, Jr., Jim C. Walton, Douglas N. Daft, James W. Breyer, M. Michele Burns, Christopher J.

Williams, and Linda S. Wolf. (Id. ¶¶ 23-31.) Plaintiffs refer to these eight directors as the

“2005-06 Director Defendants.” (Id. ¶ 42.) In addition, Plaintiffs erroneously include Michael

T. Duke in the group labeled the “2005-06 Director Defendants,” even though they acknowledge

that Duke did not become a Wal-Mart director until 2008. (Id. ¶ 24.) The remaining six Director

Defendants—Aida Alvarez, James Cash, Roger Corbett, Gregory Penner, Steven Reinemund,

and Arne Sorenson—are not alleged to have been on the Wal-Mart board during the alleged

2005-06 conduct. (Id. ¶¶ 32-37.)

Plaintiffs also propose claims against “Former Director Defendant” Roland A.

Hernandez, and three “Executive Defendants” (Eduardo Castro-Wright, Thomas A. Mars, and

Thomas D. Hyde). (Id. ¶¶ 38-41.) Together with the Director Defendants, Plaintiffs refer to this

entire group collectively as the “Individual Defendants.” (Id. ¶ 42.)

B. The Complaint

Plaintiffs lay out the case they wish to pursue, on behalf of the Company, in Part VI of

the Complaint, captioned “The Defendants’ Wrongful Conduct.” Yet, in the 155 paragraphs

comprising this discussion, the Director Defendants (other than Duke and Scott) are mentioned

in connection with the alleged 2005-06 conduct in only four paragraphs (see Compl. ¶¶ 135, 152,

176, 224)—and these cameo appearances demonstrate the lack of involvement of these Director

Defendants in the alleged wrongdoing, even on Plaintiffs’ retelling.

Plaintiffs first allege, without any factual support, that in November 2005, an internal

investigator “began making reports to” the then-Chairman of Wal-Mart’s Audit Committee.

(Compl. ¶ 135.) The only “report” identified with any particularity (much later in the

Complaint) is one in which the investigator allegedly stated that “[t]here is reasonable suspicion

to believe that Mexican and USA laws have been violated”; yet while Plaintiffs cite and attach


7

selected pages from this report (id. ¶ 152 and Ex. E), they provide no support for their contention

that it was sent to the Audit Committee’s chair, let alone to any of the Director Defendants (for

whom the demand futility analysis is applicable).2

Plaintiffs’ only other Director Defendant-specific allegation is even more attenuated and

conjectural: “Had the Strategic Committee members, including Defendant Breyer, performed

their jobs faithfully and loyally, they would have inquired whether Wal-Mart’s exponential

growth in Mexico was being accomplished in compliance with the law.” (Compl. ¶ 224.) There

is no allegation that Mr. Breyer (or any other Director Defendant) actually made such an inquiry

or that the failure to make such an inquiry was an intentional dereliction of duty. Nor is there

any allegation that any current or former Director Defendant ever condoned any illegal conduct,

much less instructed employees to engage in it. Although Plaintiffs now maintain that the

Company’s contemporaneous investigation into the alleged 2005-06 conduct was deficient, they

do not allege that this was due to any decision or intentional inaction by any of the current or

former Director Defendants (with the possible exceptions of Duke and Scott).

Plaintiffs propose that the Company assert three theories of liability against the Individual

Defendants, including all of the Director Defendants. First, the Individual Defendants are

alleged to have breached their fiduciary duties to the Company by failing to prevent, or by

acquiescing in and covering up, the alleged improper payments in Mexico. (Id. ¶¶ 282-85.)

Second, the Individual Defendants are alleged to have breached their fiduciary duties to the

Company by failing to implement controls to prevent such alleged improper payments from

occurring. (Id.) Third, certain Individual Defendants are alleged to have violated Sections 14(a)

2 The director who served as Audit Committee chair in 2005 left the Board in 2008 and

therefore is not part of the demand futility analysis. (See Compl. ¶ 38.)


8

and 29(b) of the Exchange Act by causing Wal-Mart to make false or misleading statements in

its April 2010 and April 2011 proxy materials relating to annual director elections. (Id. ¶¶ 286-

92.)

Part IX of the Complaint, entitled “Derivative and Demand Futility Allegations,” sets

forth the sum total of the allegations Plaintiffs contend establish demand futility under Delaware

law. With respect to the Aronson affirmative decision standard, Plaintiffs include just five brief

paragraphs that state in conclusory fashion that the Board’s “decisions” were not “valid exercises

of business judgment.” (Compl. ¶¶ 256-60.) With respect to the Rales standard for director

inaction, Plaintiffs allege that a majority of the 2012 Board “either sat on the Wal-Mart Board

and/or served as a high-ranking executive officer during the relevant [2005-06] period” and that

“each of these current directors faces a substantial likelihood of liability for allowing Wal-Mart

to violate the FCPA in its Mexican operation.” (Id. ¶ 261; see also id. ¶¶ 265, 268.) Plaintiffs

then make similar allegations regarding certain of the Directors individually. (Id. ¶¶ 270-80.)

The sufficiency of these allegations of demand futility is the subject of this motion.

C. Wal-Mart’s Charter

Wal-Mart’s charter immunizes the Company’s directors from liability for breaches of

fiduciary duty to the fullest extent allowed by Section 102(b)(7) of the Delaware General

Corporation Law. See Restated Cert. of Incorp. at 13 (attached to the accompanying Declaration

of Teresa M. Wineland as Exhibit A); 8 Del. C. § 102(b)(7).3 Wal-Mart’s charter thus exculpates

3 Because the accuracy of Wal-Mart’s certificate of incorporation, which is filed with the

Delaware Secretary of State, cannot be questioned, the Court may take judicial notice of the

certificate on a motion to dismiss. See In re Baxter Int’l S’holders Litig., 654 A.2d 1268, 1270

(Del. Ch. 1995) (“The Court may take judicial notice of the certificate in deciding a motion to

dismiss”); see also Noble Sys. Corp. v. Alorica Cent., LLC, 543 F.3d 978, 982 (8th Cir. 2008)

(in ruling on motions to dismiss, courts may take judicial notice of “public records, materials


9

its directors from personal liability for monetary damages for all breaches of fiduciary duty

except “breaches of the duty of loyalty or actions or omissions not in good faith or that involve

intentional misconduct or a knowing violation of law.” In re SAIC, Inc. Deriv. Litig., 948 F.

Supp. 2d 366, 378 (S.D.N.Y. 2013), aff’d Welch v. Havenstein, 553 F. App’x 54, 56 (2d Cir.

2014). Because of this provision of Wal-Mart’s charter, Plaintiffs cannot state a claim for

monetary damages against the Director Defendants for alleged breaches of the duty of care. To

demonstrate that the Director Defendants face a substantial likelihood of liability for a “non-

exculpated” claim alleging a breach of fiduciary duty, Plaintiffs instead must “plead

particularized facts that demonstrate that the directors acted with scienter; i.e., [that] there was

an intentional dereliction of duty or a conscious disregard for their responsibilities amounting to

bad faith.” In re Goldman Sachs Grp. Inc. S’holder Litig., 2011 WL 4826104, at *12 (Del. Ch.

Oct. 12, 2011) (emphasis added); Stone, 911 A.2d at 370 (plaintiffs must allege with particularity

intentional misconduct).

III. ARGUMENT

A. Plaintiffs’ Demand Futility Allegations Are Subject To Exacting Pleading

Standards.

“[T]he decision to pursue or refrain from undertaking a claim on behalf of the corporation

is entrusted to the board of directors as within the ambit of its management responsibility.”

Alabama-By-Products Corp. v. Cede & Co., 657 A.2d 254, 264–65 (Del. 1995); see also

Aronson v. Lewis, 473 A.2d 805, 811 (Del. 1984), overruled on other grounds by Brehm v.

Eisner, 746 A.2d 244 (Del. 2000) (It is a “cardinal precept . . . that directors, rather than

shareholders, manage the business and affairs of the corporation.”). By their very nature,

that do not contradict the complaint, or materials that are necessarily embraced by the

pleadings” (internal quotations omitted)).


10

stockholder derivative actions infringe on the “primacy of board decisionmaking regarding legal

claims belonging to the corporation.” Citigroup, 964 A.2d at 120 (internal quotation marks

omitted). Thus, under Delaware law, the demand requirement is a “substantive right designed to

give a corporation the opportunity to rectify an alleged wrong without litigation, and to control

any litigation which does arise.” Braddock v. Zimmerman, 906 A.2d 776, 784 (Del. 2006)

(internal quotation marks omitted); see also Berry, 382 S.W.3d at 817 (Delaware’s demand

requirement serves an important purpose “[b]ecause such a suit impinges on the authority of a

company’s board of directors over matters of corporate governance, including whether to litigate

a claim on behalf of the corporation”). Pursuant to Delaware law, a shareholder may only

circumvent the Board’s authority and pursue a derivative action on a corporation’s behalf if the

stockholder “(a) has first demanded that the directors pursue the corporate claim and the

directors have wrongfully refused to do so; or (b) [has] establishe[d] that pre-suit demand is

excused because the directors are deemed incapable of making an impartial decision regarding

the pursuit of the litigation.” Wood v. Baum, 953 A.2d 136, 140 (Del. 2008); see also Rales v.

Blasband, 634 A.2d 927, 930 (Del. 1993); Aronson, 473 A.2d at 808.

Because Wal-Mart is a Delaware corporation, Delaware law governs the substantive

aspects of the demand requirement. See Kamen v. Kemper Fin. Servs., Inc., 500 U.S. 90, 108-09

(1991) (“[Courts] must apply the demand futility exception as it is defined by the law of the State

of incorporation.”); Cottrell v. Duke, 737 F.3d 1238, 1247 (8th Cir. 2013) (stating that demand

futility is “a threshold issue of substantive state law” and that both federal and state courts must

apply “the same state-law-based standard”); Weinberger v. Am. Composting, Inc., 2012 U.S.

Dist. LEXIS 49932, at *10 (E.D. Ark. Apr. 9, 2012) (“The United States Supreme Court has held

that questions concerning demand futility involve substantive law, and are therefore governed by


11

the law of the state of incorporation of the company being sued.”). This is true with respect to

federal causes of action no less than state causes of action. Kamen, 500 U.S. at 108-09. Thus,

demand futility is a necessary predicate to all of the claims—state and federal—that Plaintiffs

propose in the Complaint.

If, as here, a stockholder does not first demand that the directors pursue the alleged cause

of action (Compl. ¶ 255), then Federal Rule of Civil Procedure 23.1 (like the identical Delaware

Court of Chancery Rule 23.1) requires the stockholder to “allege with particularity” why demand

should be excused. In re Goldman Sachs Mortg. Serv. S’holder Deriv. Litig., 2012 WL 3293506,

at *3 (S.D.N.Y. Aug. 14, 2012); see also In re Bear Stearns Cos. Inc. Sec., Deriv. & ERISA

Litig., 2011 WL 4063685, at *5 (S.D.N.Y. Sept. 13, 2011); Berry, 382 S.W.3d at 820 (dismissing

derivative suit because the “allegations are conclusory”). Rule 23.1 “imposes a pleading

standard higher than the normal standard applicable to the analysis of a pleading challenged

under Rule 12(b)(6).” Goldman Sachs Mortg. Serv., 2012 WL 3293506, at *3 (internal quotation

marks omitted); cf. Stone, 911 A.2d at 367 n.9 (“Allegations of demand futility under [Delaware

Chancery] Rule 23.1 must comply with stringent requirements of factual particularity that differ

substantially from the permissive notice pleadings governed solely by Chancery Rule 8(a).”)

(internal quotation marks omitted).

In order to allege sufficiently that a demand upon the board would have been futile, a

plaintiff must present particularized facts showing that the board is “incapable of exercising its

power and authority to pursue derivative claims directly.” White v. Panic, 783 A.2d 543, 551

(Del. 2001). The plaintiff may not rely on mere conclusory allegations, In re INFOUSA Inc.

S’holders Litig., 953 A.2d 963, 985 (Del. Ch. 2007), because “‘[v]ague or conclusory allegations

do not suffice to challenge the presumption of a director’s capacity to consider demand.’”


12

Goldman Sachs Mortg. Serv., 2012 WL 3293506, at *3 (quoting INFOUSA, 953 A.2d at 985). If

a plaintiff fails to carry this demanding pleading burden, the complaint must be dismissed

irrespective of the merits of the underlying claims. Louisiana Muni. Police Employees’

Retirement Sys. v. Hesse, 962 F. Supp. 2d 576, 590-91 (S.D.N.Y. 2013); see also Haber v. Bell,

465 A.2d 353, 357 (Del. Ch. 1983).

Delaware law provides two alternative tests for demand futility:

First, when a claim involves “a contested transaction i.e., where it is alleged that the

directors made a conscious business decision in breach of their fiduciary duties,” then the

Aronson test applies. Wood, 953 A.2d at 140. Under that test, a plaintiff must allege

“particularized facts creating a reason to doubt that (1) the directors are disinterested and

independent or that (2) the challenged transaction was otherwise the product of a valid exercise

of business judgment.” Id.; see also Aronson, 473 A.2d at 814.

Second, when the suit involves “not a business decision of the Board but rather a

violation of the Board’s oversight duties,” or allegations of Board inaction, then the Rales test

applies. Wood, 953 A.2d at 140. To establish demand futility under Rales, a stockholder

plaintiff must “allege particularized facts that ‘create a reasonable doubt that, as of the time the

complaint [was] filed, the board of directors could not have properly exercised its independent

and disinterested business judgment in responding to a demand.’” Citigroup, 964 A.2d at 120

(quoting Rales, 634 A.2d at 934); see also, e.g., Wood, 953 A.2d at 140; In re Dow Chem. Co.

Derivative Litig., 2010 WL 66769, at *12 (Del. Ch. Jan. 11, 2010). A complaint alleging

director inaction therefore must plead with particularity that at least half of the contemporaneous

board members either (1) are not disinterested in the claims asserted; or (2) are not independent

of an interested director. Citigroup, 964 A.2d at 121; see also Blaustein v. Lord Baltimore


13

Capital Corp., 84 A.3d 954, 958 (Del. 2014) (plaintiff must plead with particularity that “a

majority of the board lacks independence”) (emphasis added).

A plaintiff does not demonstrate interestedness merely by asserting that the directors

were somehow involved in events described in the complaint. Kaplan v. Wyatt, 499 A.2d 1184,

1189 (Del. 1985); Aronson, 473 A.2d at 818. Moreover, “demand is not excused” as futile

“solely because the directors,” in evaluating a pre-suit demand, “would be deciding to sue

themselves.” Citigroup, 964 A.2d at 121. Delaware courts reject such a “bootstrap argument”

because accepting it would “effectively abrogate Rule 23.1”; any plaintiff could establish

demand futility merely by naming a majority of directors as defendants. Aronson, 473 A.2d at

818. Instead, plaintiffs must plead particularized facts showing that a majority of the directors

(at the time the complaint was filed) are “interested” either because (1) they made a corporate

decision in which they received a benefit not shared with the stockholders, or (2) because they

face a “substantial likelihood” of personal liability as a result of the plaintiff’s claims. Citigroup,

964 A.2d at 121 (emphasis added); Guttman, 823 A.2d at 503 (the key inquiry “is whether the

plaintiffs have pled facts that show that [the] directors face a sufficiently substantial threat of

personal liability” to render them “interested” for purposes of considering demand).

Where, as here, a company’s charter includes an exculpatory provision pursuant to

Section 102(b)(7) of the Delaware General Corporation Law, the directors cannot face any

personal liability for breaching their fiduciary duties absent “intentional . . . bad faith” conduct.

Goldman Sachs Grp. Inc. S’holder Litig., 2011 WL 4826104, at *12; Wood, 953 A.2d at 141

(“Where, as here, directors are exculpated from liability except for claims based on ‘fraudulent,’

‘illegal’ or ‘bad faith’ conduct, a plaintiff must also plead particularized facts that demonstrate

that the directors acted with scienter, i.e., that they had ‘actual or constructive knowledge’ that


14

their conduct was legally improper.”); Stone, 911 A.2d at 370. The scienter standard does not

permit a finding of demand futility based on allegations of director negligence or even

recklessness.

An exculpatory provision in the corporate charter is particularly important where, as here,

a derivative plaintiff seeks to plead a Caremark claim. Negligence in monitoring operational

activities—a breach of the duty of care—cannot result in personal liability and therefore does not

suffice for demand futility. See In re Goldman Sachs, 2011 WL 4826104, at *18; SAIC, 948 F.

Supp. 2d at 381. Rather, the complaint must adequately plead that each director consciously

disregarded known wrongdoing or intentionally instructed management to break the law—

allegations that are wholly absent from the Complaint here.

Moreover, demand futility allegations must be “individualized” and director-by-director;

“‘group’ accusation[s]” are not sufficient. Citigroup, 964 A.2d at 121 n.36. “[I]n order to

evaluate the demand futility claim, the court must be apprised of facts specific to each director

from which it can conclude that that particular director could or could not be expected to fairly

evaluate the claims of the shareholder plaintiff.” Potter v. Hughes, 546 F.3d 1051, 1058 (9th Cir.

2008)) (emphasis added); Freuler v. Parker, 803 F. Supp. 2d 630, 638 (S.D. Tex. 2011)

(applying Delaware law) (requiring knowledge or intentional misconduct to be pleaded with

“individual allegations for each director”). Delaware law is clear that “the wholesale imputation

of one director’s knowledge to every other for demand excusal purposes” is impermissible.

Desimone v. Barrows, 924 A.2d 908, 943 (Del. Ch. 2007).

Finally—contrary to one of Plaintiffs’ central contentions—a plaintiff may not presume a

director’s knowledge based on her Board or committee membership, see Wood, 953 A.2d at 142;

South v. Baker, 62 A.3d 1, 17 & n.6 (Del. Ch. 2012), or impute the alleged knowledge of a single


15

board committee to the entire Board. See Rahbari v. Oros, 732 F. Supp. 2d 367, 386 n.21

(S.D.N.Y. 2010); see also In re Google, Inc. S’holder Deriv. Litig., 2012 WL 1611064, at *7

(N.D. Cal. May 8, 2012) (applying Delaware law) (finding “no allegations demonstrating that

other individual directors had express notice of wrongdoing” and refusing “to impute notice to

these defendants”).

As the Court is aware, other stockholders filed substantially similar complaints in the

Delaware Court of Chancery, which have been consolidated. Then-Chancellor (now Chief

Justice) Strine indicated that the allegations in those complaints do not appear sufficient to

establish demand futility. See Appendix A (Civil Action No. 7455-CS (Del. Ch.), Hr’g Tr., July

16, 2012 at 11:15-12:9 (criticizing the complaint’s “cursory pleading” and noting Caremark’s

“excruciatingly difficult standard”); id. at 18:7-19:15 (“I don’t know what you did to look at the

Caremark standard, seriously, because it is—it’s a very different thing to say that a big

corporation had people who engaged in illegal conduct and then to take away in the name of the

stockholders the right of the board to address that.”). For the reasons that follow, Chief Justice

Strine’s assessment that nearly identical complaints have failed to plead demand futility is

correct, and Plaintiffs’ purported derivative action should be dismissed.

B. The Complaint Does Not Plead With the Requisite Particularity That Demand

Would Have Been Futile.

1. Plaintiffs’ Allegations That The Defendants Breached Their Fiduciary Duties

Do Not Invoke The Aronson Test For Demand Futility.

The Aronson test does not apply in this case. In a half-hearted attempt to trigger the

Aronson test for demand futility, Plaintiffs contend that certain alleged “decisions” by the Board

“were not valid exercises of business judgment.” (Compl. ¶¶ 256-60.) Plaintiffs include

conclusory statements that the Director Defendants collectively made a “decision to violate the

FCPA and Mexican law,” “to seek reelection while concealing the wrongdoing,” and “to reward


16

wrongdoers through promotions and compensation.” (Id.) Such statements, unsupported by

factual allegations, are the antithesis of particularized pleadings. They are mere conclusions that

do not even satisfy Rule 8, see Ashcroft v. Iqbal, 556 U.S. 662, 678-79 (2009); Bell Atl. Corp. v.

Twombly, 550 U.S. 544, 555-56 (2007), much less the heightened pleading standards for demand

futility. If this Court were to accept Plaintiffs’ barebones allegations as sufficient to establish

that a pre-suit demand is futile in this case, then the stringent pleading standards under Rule 23.1

would be rendered meaningless.

Plaintiffs’ cursory allegations, which are bereft of “particularized facts” about any

“specific decisions” or “transaction[s]” by the Board, amount to a tacit recognition that the

Aronson test simply does not apply here. Louisiana Muni. Police Employees’ Retirement Sys.,

962 F. Supp. 2d at 584; see also Welch, 553 F. App’x at 55 (holding that the district court

properly declined to apply the Aronson test “[b]ecause the complaint makes no particularized

allegation that the board took action to approve the fraudulent conduct”); Seminaris v. Landa,

662 A.2d 1350, 1354 (Del. Ch. 1995) (rejecting the Aronson test where “plaintiff does not

challenge any specific board action that approved or ratified these alleged wrongdoings”);

Google, 2012 WL 1611064, at *4-5. Plaintiffs do not explain, for example, “when [the Board’s

alleged] decisions were made, what the contours of those decisions were, and what, if any,

research and information were part of [the Board’s] deliberations.” Louisiana Muni. Police

Employees’ Retirement Sys., 962 F. Supp. 2d at 584. Indeed, when demand futility is premised

on a board’s supposed “decision” to violate the FCPA, courts have held that a complaint fails the

Aronson test where it does not allege with particularity “who made this decision, how this

decision was made or that there was an intent to violate any law.” Strong v. Taylor, 877 F. Supp.


17

2d 433, 451 (E.D. La. 2012) (applying Delaware law). Plaintiffs’ Complaint displays all of these

deficiencies.4

In addition, even if Plaintiffs had adequately alleged any “decisions” by the Board (which

they do not), the Complaint alleges no facts sufficient to overcome the “powerful presumption”

of the business judgment rule—that the Directors acted at all times in good faith and in the

honest belief that they were acting in the best interest of Wal-Mart and its shareholders. Brehm,

746 A.2d at 256. To rebut that presumption, Plaintiffs would have to plead particularized facts

alleging that the Director Defendants were “acting intentionally to advance any agenda that was

not in the best interest of [the company],” Strong, 877 F. Supp. 2d at 451; see also In re Walt

Disney Co. Deriv. Litig., 825 A.2d 275, 286 (Del. Ch. 2003), or engaging intentionally in

conduct they “knew . . . was illegal.” Wood, 953 A.2d at 142. As set forth in more detail below,

there are no such allegations of dishonesty, bad faith, or intentional misconduct on behalf of the

majority of Wal-Mart’s directors. See infra, Part B.2.

2. Plaintiffs’ Allegations That The Defendants Breached Their Fiduciary Duties

Do Not Meet The Rales Test For Demand Futility.

Unable to plead in good faith any particularized facts that could possibly satisfy the

Aronson test for establishing demand futility due to actions taken by the Board, Plaintiffs are left

to establish demand futility under the equally stringent Rales test applicable to director inaction.

Under Rales, this Court must determine whether the Complaint contains allegations sufficient to

4 Further, the Complaint’s Aronson allegations are inadequate because each of them is phrased

in terms of “the Board”; Plaintiffs do not even pretend to focus on each individual Director as

required by Delaware law. (Compl. ¶¶ 256-260.) That alone demonstrates that the Aronson

framework does not apply. Citigroup, 964 A.2d at 121 n.36. The particularized pleading

requirement means that Plaintiffs must include allegations specific to the events and each of

the directors in the suit, not boilerplate allegations like those at issue here. (See, e.g., Compl.

¶ 256 (“The Board’s decision to violate [the law] . . . was not a valid exercise of business

judgment.”)) If that were not the rule, any derivative plaintiff could defeat the purpose of

Rule 23.1 simply by making such a generic statement.


18

demonstrate that a majority of the Board (as of May 2012) lacked the independence required to

assess a demand. See Citigroup, 964 A.2d at 120 (quoting Rales, 634 A.2d at 934). Such a lack

of independence must be based on particularized factual allegations demonstrating either (a) a

substantial likelihood that the director himself would be subject to personal liability as a result of

Plaintiffs’ proposed claims, or (b) a showing that the director is “beholden” to another director

who faces the same substantial likelihood of personal liability. Id. at 121; Beam v. Stewart, 845

A.2d 1040, 1050 (Del. 2004). The Complaint in this case comes nowhere close to clearing this

hurdle.

In particular, the Complaint does not come close to pleading particularized facts to

suggest that the Director Defendants face a substantial likelihood of liability with respect to its

allegations that the Board “fail[ed] . . . to exercise reasonable oversight” to prevent the alleged

2005-06 conduct in Mexico—a theory of liability known as a “Caremark claim.” Caremark, 698

A.2d at 971. Caremark liability is “possibly the most difficult theory in corporation law,” Stone,

911 A.2d at 372, requiring “bad faith” and an intentional dereliction of duty by the directors.

Citigroup, 964 A.2d at 123; King v. Baldino, 648 F. Supp. 2d 609, 621 (D. Del. 2009); Guttman,

823 A.2d at 506. As the Delaware Supreme Court held when it adopted the Caremark standard,

“imposition of liability [under Caremark] requires a showing that the directors knew that they

were not discharging their fiduciary obligations.” Stone, 911 A.2d at 370 (emphasis added).

Plaintiffs’ own allegations belie these requirements and defeat any possibility of Caremark

liability against the Director Defendants.

a. Plaintiffs Do Not Adequately Allege That A Majority Of Wal-Mart’s

Directors Lacks Independence With Respect To The Events Alleged

To Have Taken Place In 2005-06.

The crux of Plaintiffs’ demand futility argument is that the Director Defendants are not

independent or disinterested because, according to Plaintiffs, a majority of them are likely to face


19

personal liability as a result of the events that allegedly took place in 2005-06 (the alleged

bribery in Mexico and the internal investigation that allegedly concealed the wrongdoing).

(Compl. ¶ 268.) For purposes of this motion, the question is not whether there were FCPA

violations or other misdeeds in 2005-06. Instead, the issue is whether at least eight of fifteen

directors—a majority of the May 2012 Board—were each incapable of exercising their

continuing obligation to address such issues in the best interests of the Company and its

stockholders, by, for example, voting to make personnel changes (or not), voting to make

compliance system changes (or not), voting to conduct an internal investigation (or not), voting

to cooperate with the government (or not), or voting to initiate suit (or not).

But Plaintiffs fail altogether to engage in the requisite director-by-director analysis; they

rely instead on group-wide allegations about what the Board must have known at that time, based

on a fundamentally flawed “imputation” theory. As discussed below, Delaware courts have

repeatedly rejected this imputation theory, especially where, as here, the Company has an

exculpatory provision in its charter.

To satisfy Rales under these circumstances, Delaware law requires particularized

allegations that “the directors knew they were not discharging their fiduciary obligations” and

were acting with “a conscious disregard for their responsibilities.” Stone, 911 A.2d at 370

(emphasis added); Citigroup, 964 A.2d at 125 (same). Further, to the extent Plaintiffs are

attempting to establish that the Director Defendants are likely to be liable under the FCPA,

Plaintiffs must plead actual knowledge or willful blindness by each of the directors—i.e., that

each director actually believed there was a “high probability” bribes were being paid while

“consciously and intentionally avoid[ing] confirming that fact.” United States v. Kozeny, 667


20

F.3d 122, 132 (2d. Cir. 2011); see also id. at 135-36 (“[T]o violate FCPA one must act

‘corruptly’ and ‘willfully.’”).

The common thread is scienter: Plaintiffs cannot establish demand futility by alleging

that a director “should have known” or “must have known” that misconduct was afoot. They

have to plead, with particularity, that each individual director had actual knowledge of activity

that the director knew was unlawful. As set out below, the Complaint does not even come close

to meeting the scienter standard for at least thirteen of the fifteen Director Defendants. Indeed,

the Complaint virtually concedes that fully ten of the fifteen directors are disinterested and

independent. First, five of the directors (Alvarez, Cash, Corbett, Reinemund, and Sorenson)

joined the Board after the alleged 2005-06 conduct had concluded, some as recently as 2010, and

are not alleged to have any connection to the 2005-06 events, or to be beholden to anyone who

does. (See Compl. ¶¶ 33-37, 42, 192.) A second group of five directors (Breyer, Burns, Daft,

Williams, and Wolf) is lumped together in a short section of the Complaint that does not contain

a single individualized allegation about any of them. (Id. ¶¶ 277-281.) These five directors

stand accused of nothing more than having served as members of “various committees.” (Id. ¶

277.) Accordingly, the Court need look no further than these ten directors to determine that the

demand futility requirements have not been and cannot be met as to a majority of the Board.5

Alvarez, Cash, Corbett, Reinemund, Sorenson. With respect to five of the Director

Defendants who joined the Board in recent years (Alvarez, Cash, Corbett, Reinemund, and

Sorenson), Plaintiffs do not even suggest they are disqualified from entertaining a demand

pertaining to the alleged 2005-06 conduct. The Complaint references each of these five directors

5 For the convenience of the Court, Appendix B sets forth a table showing every allegation in

the Complaint levied against each of the Director Defendants.


21

only three times (Compl. ¶¶ 33-37, 254, 269), acknowledges that they joined the Board after the

alleged 2005-06 conduct concluded (id. ¶¶ 33-37, 42; see also id. ¶ 192 (alleging that the

investigation concluded on May 10, 2006)), and offers no reason why these five directors would

be incapable of exercising disinterested and independent judgment with respect to claims

pertaining to that time period. Indeed, none of these five directors is alleged to have had any

connection whatsoever to Wal-Mart while the alleged 2005-06 conduct was taking place, let

alone acted improperly with scienter during that time period. Because the Complaint includes no

specific or particularized allegations that these five directors face a “substantial likelihood”—or

any likelihood—of personal liability from any alleged conduct in 2005-06, Citigroup, 964 A.2d

at 121, they are not disqualified from considering a demand.

Breyer, Burns, Daft, Williams, Wolf. With respect to five of the Director Defendants

who were on the Board during the alleged 2005-06 conduct (Breyer, Burns, Daft, Williams, and

Wolf), the Complaint fails to assert a single factual allegation that any of them knew about or

consciously ignored the alleged improper payments in Mexico. Instead, Plaintiffs challenge their

disinterestedness and independence based on their status as members of “various committees”

(Compl. ¶ 277), a concept that has been rejected consistently in decisions applying Delaware

law. See, e.g., Wood, 953 A.2d at 142 (the “assert[ion] that membership on the Audit Committee

is a sufficient basis to infer the requisite scienter . . . is contrary to well-settled Delaware law.”).

The Complaint alleges in conclusory—and, tellingly, alternative—fashion that these five

directors “must” have had knowledge because they were “either directly informed of the

wrongdoing or were informed through the proper operation of the Board’s governance and the

Company’s reporting systems.” (Compl. ¶ 278 (emphasis added); see also id. ¶ 40 (alleging that

the then-General Counsel “had a duty to report [facts regarding the investigation] to the Audit


22

Committee”); id. ¶ 135 (alleging that “the Audit Committee was obligated, under the Audit

Committee Charter, to report the matter to the full Board”).) But there is not a single fact to

support the allegation that these directors were “directly informed” of any wrongdoing, much

less that they committed an intentional breach of fiduciary duty, with scienter, by failing to take

any action while in possession of such knowledge.

Courts may not impute knowledge of wrongdoing to directors simply because a

company’s “corporate governance structure requires that notice [of the wrongdoing] reach the

Board.” Gulbrandsen v. Stumpf, 2013 WL 6406922, at *6 (N.D. Cal. Dec. 6, 2013); Citigroup,

964 A.2d at 135 (“[D]irector liability is not measured by the aspirational standards established by

the internal documents detailing a company’s oversight system.”). Even if they could, mere

knowledge of wrongdoing is not sufficient to establish the absence of disinterestedness under

Rales. Plaintiffs must also establish that each director with such knowledge committed an

intentional dereliction of duty—i.e., that he or she, with scienter and in violation of the director’s

fiduciary obligations, chose not to take appropriate action. The Complaint contains no such

allegations as to these five Director Defendants.

Plaintiffs also allege that because these directors served on “various committees” at the

time (Compl. ¶ 277), they should be presumed to have been aware of the allegedly illegal

conduct in Mexico. (See, e.g., id. ¶ 224 (alleging that Breyer served on the Committee on

Strategic Planning, and therefore that he “would have inquired whether Wal-Mart’s exponential

growth in Mexico was being accomplished in compliance with the law”); id. ¶¶ 28-29, 135

(alleging that Burns and Williams served on the Audit Committee, and therefore that they must

have received reports regarding the investigation).) But Delaware law is clear that a plaintiff

may not presume a director’s knowledge based on her Board or committee membership. See


23

Wood, 953 A.2d at 142; South, 62 A.3d at 17 & n.6 (“As numerous Delaware decisions make

clear, an allegation that the underlying cause of a corporate trauma falls within the delegated

authority of a board committee does not support an inference that the directors on that committee

knew of and consciously disregarded the problem for purposes of Rule 23.1”); In re JPMorgan

Chase & Co. Deriv. Litig., 2014 U.S. Dist. LEXIS 46363, at *17, 21 (S.D.N.Y. Mar. 31, 2014).

Indeed, the Complaint’s reliance on such roundabout pleading is an implicit admission that

Plaintiffs cannot in good faith allege that these directors committed an intentional wrong against

the Company.

Because the Complaint lacks any particularized allegations that these five directors are

incapable of exercising disinterested and independent judgment, they are not disqualified from

considering a demand. And when these five are added to the five discussed above who were not

even on the Board during the alleged 2005-06 conduct, that means a majority—ten of fifteen—of

the directors on the Board at the time the Complaint was filed are disinterested for purposes of

demand futility as a matter of substantive Delaware law. That requires granting this motion even

if Plaintiffs’ allegations are credited as to the other five Directors (though, as is explained next,

they should not be).

Jim Walton. Although Plaintiffs assert separate demand futility allegations with respect

to Jim Walton (Compl. ¶ 275), those allegations are deficient for many of the same reasons

described above. Jim Walton was a member of the Board during the alleged 2005-06 conduct,

but Plaintiffs do not assert that he had actual knowledge about those events or that he failed—

improperly, with scienter—to take appropriate action. Again, the Complaint merely presumes

knowledge based on his role as director. For example, Plaintiffs allege that Jim Walton must

have known about the alleged improper payments in Mexico because, “[a]s a member of the


24

Board, he received regular reports from Wal-Mart’s Audit Committee.” (Id.) Plaintiffs further

allege that Jim Walton “would have also learned about the evidence of bribery at Wal-Mex from

CEO Scott and General Counsel Mars,” but there is no allegation that Scott or Mars actually

communicated this information to Jim Walton. (Id.) Cases applying Delaware law make clear

the court cannot assume that reports in the hands of senior management “pierced the confines of

the boardroom.” Gulbrandsen v. Stumpf, 2013 WL 1942158, at *6 (N.D. Cal. May 9, 2013).

Thus, the allegations against Jim Walton are insufficient to excuse demand.

Rob Walton. With respect to Rob Walton, who also was a member of the Board during

the alleged 2005-06 conduct, Plaintiffs’ demand futility allegations again rely on mere

imputation of knowledge, rather than particularized factual allegations demonstrating actual

knowledge and scienter—this time, the presumption is based on Rob Walton’s service on the

Executive Committee, “a managerial role that necessitated his being aware of the problems at

Walmex.” (Compl. ¶ 273.) Once again, however, allegations that “defendants knew or should

have known of fraudulent conduct based solely on their board membership or executive

positions” are inadequate to plead scienter. In re Sotheby’s Holdings, Inc., 2000 WL 1234601, at

*7 (S.D.N.Y. Aug. 31, 2000); Louisiana Muni. Police Employees’ Retirement Sys., 962 F. Supp.

2d at 586-87. Plaintiffs also allege that Rob Walton received an anonymous email in January

2006 “stating that Walmex’s top real estate executives were receiving kickbacks from

construction companies,” which Rob Walton is alleged to have then “suppressed.” (Id. ¶ 273;

see also id. ¶ 158.) But this email is not alleged to have any connection to the alleged bribery at

issue in this case, and Plaintiffs say nothing about what was done in response, whether the

accusation was substantiated or refuted, or anything else about this anonymous note.


25

Finally, Plaintiffs allege that “familial ties disqualify [Rob Walton] from considering

demand” because he is Jim Walton’s brother and Penner’s father-in-law. (Id. ¶ 274.) But

familial ties do not render a director incapable of considering a demand unless the Complaint

alleges with particularity that the director is “so beholden to an interested director . . . that his

discretion would be sterilized.” Beam, 845 A.2d at 1050 (internal quotation marks omitted).6

Plaintiffs do not allege that Rob Walton is beholden to anyone.

Penner. The Complaint does not include a single allegation that Penner had any

involvement or knowledge regarding the Mexico issues. Indeed, Penner did not join the Board

until 2008. (Id. ¶ 32.) Plaintiffs’ sole basis for disqualifying Penner is familial ties: According

to Plaintiffs, Penner is “disabled from making a decision on a shareholder demand that exposes

his father-in-law and fellow Board member [Rob Walton] to a substantial likelihood of civil or

criminal liability.” (Id. ¶ 276.) But that argument fails for two reasons.

First, Plaintiffs’ conclusory allegations about Penner’s “lavish lifestyle” (id.) are not

sufficient to establish that Penner is “beholden” to Rob Walton. Beam, 845 A.2d at 1050; see

also In re J.P. Morgan Chase & Co. S’holder Litig., 906 A.2d 808, 822 (Del. Ch. 2005)

(rejecting challenge to director’s independence where plaintiff failed to allege how the

relationship “imping[ed] on [the director’s] ability to act independently”—for example, by

alleging that future benefits “would be jeopardized” if the director voted against the interested

6 See also Strickland v. Hongjun, 2011 U.S. Dist. LEXIS 73944, at *9 (S.D.N.Y. July 8, 2011)

(allegation that the director’s mother and mother-in-law are also directors is insufficient

because “the particularized pleadings must demonstrate why the relationship creates a

reasonable doubt as to the director’s disinterestedness”); King, 648 F. Supp. 2d at 620 n.49

(“Demand is not excused, however, just because directors would have to sue ‘their friends,

family and business associates.’”); Siebert v. Harper & Row, Publishers, Inc., 1984 WL

21874, at *3 (Del. Ch. Dec. 5, 1984) (director not disabled from considering a demand where

his cousin was a fellow director and a corporate manager).


26

director). These allegations do not “raise, per se, a reasonable doubt as to [his] independence”

absent “particularized factual allegations” that Penner “act[s] at the direction of” Rob Walton—

which Plaintiffs have not made. Berry, 382 S.W.3d at 819 (internal quotation marks omitted).

Second, as explained above, Plaintiffs have not adequately alleged that Rob Walton is

himself an interested director. Thus, Penner’s relationship to Rob Walton is irrelevant for

demand futility purposes. See Beam, 845 A.2d at 1050; Brehm, 746 A.2d at 257-58 (“Because

we hold that the Complaint fails to create a reasonable doubt that Eisner was disinterested . . . we

need not reach or comment on [whether directors were beholden to Eisner].”).

Duke and Scott. Plaintiffs assert more particularized allegations about Duke (who was

not on the Board at the time of the alleged 2005-06 conduct) and Scott (who was). Defendants

dispute those allegations and the inferences that Plaintiffs seek to draw from them, and dispute

the sufficiency of those allegations to state any claim for relief, but that is irrelevant for purposes

of the present motion. Even if the Court were to accept Plaintiffs’ allegations for present

purposes, and conclude that Messrs. Duke and Scott were incapable of participating in a demand

decision regarding the alleged 2005-06 conduct, they are a distinct minority of the fifteen-

member Board. In the absence of particularized facts showing that at least six additional

directors also fail the Rales test, the allegations involving Messrs. Duke and Scott are not

sufficient to establish demand futility.

* * *

As set forth above, Plaintiffs “fail[ ] to allege a single particularized fact detailing

knowledge as to” at least ten, and more accurately thirteen, of the fifteen Director Defendants.

Strong, 877 F. Supp. 2d at 449; see also Kaltman v. Sidhu, 2004 WL 357861, at *5 (N.D. Tex.

Feb. 26, 2004) (“Plaintiffs ha[ve] failed to allege with particularity what information [the


27

directors] knew, who knew it, [or] when they knew it.”). The allegations of wrongdoing in the

Complaint pertain to officers and employees, not directors. Plaintiffs simply ignore, or attempt

to blur, a fundamental aspect of corporate governance: It is management that carries out the

Company’s business and operations, whereas the Board oversees management. See Principles of

Corp. Governance § 3.01 (Am. L. Inst. 1994). “Nothing in the complaint provides any

particularized basis to infer that . . . [the directors] had any idea about the [alleged misconduct],”

let alone that they acted improperly with scienter. Guttman, 823 A.2d at 504 (emphasis added);

see also Waber v. Dorman, 2011 WL 814992, at *7 (N.D. Ill. Feb. 23, 2011) (demand not

excused where plaintiff’s allegations “simply do not provide the particulars for what the board

knew, how they learned it, or when they learned it”). Because the Complaint contains no such

allegations, demand is not excused and the Complaint must be dismissed.

b. Plaintiffs Do Not Adequately Allege That A Majority Of Wal-Mart’s

Directors Faces A Substantial Likelihood Of Liability Based On A

Failure Of Oversight In 2005-06.

Plaintiffs’ allegations also are inadequate to establish demand futility based on a failure

of the Director Defendants to prevent the alleged improper payments in Mexico. (See, e.g.,

Compl. ¶¶ 219-20, 265, 268.) Under Delaware law, this theory of liability—that the Board

breached a fiduciary duty by exhibiting a “lack of good faith as evidenced by a sustained or

systematic failure . . . to exercise reasonable oversight”—is called a “Caremark claim.”

Caremark, 698 A.2d at 971.

Caremark liability is “possibly the most difficult theory in corporation law upon which a

plaintiff might hope to win a judgment.” Stone, 911 A.2d at 372. To establish Caremark

liability, a plaintiff must show that the directors (1) “utterly failed to implement any reporting or

information system or controls,” or (2) “having implemented such a system or controls,

consciously failed to monitor or oversee its operations thus disabling themselves from being


28

informed of risks or problems requiring their attention.” King, 648 F. Supp. 2d at 621 (emphases

added); see also Stone, 911 A.2d at 370. In other words, Caremark requires “a showing that the

directors were conscious of the fact that they were not doing their jobs.” Guttman, 823 A.2d at

506; see also Citigroup, 964 A.2d at 123 (“[A] showing of bad faith is a necessary condition to

director oversight liability.”); SAIC, 2013 WL 2466796, at *12 (“Even a showing of gross

negligence by a majority of the Board will not suffice.”).

It is not enough for a plaintiff, “with the benefit of hindsight,” to “seek[] to equate a bad

outcome with bad faith.” Stone, 911 A.2d at 373. Nor is “[s]imply describing the calamity and

alleging that it occurred on the directors’ watch” sufficient. In re Hecla Mining Co. Deriv.

S’holder Litig., 2014 WL 689036, at * (D. Idaho Feb. 20, 2014) (quoting South, 62 A.3d at 14)

(internal quotation marks omitted); see also Wood, 953 A.2d at 143 (rejecting Caremark claim

where there were no particularized allegations that defendants “consciously and in bad faith

ignored the improprieties alleged in the complaint”); In re China Automotive Systems Inc.

Derivative Litigation, 2013 WL 4672059, *8 (Del. Ch. Aug. 30, 2013) (“[J]ust being a director

on the committee where the alleged wrongdoing is within [its] delegated authority does not give

rise to a substantial threat of personal liability under Caremark without supporting allegations of

particularized facts showing bad faith.”) (internal quotation marks omitted).

The gravamen of Plaintiffs’ purported Caremark claim is that the eight 2005-06 Director

Defendants breached their fiduciary duties through “lax oversight over investigations of

corruption at high levels and discouragement of whistleblowers” (Compl. ¶ 205), and by “their

refusal to take measures to shore up those known inadequate internal controls.” (Id. ¶ 265.) But

Plaintiffs plead no facts (much less particularized ones) supporting the Board’s alleged failure to

establish internal reporting systems or its alleged intentional decision to leave inadequate


29

systems in place. To the contrary, Plaintiffs acknowledge that the Company had reporting and

anticorruption systems in place, including, at a minimum, “Corporate Governance Guidelines,” a

“Code of Ethics,” a “Statement of Ethics,” an “Audit Committee Charter,” and ethical guidelines

for the “CEO and Senior Financial Officials.” (Id. ¶¶ 50-56; see Wineland Decl., Exhibits B-E.)7

The Complaint further acknowledges that Wal-Mart’s “anticorruption policy lays out in . . .

great[] detail the prohibited conduct that each Wal-Mart employee, director, and officer must

observe,” and that senior financial officials are “required” to report ethics violations. (Id. ¶¶ 56-

58.) Plaintiffs further allege that “in 2005, Wal-Mart summoned its top procurement executives

to its corporate headquarters” and instructed them to ensure compliance with the FCPA. (Id. ¶

157.)

Delaware law makes clear that Plaintiffs’ own allegations defeat their proposed

Caremark claims. For example, in South v. Baker, stockholders of a mining corporation sought

to assert derivative Caremark claims in connection with three mining accidents, alleging that the

directors had failed to ensure that a reasonable safety-focused reporting system existed. 62 A.3d

at 6, 18. The Delaware Chancery Court dismissed the action because the complaint

acknowledged that the board had established a Safety Committee charged with various reporting

duties; thus, the plaintiffs’ own allegations “eviden[ced an] effort to establish a reasonable

system.” Id. Likewise, in Louisiana Municipal Police Employees’ Retirement System v. Hesse,

the stockholders claimed that the directors faced Caremark liability because “they recklessly

failed to oversee, monitor, and manage Sprint’s internal controls to prevent illegal activity.” 962

7 The Court may consider these documents because they are referenced in the Complaint and

their authenticity cannot be disputed. See Kushner v. Beverly Enter., Inc., 317 F.3d 820, 831-

32 (8th Cir. 2003) (“When deciding a motion to dismiss, a court may consider the complaint

and documents whose contents are alleged in a complaint and whose authenticity no party

questions, but which are not physically attached to the pleading.”).


30

F. Supp. 2d at 588. The district court dismissed the action for failure make demand on the board

because “[p]laintiffs d[id] not contend Sprint lacked reporting or information channels; to the

contrary, they acknowledge[d] there were corporate governance committees.” Id.; see also

Stone, 911 A.2d at 372-73 (dismissing Caremark claims because the complaint acknowledged

that the corporation had a compliance and reporting system in place).

Here, too, Plaintiffs’ own allegations regarding Wal-Mart’s reporting and information

systems are fatal to their Caremark claim. “These pled facts do not support an inference of an

utter failure to attempt to assure a reasonable information and reporting system exists, but rather

the opposite: an evident effort to establish a reasonable system. The complaint thus refutes the

assertion that the directors utterly failed to attempt to fulfill their oversight obligations.” South,

62 A.3d at 18 (quotation marks and citations omitted); see also Stone, 911 A.2d at 370;

Louisiana Muni. Police Employees’ Retirement Sys., 962 F. Supp. 2d at 588.

One reason a Caremark claim is so difficult to plead is that a shareholder must show

either the utter absence of a reasonable reporting or information system, or if one existed, that the

Board consciously failed to monitor or oversee its operations. It is not enough that alleged

wrongdoing may have escaped detection under such an information or reporting system, or that

alleged wrongdoing was not properly reported to the Board. See Stone, 911 A.2d at 373

(“Although there ultimately may have been failures by employees to report deficiencies to the

Board, there is no basis for an oversight claim seeking to hold the directors personally liable for

such failures by the employees.”). Plaintiffs “cannot simultaneously” admit the existence of

oversight procedures while claiming that the directors utterly disregarded their oversight duties,

absent well-pleaded allegations that the directors deliberately failed to monitor the Company—

something that Plaintiffs do not allege at all, let alone on a director-by-director basis. Dow


31

Chem., 2010 WL 66769, at *13 n.85; In re China Automotive, 2013 WL 4672059, *8 (rejecting

Caremark-based demand futility argument because plaintiff “does not allege with particularity

any direct or personal involvement” on behalf of each director).

Plaintiffs attempt to bolster their Caremark claims by pointing to purported “red flags”

that supposedly alerted the 2005-06 Director Defendants to the allegedly improper payments in

Mexico. For example, Plaintiffs allege that Wal-Mart hired Kroll Inc. in 2003 to investigate and

report on claims that certain Wal-Mex employees had “help[ed] favored high-volume customers

evade sales taxes.” (Compl. ¶¶ 79-82.) But the Complaint does not “identify what the Directors

actually knew about the ‘red flags,’ and how they responded to them.” In re Intel Corp. Deriv.

Litig., 621 F. Supp. 2d 165, 174 (D. Del. 2009) (rejecting demand futility arguments based on

Caremark claim); Desimone, 924 A.2d at 950-51; Welch, 553 F. App’x at 55-56 (rejecting

“novel contention” that the board should be charged with “constructive notice” of the alleged red

flags); King v. Baldino, 409 F. App’x 535, 538 (3d Cir. 2010) (noting the “absence of facts

showing that the board was aware of” the alleged red flags); In re JPMorgan, 2014 U.S. Dist.

LEXIS 46363, at *17 (“Plaintiff . . . cites no factual allegations showing that any member of the

Board other than [one director] was informed of those” red flags). Indeed, allegations that Wal-

Mart hired a respected outside firm such as Kroll to conduct such an investigation belie

Plaintiffs’ Caremark claim that the Board failed to monitor the activities of the corporation.8

8 The Complaint also describes a hodge-podge of other events that allegedly occurred between

2004 and 2006, all of which are unrelated to the alleged bribery in Mexico that is at issue in

this case, and none of which supports a Caremark claim here. (See, e.g., Compl. ¶¶ 204-220

(describing “wage and hour cases launched against Wal-Mart,” the resignation of Wal-Mart

director Thomas Coughlin, an investigation in Puerto Rico, and a letter from shareholders)).

Even if every 2005-06 Director Defendant had actual knowledge of each of these events—

and there is nothing in the Complaint alleging such knowledge—the relationship between

these events and the alleged bribery in Mexico is far too attenuated for them to be considered


32

Plaintiffs’ Caremark allegations amount to nothing more than a request for the Court to

draw yet another impermissible inference. According to Plaintiffs, if improper payments were

made at Wal-Mart’s Mexican subsidiary, the 2005-06 Director Defendants must have failed to

exercise adequate oversight at that time. But “Delaware courts routinely reject the conclusory

allegation that because illegal behavior occurred, internal controls must have been deficient, and

the board must have known so.” Desimone, 924 A.2d at 940; Citigroup, 964 A.2d at 127

(rejecting claim “that because defendants failed to prevent the Company’s losses associated with

certain business risks, they must have consciously ignored these warning signs or knowingly

failed to monitor the Company’s risk”); Stanley v. Arnold, 2012 WL 5269147, at *6 (S.D. Ohio

Oct. 23, 2012) (applying Delaware law) (“Plaintiff’s argument that if there was a regulatory

violation, then ipso facto, the Board must have breached its fiduciary duties is improper.”).

3. Plaintiffs’ Allegations That The Director Defendants Violated Section 14(a)

In 2010 And 2011 Do Not Meet Either Test For Demand Futility.

Finally, Plaintiffs fail to plead demand futility based on the Director Defendants’ alleged

involvement in events that have taken place since 2006—specifically, for “caus[ing] Wal-Mart to

disseminate two false and misleading proxies, the April 2010 Proxy and the April 2011 Proxy, in

violation of Section 14(a) of the Exchange Act.” (Compl. ¶ 269.) According to Plaintiffs, the

Proxy Statements were false or misleading because they failed to disclose that nine of the

Director Defendants—the eight who were directors during the alleged 2005-06 conduct and

Michael T. Duke, who was a Wal-Mart executive at that time—lacked “personal and

“red flags” under Delaware law. Numerous cases applying Delaware law reject such

disconnected allegations of “red flags.” See, e.g., Dow Chem., 2010 WL 66769, at *13 (just

“because bribery may have occurred in the past . . . by different members of management, in

a different country . . . and for a different transaction” does not mean “the board should have

suspected similar conduct by different members of management, in a different country, in an

unrelated transaction”); In re JPMorgan, 2014 U.S. Dist. LEXIS 46363, at *18; Citigroup,

964 A.2d at 129; South, 62 A.3d at 17.


33

professional integrity,” “consciously ignored red flags concerning the existence of widespread

corruption,” and were “flagrantly violating Wal-Mart’s Statement of Ethics.” (Compl. ¶¶ 227-

29.)9

The Complaint does not contain any allegations—let alone particularized ones—

“explaining any process by which the board . . . actively or purposefully made a decision to omit

the [allegedly missing] information” from the Proxy Statements, In re Morgan Stanley Deriv.

Litig., 542 F. Supp. 2d 317, 322 (S.D.N.Y. 2008) (applying Delaware law); see also Canty v.

Day, 2014 U.S. Dist. LEXIS 50506, at *19 (S.D.N.Y. Apr. 9, 2014) (applying Delaware law), or

that the Director Defendants took specific action by which they “approved or ratified these

alleged wrongdoings,” Seminaris, 662 A.2d at 1354. Thus, the Aronson test for demand futility

does not apply. See id.; see also supra, Part B.1.

Even if the Court were to construe Plaintiffs’ Section 14(a) claims as invoking the

Aronson test, Plaintiffs cannot overcome the presumption that the Board’s actions were the

product of a valid exercise of business judgment. Beam, 845 A.2d at 1049. Indeed, Plaintiffs

fail to plead any particularized facts regarding the Director Defendants’ actions, knowledge, or

intent with respect to the Proxy Statements, or even involvement in the drafting of the Proxy

9 Plaintiffs’ proposed Section 14(a) claim encompasses only the April 2010 and April 2011

Proxy Statements. (Compl. ¶¶ 286-292.) The Complaint also alleges in passing that the

Individual Defendants “breached their fiduciary duties and violated the federal securities

laws by making false and misleading statements” in “Wal-Mart’s 2006-2011 Annual

Reports” and “Wal-Mart’s 2006-2011 Proxy Statements.” (Id. ¶ 48.) This single

allegation—unconnected to any cause of action and devoid of any reference to particular

false or misleading statements, any Director Defendant’s knowledge of the false or

misleading nature of such statements, or any Director Defendant’s involvement in the

preparation or approval of such statements—does not meet Plaintiffs’ burden to plead

particularized facts as to each Director Defendant. Accordingly, any Section 14(a) claim

based on the 2006-2009 proxy statements must be dismissed for failure adequately to plead

demand futility for the same reasons as claims based on the April 2010 and April 2011 Proxy

Statements.


34

Statements; thus, the Complaint is incapable of establishing the bad faith or intentional

abdication of fiduciary duties necessary to overcome Aronson’s business judgment prong. N.J.

Bldg. Laborers Pension Fund v. Ball, 2014 U.S. Dist. LEXIS 32582 (D. Del. Mar. 13, 2014);

Freedman v. Mulva, 2014 U.S. Dist. LEXIS 31778, at *16 (D. Del. Mar. 12, 2014). “Nothing in

[the] complaint suggests that the Director Defendants were aware of the alleged misstatements or

omissions, intended to cause harm . . . or acted in bad faith by not adequately informing

themselves. For this reason, [the] disclosure claims fail to satisfy the demand requirement under

. . . Aronson.” N.J. Building Laborers Pension Fund, 2014 U.S. Dist. LEXIS 32582, at *19-20;

see also Strugala, 817 F. Supp. 2d at 389 (“The business judgment rule exists to protect directors

from . . . second guessing.” (applying Delaware law)).

Nor do the Section 14(a) allegations satisfy the Rales test. Under Rales, demand futility

can be established only by demonstrating a lack of disinterest and independence on behalf of at

least eight of the Director Defendants—a showing that requires a “substantial likelihood” of

personal liability for the alleged Section 14(a) violations. Citigroup, 964 A.2d at 120. The

Complaint’s allegations are insufficient to satisfy this demand futility requirement for at least

four reasons.10

First, the Director Defendants face no substantial likelihood of liability under Section

14(a) because Plaintiffs’ Section 14(a) allegations are nothing more than corporate

10

For the same reasons, Plaintiffs’ Section 29(b) claim should also be dismissed for failure to

plead demand futility. The Complaint contains no separate allegations of demand futility

with respect to the Section 29(b) claim (see Compl. ¶¶ 253-281), relying instead on the

insufficient allegations pertaining to the Section 14(a) claim. Further, any Section 29(b)

claim would be derivative of the proposed Section 14(a) claim. See Berckeley Inv. Group,

Ltd. v. Colkift, 455 F.3d 195, 205 (3d Cir. 2006) (Section 29(b) provides a remedy for a

Section 14(a) violation and “itself does not define a substantive violation of the securities

laws”); see also Reserve Life Ins. Co. v. Provident Life Ins. Co., 499 F.2d 715, 726 (8th Cir.

1974); Compl. ¶ 294.


35

mismanagement allegations disguised as federal securities law violations—a tactic that has been

rejected by the Supreme Court. See Santa Fe Indus., Inc. v. Green, 430 U.S. 462, 479 (1977)

(the federal securities laws “d[o] not seek to regulate transactions which constitute no more than

internal corporate mismanagement”) (internal quotation marks omitted); Golub v. PPD Corp.,

576 F.2d 759, 764 (8th Cir. 1978) (“[I]t was not the purpose of the federal security laws

[including Section 14(a)] to provide a federal cause of action for stockholders who have been

damaged by mere corporate mismanagement or breach of fiduciary duty by those in charge of

the affairs of the corporation.”). Indeed, the federal courts “uniformly reject efforts to bootstrap

such acts of corporate mismanagement and breach of [fiduciary duty] into claims for federal

securities fraud.” First Gen. Resources Co. v. Hartman & Craven, 1989 U.S. Dist. LEXIS

12966, at *6 (S.D.N.Y. Nov. 1, 1989) (collecting cases).

Federal courts are also unequivocal that disclosure under the federal securities laws is not

a “rite of confession,” Data Probe Acquisition Corp. v. Datatab, Inc., 722 F.2d 1, 5-6 (2d Cir.

1983), and directors are not required by the federal securities laws to “disclose uncharged,

unadjudicated wrongdoing or mismanagement.” Ciresi v. Citicorp, 782 F. Supp. 819, 823

(S.D.N.Y. 1991), aff’d, 956 F.2d 1161 (2d Cir. 1992); see also United States v. Matthews, 787

F.2d 38, 47-49 (2d Cir. 1986) (holding that Section 14(a) did not require the defendant to

disclose in proxy statement that he was guilty of the uncharged crime of conspiracy because

courts have “almost universally . . . rejected efforts to require that management make qualitative

disclosures” in proxy statements); In re Citigroup, Inc. Sec. Litig., 330 F. Supp. 2d 367, 377

(S.D.N.Y. 2004) (“the federal securities laws do not require a company to accuse itself of

wrongdoing”); Ballan v. Wilfred Am. Educational Corp., 720 F. Supp. 241, 249 (E.D.N.Y. 1989)


36

(“the SEC’s proxy disclosure rules do not require a company’s management to confess guilt to

uncharged crimes”).

Second, the Complaint does not allege that any of the Director Defendants had

knowledge of the supposedly false or misleading nature of the Proxy Statements (or any of the

reported facts underlying those statements). See SEC v. Shanahan, 646 F.3d 536, 546 (8th Cir.

2011) (holding that knowledge is the requisite state of mind for Section 14(a) claims, at least as

to outside directors); see also Shidler v. All Am. Life & Fin. Corp., 775 F.2d 917, 926 (8th Cir.

1985) (“strict liability is not the appropriate standard of liability” for Section 14(a) claims).

Plaintiffs merely rely upon the same inadequate allegations of imputed “knowledge” of the

alleged 2005-06 events that are insufficient to support demand futility with respect to their

breach of fiduciary duty claims, as described above. See supra, Part 2.a; see also In re China

Automotive, 2013 WL 4672059, at *8 (demand not excused because plaintiffs’ allegations

“contain no particularized allegations that the directors knew the statements were wrong”

(emphasis added)).

Third, there can be “no substantial threat of personal liability when, inter alia, the

complaint is ‘devoid of any pleading regarding the full board’s involvement in the preparation

and approval of’” the Proxy Statements. In re Bank of New York Mellon Corp. Forex

Transactions Litig., 2013 WL 3358028, at *4 (S.D.N.Y. July 2, 2013) (applying Delaware

demand futility framework and quoting Wood, 953 A.2d at 142). In this case, the Complaint

alleges only that the Director Defendants “caused Wal-Mart to disseminate” the Proxy

Statements (Compl. ¶ 269)—it does not contain particularized allegations that each of the

Director Defendants was involved in the preparation, development, drafting, or approval of those

documents. Where, as here, the Complaint does not “contain specific factual allegations that


37

reasonably suggest sufficient board involvement in the preparation of the [Proxy Statements],”

the Court cannot “reasonably conclude that the director defendants face a substantial likelihood

of personal liability” for allegedly false or misleading statements in those filings. Citigroup, 964

A.2d at 134.

Fourth, Plaintiffs lack standing to assert the Section 14(a) derivative claims they propose

against the Director Defendants because Wal-Mart itself (on whose behalf Plaintiffs propose to

bring suit) lacks standing to bring such a claim. It is black-letter law that derivative plaintiffs can

assert only those claims the corporation would be entitled to bring directly. See, e.g., Daily

Income Fund, Inc. v. Fox, 464 U.S. 523, 527-28 (1984). Here, Wal-Mart is alleged to have

“issue[d] a false and misleading proxy statement.” (Compl. ¶ 225.) Wal-Mart cannot assert a

Section 14(a) claim for allegedly false statements made in its own proxy materials. There is

nothing in the legislative history suggesting that Congress, in enacting Section 14(a), intended to

create a private right of action for issuers of proxy statements. See J. I. Case Co. v. Borak, 377

U.S. 426, 431-32 (1964) (discussing legislative history); see also Virginia Bankshares v.

Sandberg, 501 U.S. 1083, 1102-03 (1991). Because Wal-Mart lacks standing, so do Plaintiffs—

thus, the Director Defendants face no risk of liability on these claims.

IV. CONCLUSION

This case should be dismissed because Plaintiffs’ conclusory allegations fail to satisfy the

strict requirements for pleading demand futility.


38

Dated: July 3, 2014 Respectfully submitted,

THEODORE J. BOUTROUS JR.

JONATHAN C. DICKEY

MARK A. PERRY

GEORGE H. BROWN

BRIAN M. LUTZ

MATTHEW S. KAHN

GIBSON, DUNN & CRUTCHER LLP

333 SOUTH GRAND AVENUE

LOS ANGELES, CA 90071-3197

TELEPHONE: (213) 229-7000

FAX: (213) 229-7520

/s/ Teresa Wineland

JESS ASKEW III (Ark. Bar No. 86005)

[email protected]

TERESA WINELAND (Ark. Bar No. 81168)

[email protected]

KUTAK ROCK LLP

124 WEST CAPITOL AVENUE, SUITE 2000

LITTLE ROCK, AR 72201

TELEPHONE: (501) 975-3000

FAX: (501) 975-3001

Attorneys for Nominal Defendant Wal-Mart Stores, Inc., and the Individual Defendants


39

CERTIFICATE OF SERVICE

I certify that on this 3rd day of July, 2014, this document was served on the following

counsel for plaintiffs by means of the CM/ECF system:

James C. Wyly

[email protected]

Sean F. Rommel

[email protected]

Wyly ~ Rommel, PLLC

4004 Texas Blvd.

Texarkana, TX 75503

John. G. Emerson

[email protected]

Emerson Poynter LLP

830 Apollo Lane

Houston, TX 77058

Scott E. Poynter

[email protected]

William T. Crowder

[email protected]

Corey D. McGaha

[email protected]

Emerson Poynter LLP

500 President Clinton Ave., Ste. 305

Little Rock, AR 72201

Allen P. Roberts

[email protected]

325 Jefferson St. SW

Camden, AR 71701

Brian P. Murray

[email protected]

Gregory B. Linkh

[email protected]

Murry Frank LLP

275 Madison Avenue, 8th Floor

New York, NY 10016

Joseph P. Guglielmo

[email protected]

Judith S. Scolnick

[email protected]

Donald A. Broggi


mailto:[email protected]

40

[email protected]

Joseph Cohen

[email protected]

Thomas L. Laughlin

[email protected]

Scott+Scott LLP

500 Fifth Avenue, 40th Floor

New York, NY 10110

Robert A. Jigarjian

[email protected]

Jigarjian Law Office

128 Tunstead Avenue

San Anselmo, CA 94960

/s/ Teresa Wineland

Teresa Wineland


1

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

HENRIETTA KLEIN, : : Plaintiff, : : vs. : Civil Action : No. 7455-CS S. ROBSON WALTON, et al, : : Defendants, : : and : : WAL-MART STORES, INC., a : corporation, : : Nominal Defendant. : -------------------------------- (Caption continued)

- - - Chancery Courtroom No. 12A New Castle County Courthouse Wilmington, Delaware Monday, July 16, 2012 2:10 p.m. BEFORE: HON. LEO E. STRINE, JR., Chancellor.

- - -

ORAL ARGUMENT

- - -

------------------------------------------------------ CHANCERY COURT REPORTERS

500 North King Street - Suite 11400 Wilmington, Delaware 19801-3759

(302) 255-0525

Case 4:12-cv-04041-SOH Document 110-1 Filed 07/03/14 Page 1 of 39 PageID #: 2050

2

CHANCERY COURT REPORTERS

ELSIE COHEN, : : Plaintiff, : : v. : Civil Action : No. 7470-CS AIDA M. ALVAREZ, et al. : : Defendants. : : and : : WAL-MART STORES, INC., a : Delaware corporation, : : Nominal Defendant. : ---------------------------------- PAULA GERBER, : : Plaintiff, : : v. : Civil Action : No. 7477-CS AIDA M. ALVAREZ, et al : : Defendants. : : and : : WAL-MART STORES, INC., a : Delaware corporation, : : Nominal Defendant. : ---------------------------------- (Caption continued)

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LEON BRAZIN and MITCHELL : PINSLY, : : v. : Civil Action : No. 7489-CS S. ROBSON WALTON, et al. : : Defendants. : : and : : WAL-MART STORES, INC., a : Delaware corporation, : : Nominal Defendant. : ------------------------------ :CALIFORNIA STATE TEACHERS' : RETIREMENT SYSTEM, derivatively : on behalf of WAL-MART STORES, : INC., : : Plaintiff, : : v. : Civil Action : No. 7490-CS AIDA M. ALVAREZ, et al. : : Defendants. : : and : : WAL-MART STORES, INC., a : Delaware Corporation, : : Nominal Defendant. : --------------------------------- (Caption continued)

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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, FIREFIGHTERS' VARIABLE : SUPPLEMENTS FUND, FIRE OFFICERS' : VARIABLE SUPPLEMENTS FUND, BOARD : OF EDUCATION RETIREMENT SYSTEM OF: THE CITY OF NEW YORK, TEACHES' : RETIREMENT SYSTEM OF THE CITY OF : NEW YORK, and NEW YORK CITY : TEACHERS' VARIABLE ANNUITY : PROGRAM, derivatively on behalf : of WAL-MART STORES, INC. : : Plaintiffs, : : v. : Civil Action : No. 7612-CS AIDA M. ALVAREZ, et al. : : Defendants. : : and : : WAL-MART STORES, INC., a : Delaware corporation, : : Nominal Defendant. : --------------------------------- (Caption continued)

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KIMBERLY R. KNOWLES, derivately : on behalf of WAL-MART STORES, : INC., : : Plaintiffs, : : v. : : AIDA M. ALVAREZ, et al. : : Defendants, : : and : : WAL-MART STORES, INC. : : Nominal Defendant. :

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APPEARANCES:

JESSICA ZELDIN, ESQ. Rosenthal, Monhait & Goddess, P.A. -and- LAWRENCE DEUTSCH, ESQ. of the Pennsylvania Bar Berger & Montague, P.C. For Plaintiffs Elsie Cohen, Paula Gerber and Kimberly Knowles SETH D. RIGRODSKY, ESQ. Rigrosky & Long, P.A. -and- FREDERIC S. FOX, ESQ. HAE SUNG NAM, ESQ. JEFFREY P. CAMPISI, ESQ. of the New York Bar Kaplan Fox & Kilsheimer LLP For Plaintiff The NYC Funds STUART M. GRANT, ESQ. Grant & Eisenhofer P.A. -and- DANIEL GIRARD, ESQ. JONATHAN K. LEVINE, ESQ. of the California Bar Girard Gibbs LLP Proposed Co-Lead Counsel JAMES P. McEVILLY, III, ESQ. Faruqi & Faruqi, LLP Counsel for Plaintiffs Henrietta Klein, Leon Brazin and Mitchell Pinsly VALERIE BUDZIK, ESQ. of the New York Bar Deputy Comptroller for Legal Affairs City of New York Appearances (Cont'd)

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BLAKE A. BENNETT, ESQ. Cooch and Taylor, P.A. For Sheldon Schlaff, Interested Party DONALD J. WOLFE, JR., ESQ. STEPHEN C. NORMAN, ESQ. Potter Anderson & Corroon LLP -and- BRIAN M. LUTZ, ESQ. of the New York Bar MARK A. PERRY, ESQ. of the District of Columbia Bar Gibson Dunn & Crutcher LLP For Defendants Aida M. Alvarez, James Breyer, M. Michele Burns, James I. Cash, Jr., Eduardo Castro-Wright, Roger C. Corbett, Thomas M. Coughlin, 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, Linda S. Wolf, David D. Glass, Roland A. Hernandez, John D. Opie, J. Paul Reason, Jose H. Villarreal, Thomas A. Mars, Thomas A. Hyde, John B. Menzer, Jack C. Shewmaker, and Lee Stucky, and nominal defendant, Wal-Mart Stores, Inc.

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THE COURT: Good afternoon, everyone.

I take it we have not reached agreement on anything?

MR. GRANT: That's correct, Your

Honor.

THE COURT: Okay. Well, I'm going

to -- you all can relax. I'll tell you how we're

going to proceed. Let me say, with respect to the

defendants' motion, it's granted. The case should

proceed in one jurisdiction. One of the judges I

respect most in the history of the world in one of his

later decisions suggested that people file motions

suggesting people call each other on the phone. That

is a suggestion of one of the judges I respect the

most in the world. He's not a judge anymore. I don't

believe any other judge of this court has found it to

be a useful device. We are happy to do our job. I

say this as an issue of Delaware law. The federal

courts have a traditional modifier in terms of in

front of them that's called the overburdened federal

courts. I think every chief justice -- I believe

Chief Justice Marshall, he was quoted at -- when he

was riding circuit and sharing a bed with a fellow

justice as saying -- talking at first about the

overburdened federal courts -- so they're always

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overburdened. Courts that are overburdened, people

should stay in their lane. Frankly, if there's an

issue of Wyoming law, I'm happy to defer to Wyoming.

I would hope everybody would stay in their lane, to

the extent the motion to proceed in one jurisdiction

is granted.

Now, the defendants have to actually

do what they always traditionally had to do, which is

pick a jurisdiction, person up, and file a motion to

stay in the other jurisdictions. But I will just say,

I do not find helpful having parties just send me

something to tell me to call somebody. It may be

helpful to somebody. But again, I don't want to speak

for all my colleagues. I don't think that generally

we find it useful. The defendants kind of have to

pick -- I'm certainly happy to talk to my judicial

colleagues at any time, once proper motions have been

filed and all that kind of good stuff. So that's it.

With respect to the other thing, both

of the current motions are denied. Let me explain

this unusual ruling. But they're both denied. There

is nothing about this case that requires expedition.

There is everything about the context of this case

which requires great care and pleading. I have read

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both of the complaints. I do a very good job of

reporting on already public facts about the fact

that -- there's certainly a good case to be made here

that there were -- that you'd have to accept as true

that improper payments for purposes of this -- of a

pleading standard -- that improper payments were made

by executives of Wal-Mart in Mexico. As the lawyers

who know their Delaware law realize, that's some

distance away from giving you grounds to plead out a

Caremark claim. Belatedly, one of the -- it's

actually somebody who had to join the party because of

everybody else's rush, which is somebody has been

invited to play on one team who has a relatively

modest number of Wal-Mart shares, in part, I think,

because of the success of their law firm and in

getting good results and the fact that that party

actually filed a books and records action.

Now, I'm probably the last judge in

any position to ever say that people should file what

I thought was our Supreme Court's dictated order,

which is file books and records first and then file a

complaint. Since I got reversed on that -- I thought

that was the rule. Like you kind of picked. You no

longer had -- and I got reversed in a federal case

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where a federal judge who had dismissed two complaints

sent somebody something in litigation to me. I didn't

really understand that. Although it was not mentioned

in the Supreme Court's reversing position, the federal

rules have been very consistent, like Delaware, when

you file a 23.1 complaint. You're not allowed to get

discovery in aid of it. Until you're determined to be

able to proceed with your complaint, you can't get

discovery. Well, end running procedural rules of the

nation didn't seem like a proper purpose to me, but I

now understand it's a legislative issue. It's

certainly never seen as a proper purpose in Chancery

that you end run our own rules. But I'm not sure,

after that case, that I can stop this.

What I am sure of is the following. I

don't know why the plaintiffs would ever wish to

proceed -- either one of the contending groups would

wish to proceed to defend either of the extant

complaints. If you think it's just okay to do a

cursory pleading about an independent director and say

that, based on a New York Times article, we think that

they didn't master the distinction between how certain

investigations are done -- I mean, go back and read

Caremark. Caremark sets up an excruciatingly

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difficult standard. This is exactly the kind of

nonexpedited case where actual stockholders, people

who actually cared about the outcome, would wish to

investigate by way of a books and records examination,

take a sincere look at the books and records and file

the strongest possible complaint that you could. Got

no idea why anyone would rush off having read the New

York Times and decide that that's a good way to state

a Caremark claim.

So now I do have a couple factors that

should give me heart; right? Two institutional

investors with a big number of Wal-Mart shares. One

has been involved in corporate governance activities

directed at Wal-Mart for a few years and directed to

them around this issue. That seems like a good thing.

From what they say, they reached out to the other

institutional investor and were slapped down.

The other institutional investor,

which has a lot of shares, wrote me a document on

May 25th saying appointing a co-lead plaintiff would

also complicate this litigation. Has a heading, no

less, a heading, "Additional lead plaintiffs are not

needed." But that institutional investor that has the

second biggest stake was unwilling to work with the

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institutional investor with the biggest stake?

Neither the lawyers for the two biggest shareholding

plaintiffs nor the general counsel have provided me

with one high-minded reason to support their proposed

structure. By "high-minded," I mean a structure that

would commence itself as being in the best interests

of the stockholders of Wal-Mart.

For example, it would make perfect

rational sense for me for CalSTRS and the New York

Funds to say, "We want to be colead. We have over

10 million shares. We don't want to deal with a bunch

of people without much." That would have made a lot

of sense to me. Might even have made sense -- by the

way, neither one of us filed a books and records

action, and we looked at each of our complaints and we

read Stone v. Ritter and some other cases recently and

it doesn't cut it. And maybe these folks filing the

books and records -- and maybe they actually know

something and we ought to use them, because they

actually thought of something we should have thought

of when we rushed off to court for no apparent reason

in an action that seeks only monetary relief and in

which the underlying bribes, I believe, took place

during the second Bush administration? But no. For

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reasons that none of the affidavits shed light on,

neither of these funds, which are supposed to be

fiduciaries for ordinary people, talk to each other.

One of them couldn't have an additional lead plaintiff

but then has one.

So as of now, I have no basis to

approve either. I'm not going to make up my own --

and I understand there's difficulties. No one likes

it -- there's -- people have said to the Court, and I

get -- I've heard both perspectives. "You need to

encourage us to work with each other." And then

there's the, You should just decide." As many of you

know, I've recently decided several of these. Just

picked. I had no problem.

I think you should talk to each other.

It's stupid not to talk to each other. It's

especially stupid when nobody has any material

advantage on shares and you're all just talking about

how great you are. Because I'm not -- I don't want to

say that I'm underwhelmed, but I'm certainly not over.

I'm not sure whether whelmed is a term.

You know, put it this way. I'm not

going to get in -- I'm not looking at you all and

saying, "You know, man, I'm going to get in there with

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Kobe and say it's not this current Olympic team that's

not the dream team." It's you guys. It's the

plaintiffs' lawyer in the Wal-Mart case. You just

kicked bootie. None of you do disclosure only

settlements. None of those nominal figures I see, all

of those were hard fought pure dollars on the table.

They're not anything -- if you look behind, it's a

little more gimmicky. I mean, maybe I'm whelmed but

certainly no O in front of it.

In some of these cases where nobody

has anything -- I mean, one of the questions I

asked -- one of the persons who wanted to be lead

plaintiff, I got to tell you, why does anyone with 100

shares want to be a plaintiff? At least that person's

not an institution. One of the odd things that we

have in the new era, honestly, is the old model of

being Elliott Weiss before he joined the plaintiffs'

bar. The idea was, as I recall it, you know, you were

going to have Fidelity and Vanguard and these big

holders come in and do litigation, and therefore the

only litigation you would have was when it was real.

And I had a case recently where I had three

institutional investors. So I should have been really

cool. I should have known that litigation needed to

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be brought and at an individual plaintiff. Individual

plaintiffs -- you only had like a few hundred shares.

Turned out she had more shares than the three

institutions who were suing combined. Kind of hard to

understand how pension investors where you want, okay,

my fund has 73 shares, I want the scarce fiduciary

resources of my fund board filing suit over that case?

Really?

Now here we've got a couple pension

funds with some real investment in Wal-Mart. You

might expect that, given that Wal-Mart is a Fortune

100 company. They have got a lot of shares. Why

would they rush to court? Is the rush to court over

them or is it about the lawyers? Even when you all

talk about the careful selection process, I don't

really necessarily want to get down into that. It's

really not my desire to learn about the magical

mysteries of life, at least not those.

The structures that are being proposed

make no sense. The other thing is, let's stop. One

of the things I will say, one of the first books I got

was "Meet Martin Luther King, Jr." Both my

grandmothers worked, my mom works and my wife works.

We are not going to politicize counsels' selection

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process by everybody telling us about their political

views at their firms, who owns their firm. Do you

really want to put before us who actually owns your

firms, what stake you get, all the economics of that?

I mean, there's just some really silly stuff in these

briefs. And I say this -- I believe in equal rights

for everybody. We're not going to start having this

be a minority or woman-owned firm process. Again,

we'd have to look behind that, because there are a lot

of firms structured differently that have a woman

partner. I don't know what it means for a firm to be

woman-owned. Does that mean there's only one partner?

Because I believe one of the woman-owned firms is

being touted, a. Bunch of the lawyers in the case are

men or maybe they just have traditionally male names

and they're actually model. Usually it would be, if

your name was James and you were a woman, you would

probably be walking a runway rather than at a podium

in stockholder cases. So it's a little unusual

outcome.

Again, I'm perfectly happy to

appoint -- make a decision when I actually have a

proposed alternative that makes sense to me. I

suppose the New York Fund could say, "Well, ours is

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clean. You didn't file any books and records action.

And I don't know how you selected counsel." Again,

I'll go back to the whelmed point. So you can all

think about it. I got no problem -- I'm not slowing

this case up in the sense of there's nothing happening

here right now and that ain't the Court's fault.

Frankly, it isn't the defendants' fault. You really

don't want to have your motion to dismiss assessed on

these complaints, and you say as much. Because you

don't have -- you don't even -- I don't know what you

did to look at the Caremark standard, seriously,

because it is -- it's a very different thing to say

that a big corporation had people who engaged in

illegal conduct and then to take away in the name of

the stockholders the right of the board to address

that.

Remember, there are regulators who

deal with things like Foreign Corrupt Practices Act,

FDA. They actually work for the public. In a case

like this, when you sue derivatively, you're suing on

behalf of the investors of the company because the

company's been harmed. And you've got to somehow take

that away from -- again, I haven't focused on it.

Wal-Mart's obviously a company that is controlled by a

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controlling stockholder group. But you have to look

for purposes of demand excusal. Even when you've got

a controller, you've got to look at that board

carefully and you've got to count them in number.

You've got to find a reason for there to be board

level problems in considering a demand of board level

liability issues, and those are often difficult to do

because independent directors, if they try and are

acting in good faith, they get credit in the law. And

people who are there day-to-day as managers at

far-flung enterprises sometimes do things which are

not sanctioned officially. People can debate whether

Caremark is the right standard or not but it's the law

of our state. Everybody knows it's a difficult

pleading standard.

And so what is the advantage to

investors? Again, that's the point. I get the

advantage. I get the whole point of, if I don't get

into court, some judge somewhere is going to penalize

me because I wasn't in the first filed Olympics. I

actually -- the way I look at it, I think most of my

colleagues here look at it -- I don't view a person

that files for books and records as being behind. I'm

toying -- and I think I've said this before -- but I

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always think this all should be -- in a nonexpedited

case there should be almost a presumption that, if you

file first, you are inadequately suited to represent

other investors. Because if you file in a

nonexpedited case the quickest complaint, you've often

filed a sloppy, hastily written complaint that does

not consider the legal standard that you have to meet

for the complaint to be sustained. Why would you want

to file a weak complaint when you can file a strong

one, when you can investigate and get the facts to

file a sustainable complaint and, rather than do that

you rush off to court? The question has to be asked:

How does that serve the interest of the investors in

the company that you supposedly represent? And if the

answer is, that's the only way we get control of the

case, well, again, what's that about? And what does

it mean to get control of a case when you put it in a

weak place where the investors are -- maybe they get a

weaker settlement; right? The defendants won't engage

with you because your complaint is so weak that they

have got a high hand, or it just gets dismissed. It's

just a hard thing to understand -- and this is a good

example of a slowly unfolding thing -- serious events;

right? This is a very important thing that happened.

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And it could be a very serious wrongdoing at issue.

But it didn't happen yesterday. There's no request

for injunctive relief. And more energy has been spent

by the dueling plaintiffs over who gets to be lead

counsel and lead plaintiff than was spent

investigating and writing the complaints.

And I would have thought -- I'll

finish with this -- this would have been the ideal

case for two big holders to come in with. One, again,

I don't really understand why CalSTRS maybe and

New York Funds didn't file jointly a books and records

case. Could have been a really good strategy. Come

in, jointly file books and records case, have over --

what is it? --I forget -- 10 million shares. It's a

lot of shares. Think anybody in this court's not

going to be aware that you filed a books and records

case, get 10 million shares? A bunch of people file.

Mr. Pinsly, to pick on him, he's got 100 shares. He

wants to organize the thing. "I'm going ahead, Your

Honor. There's this books and records thing, but with

the people who own 10 million shares. Let's lock and

load and file the Pinsly complaint."

If you think we really did fall off

the vegetable truck just repeatedly, then worry about

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that. If you think -- I don't think I ever fell off a

vegetable truck and I don't think any of my colleagues

did. Again, if I have 10 million shares and we have

two of us, we've worked together, we can pick the best

darn counsel we want. If there are smaller folks,

fine. We're not really worried about you in terms of

presenting an organizational structure. What CalSTRS

said about, you know, at some point you've got to play

with the team, it's got to be a reasonable settlement.

That makes sense to me.

So what changed? Right? And what I'm

saying about the court is, we want people to consult.

We do. Does that mean that we're saying everybody's

got to be on some committee -- the subcommittee?

We're not like in the wake of the financial crisis

where we couldn't -- what was very clear is you'd have

to still have the one regulatory board that does the

futures and stuff and the SEC separately. Because

what was very clear is, if you only had one of them,

you could potentially eliminate committees of

jurisdiction in the congress? We're not like that. I

mean, we don't need to have 17 layers of

subcommittees. I've always had that explained to me.

Liaison counsel versus lead counsel.

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Come in with structures. You've heard

enough from me today. I actually don't -- I've read

everything you have to write. It doesn't make any

sense to me. And I'm not going to do something that

doesn't make sense and I'm not going to make up my

own. And since everybody's told me that they're

essentially waiting for the complaint that will come

with the books and records, I'm not sure what I'm

supposed to be doing. I mean, in a weird way I'd be

picking counsel before I even have a pleading anyone

in the room wants to defend. And that pretty much

says it all. When you have both groups saying,

really, we're waiting for somebody else's complaint

or, at best, the one group that kind of got left

out -- again, it's bizarre to me, the coalitions. Of

all the mysteries in the world I want to learn about

it's probably not these.

But even the group that left out

basically said, I know, Your Honor. They're going to

have to give us all the same books and records as the

party who actually filed the books and records case.

Well, I'm not sure why that's so. I'm not actually

sure. And I think federal judges have actually done a

fair amount of this kind of equality, which is why do

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I care about these people filing books and records.

This person filed the first complaint. They read the

Wall Street Journal first. They were up early. They

saw CNBC. They were watching Faber. They had a

letter. They Xeroxed the thing and they got it in

first. These other schmucks who actually filed a

books and records case, you know, fought with the

defendants about it. Got 17,000. Why should they get

any credit? Just give them the box. That logic

doesn't make any sense to me at all. I don't know

why, if you went off and hauled off and filed your own

indefensible complaint, why you get to free-ride over

people's actions.

Even our Supreme Court's most recent

decision on this said the preferred order is books and

records first. But I have both groups here in

breathless anticipation of the books and records

request being fulfilled so that they can actually

write a complaint that might satisfy Caremark. So

when that all happens, you can all come back to me and

you can ponder whatever these words -- they may be

totally worthless. I would urge these two big funds,

which apparently seem to purport to have a real

interest in this situation, to really reflect on what

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went down here and read your own papers, and think

about it from the standpoint of someone who might be a

retiree who you supposedly represent and think what

they would take from your papers about what you're

doing here and why and how they would understand the

inability of your two funds to cooperate in their

interest.

I think I'm a fairly skilled reader of

legal prose. You know, I get to see all the prior

to's, and the impacts as a verb all the time. I've

reread -- I've read and reread your stuff. I've

pulled the affidavits again today and had a look at

them. It's some sort of log-rolling. You know, in

politics log-rolling you often see the -- okay.

There's a corn to ethanol research thing at the blank

midwestern university. You see that. And then

there's a new train station in somebody else's city.

So, you know, it may not be pretty, but you can kind

of see what the log-rolling brought home to the

constituency. Here CalSTRS and the New York Funds

supposedly had the same constituency, and so do all

the plaintiffs supposedly. And the problem with it

is, I can't see a train station. I can't see an AG

research thing. I can't see anything in it except

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something involving my favorite profession and certain

people's interest in it as to how these two proposals

got going together, except with, as I said, the idea

that, well, heck, we kind of need the books and

records. So the people who are actually seeking them

should get a thing.

I'm not going to set any deadline.

Before you all file any motions, you need to talk to

the defendants and to each other and to try to propose

how we go forward. I would suggest we finish up -- I

think there were some preliminary discussions about

the books and records and about what they would

involve. It would strike me as useful to get that

concluded. And maybe we've learned something out of

this. Maybe we haven't. And we'll see where we are.

MR. GRANT: Your Honor, may I address

the Court for a moment?

THE COURT: Mr. Grant, in terms of

your intervention motion, I guess I didn't address

that. I don't know that you need to intervene, but

it's up to you.

MR. GRANT: As you know, my client,

the IBEW, doesn't have a complaint because we have the

220. What we were trying to do was every game has to

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have --

THE COURT: What I'm sending a message

is, I don't think you should feel like you're behind.

MR. GRANT: We appreciate that. I

just wanted to comment briefly and we'll be working

out the 220 documents. I guess whoever makes copies

of board minutes has been on vacation the last five

weeks. I'm sure Mr. Wolfe will see if he can get them

moving. So that's something where obviously we want

some time. We want to put --

THE COURT: Mr. Wolfe would have

been -- Mr. Norman would have been disappointed in you

if you didn't take at least one shot.

MR. GRANT: I had promised them

actually in advance and forewarned them that it was

coming. They knew it was.

Anyway, but a couple of responses to

some of the points you made. Please don't

misunderstand, we're to quote the second George Bush:

misunderestimate. The dialogue that has taken

place -- and just because a resolution wasn't reached

doesn't mean that there wasn't significant dialogue.

You know, Your Honor says I don't want to get into the

weeds and therefore the weeds weren't presented to you

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by either of the two large or superlarge institutions,

because I think they were both advised that Your Honor

doesn't want to get into the weeds. There may be very

specific valid reasons that Your Honor doesn't want or

need to know about which will cause the two of them to

say that they really choose not to work together. And

so it's not from want of trying. It's, you know --

THE COURT: Nobody views as weeds

high-minded philosophical disagreements about how to,

you know, best advance the interest of Wal-Mart. I

think what we're talking about is, you know, those

things have nothing to do with, frankly, the

structural -- those things weren't even hinted at.

MR. GRANT: I hear Your Honor. What

I'm suggesting is that I appreciate -- and based on

much experience one could easily reach the conclusion

that it's a battle among the attorneys. You know,

there certainly may be some of that. What I want Your

Honor to understand is there may be some of those

philosophical differences and other issues which cause

the two large folks to say, you know, we just can't

agree. Your Honor made the political analogy. I

think it's like John Boehner and Harry Reid each

saying we can sit down and talk, but in the end, when

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we come back, we both represent the whole country but

we can't seem to quite deliver what needs to be

delivered.

THE COURT: If CalSTRS and the

New York Funds are as far apart as Mr. Boehner and

Mr. Reid, that might come as a surprise to the

corporate America who has dealt with them. But I get

you. I'm just saying the papers don't -- that has --

I can only deal with the papers I'm given.

MR. GRANT: Understood, Your Honor.

THE COURT: And the coalition -- as I

said, I understood the inclusion of your firm because

of the books and records feature. I don't think

anybody wished to stand on the existing complaints.

But the departure in other areas and others -- again,

you know, if -- it would have made more sense to me

for CalSTRS and the New York Funds to have it on and

say, honestly, nobody here has enough of a stake

except us. We're going to have a clean fight about

it. Everybody wants to encourage consultation among

people. That is not -- we're not talking about vote

counting. And I think that gets lost.

The reality is, this is going to be an

awkward case for anybody to litigate, if there is a

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really big holder, if the two big holders are a carpet

at each other. In a case like this, the primary

consultation ought to happen among the big dogs.

MR. GRANT: And I get that. And I

will tell you that the inclusion and the concept of

the committee as a whole and all that is really in

response, I think, to the plaintiffs' bar in general

in Delaware perceiving from the Court that you want a

policy of inclusion. And in fact, I believe that was

in all the papers that Your Honor got, a big

discussion that seems to become one of the hurt

factors and I don't even see it in that opinion that

inclusion is in. So we have tried to do that. But of

course, in these structures the more minor roles

certainly are more minor roles.

THE COURT: The Court obviously -- if

everybody can -- to quote the dearly departed,

everybody can get along; right? That's ideal.

Especially because, as I've said to many of you, the

world moves on. And often the position that you're in

today, the position of strength, the person you're

dealing with, if you deal with it with grace when

you're in a position of strength, it might come around

to you when you're the one in the weakest position.

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I think where the Court has been most

concerned about the inclusiveness factor, Mr. Grant,

is where the logical coalition of the people who have

the most hurt game -- to quote the HIRT game -- when

there's no coalition between them, and that what

everybody is doing is saying, I got three people who

have between them 543 shares. I've got them on my

team. And now the second largest or, in this case,

the first largest stockholder is not on the team.

That's when you get -- I know it's complex. I think

the Court's message has been, just quite simply, as in

any other case, any other matter in the law, you're

not supposed to bring a dispute to the Court until you

know you have a dispute.

MR. GRANT: That's the one thing I

think we can all agree on.

THE COURT: That has not always been

the case. I filed my first three complaints, now I

move to consolidate. Oh, I win. You know, it gets --

and the weakest plaintiff -- the defendants try to

pick the weakest plaintiff and give them expedited

discovery.

MR. GRANT: Right.

THE COURT: But what I'm saying is,

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I'm open to anything. I don't want to sit here -- I

don't view myself as being indecisive. I have denied

both your motions. And honestly, if that affects the

jurisdictional thing, that's on you all. I'm not

going to make up a leadership structure.

MR. GRANT: Your Honor, that is one of

the things the Court should think about. Not in

granting the motion. We're beyond that. As we think

about these things and kind of develop thoughts, one

of the problems is, if everyone in Delaware did what

we did, which was file a 220 action or 220 demand so

that there was actually no litigation in front of this

Court, I'm not sure that a federal court in Arkansas

wouldn't move forward and say, "Okay. Game on." And

so I do understand why some people feel the need to

file quickly.

THE COURT: I will say this. I think

in my experience, the federal courts have generally

been the easiest to deal with because they're true to

their word about being overburdened and because

federal judges get plenty of psychic satisfaction from

a variety of different cases. When the plaintiffs

before them are asked, are you really standing on this

complaint and saying, well, not really, I'd like to

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get books and records, or I'd like to do this and

that, my sense is, you know, defendants -- it's really

up to the defense bar. The defense bar is going to

have to be more aggressive. Maybe they want the

federal court to go first and they say to the

plaintiff in this, "Are you sticking by this

complaint? This is your one. We'll be happy to

litigate it here." They get one complaint, Your

Honor. They chose to haul off and file newspaper

reports.

MR. GRANT: That's the weird thing.

What do you do in my shoes when you've made a 220

demand and say, "I don't want you to decide that

complaint"?

THE COURT: I think all of you on the

plaintiffs' side of this room, the Supreme Court said

clearly that, if there's going to be a fix to 220, it

has to happen by the counsel. I think getting some

statutory dignity around that ordering issue, which I

think I've got to say, every member of Chancery

believed it was already settled law that, once you

filed a plenary complaint, you couldn't trade around

the discovery thing. Having something in the law and,

again, making clear for our purposes -- I consider --

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I consider a books and records action -- first filed

matters. I'd give that one credit. Somebody filed

the right action. Again, if it's not expedited, if

there's something -- you know, if the ship of state is

leaving the harbor and you're seeking an injunction,

but we have a messy legal system in the United States.

There's plenty of courts and we can't solve it today.

MR. GRANT: Understood, Your Honor.

THE COURT: If you wish to intervene,

do you wish me to -- you still wish to intervene?

MR. GRANT: No. I'd like to withdraw

that. Obviously what I really want is the 220

documents and at some point we will file a complaint

when I --

THE COURT: Withdraw every other

motion. The motions for lead counsel structure are

denied. The motion to proceed in one jurisdiction is

granted.

Do you want me to certify that under

54(b)?

MR. NORMAN: No, Your Honor.

THE COURT: Are you sure? There's no

reason for delay, is there? We all agree in the room

that we should proceed in one jurisdiction.

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35


MR. NORMAN: Just so the record is

clear. We have moved to stay in favor of Delaware and

every other jurisdiction.

THE COURT: I applaud that. Not --

I'm not saying I want my good judicial colleagues and

others -- I'm not applauding that you moved in favor

of this jurisdiction. I'm applauding that you made a

choice. What I'm saying is, I think -- and I think I

do think most of us feel this way. Make a choice.

Then, if there's something to do, we are always

willing to talk to our colleagues and we're always

willing to do our job.

Does anyone else have anything else to

say? Are you enjoying the 100-degree heat.

MR. FOX: Good afternoon, Your Honor.

My name is Frederic Fox. I represent the New York

Pension Fund. I'll be very brief. The New York City

Funds from the outset have been willing to work with

CalSTRS. I agree with Your Honor. I think that makes

the most sense. And I do not think there are any deep

philosophical differences here that would go to the

interests of the shareholders. So we will make every

effort to continue those discussions and present the

Court with a proposal.

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Thank you.

THE COURT: Again, you all take these

thoughts into account for -- if you don't think

they're worth anything, that's fine. I respect that,

too. I know I have thoughts that I don't even agree

with myself.

I do think the ordering of this,

though, is -- again, I don't wish to disadvantage

anybody here in terms of the procession of this case.

It's clearly Delaware law case. It raises interesting

and important issues. This forum is ready to proceed.

It makes the investors of Wal-Mart best served by

having the strongest possible complaint put on the

record. I will have very little understanding of the

need to come back and fight about lead counsel

structure until the books and records are gotten and

there is a complaint based on it.

It would seem to me, you know, you all

ought to work together, get the books and records, put

the strongest possible complaint on the table, have

some additional conversations and perhaps the

disagreements will go away. I don't wish to prejudice

anybody in these discussions by saying anything. I'm

saying I'm open to any other proposal that's made and

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I will make a firm decision. But the natural order of

things here is, there's nothing -- I'm certainly not

going to jump the obtaining of the books and records

and all that stuff by setting up a leadership

structure. If everybody agrees, that's fine. But if

you're not in agreement, I just don't get why I'm

going to clear my schedule for that. It just doesn't

comport with any sensible -- we're not going to move

anywhere; right? We have a leadership structure

without a complaint that you're willing to defend.

So the psychic -- I do -- you know, I

do understand the need to have national leadership in

advance of things for future arising events. But I'm

not going to burden anybody, including the defendants,

having to be here and witness it, with scheduling

something just for the sake of scheduling it.

MR. GRANT: Your Honor, no problem.

We didn't get to do introductions in

the beginning. Your message was received loud and

clear from our group because the general counsel of

CalSTRS, Brian Bartow, is here right at counsel table.

I don't even have to deliver -- the message has been

delivered.

THE COURT: Mr. Bartow, usually your

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38


lovely state would have warmer temperatures than us.

I apologize for the 100-degree heat. But you'll get

to experience -- this is the real Mid-Atlantic

feeling, and you get to wear your white shirt and

everything and dark suit and walk down the street. In

the old days, Mr. Wolfe, people would wear seersucker.

The seersucker has declined.

MR. WOLFE: Your Honor thinks I have

the most knowledge of the older days?

THE COURT: He's actually -- his hair

is actually all -- it's actually jet black. But for

gravitas purposes and just to be debonair, he does the

salt and pepper thing. He does the coloring in

reverse kind of deal.

You don't own any seersucker?

MR. WOLFE: No.

MR. GRANT: I actually think he should

wear a sweater so we can call him a wolf in sheep's

clothing.

THE COURT: On that comedic point,

thank you all, and I'll wait to hear from you all at

the right time.

(Court adjourned at 2:58 p.m.)

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39


CERTIFICATE

I, DIANE G. McGRELLIS, Official Court

Reporter of the Chancery Court, State of Delaware, do

hereby certify that the foregoing pages numbered 3

through 37 contain a true and correct transcription of

the proceedings as stenographically reported by me at

the hearing in the above cause before the Chancellor

of the State of Delaware, on the date therein

indicated.

IN WITNESS WHEREOF I have hereunto set

my hand at Wilmington, this 17th day of July, 2012.

/s/ Diane G. McGrellis ----------------------------

Official Court Reporter of the Chancery Court

State of Delaware Certification Number: 108-PS Expiration: Permanent

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Appendix B

Board Members on

May 31, 2012

Allegations in Complaint Regarding

Actual Knowledge of Alleged

2005-06 Events in Mexico

Allegations in Complaint Regarding

Imputed Knowledge of Alleged

2005-06 Events in Mexico

Other Allegations in Complaint

Unrelated to Alleged 2005-06

Events in Mexico

Aida M. Alvarez

James W. Breyer Because Breyer served on Committee

on Strategic Planning, he “would

have inquired whether Wal-Mart’s

exponential growth in Mexico was

being accomplished in compliance

with the law.” (¶ 224.)

Because Breyer served on the

2005/06 Board he was “either

directly informed of the wrongdoing

or [was] informed through the proper

operation of the Board’s governance

and the Company’s reporting

systems.” (¶ 278, see also ¶¶ 152,

261.)

“The Director Defendants were

responsible for the blatantly

inappropriate decision to shift control

of the investigation to Mr.

Rodríguezmacedo, a primary target

of the investigation. Though Mr.

Scott gave the order, the Director

Defendants were aware that Mr.

Halter had uncovered significant

evidence of wrongdoing by Mr.

Castro-Wright and Mr.

Rodríguezmacedo. Therefore, the

“Each of the 2005-06 Director

Defendants knew about this

high visibility whistleblower

complaint that forced the

resignation and disgrace of their

colleague on the Wal-Mart

Board, and each of these same

Defendants knew that the

adequacy of Wal-Mart’s

protection of its whistleblowers

was at issue.” (¶ 208.)

“[E]ach of the 2005-06 Director

Defendants were certainly

informed . . . about the

complaints of angry

institutional investors”

regarding “ineffectual internal

controls” in the wake of the

Coughlin scandal. (¶ 219.)


2

transfer of the investigation to Mr.

Rodríguezmacedo could not have

happened but for the Director

Defendants’ acquiescence in that

decision.” (¶ 176.)

M. Michelle Burns Burns served on Audit Committee

from 2003-06 (¶ 28), and must have

received the reports that the Chair of

the Audit Committee (Hernandez)

was receiving from Halter, because

Hernandez was “obligated to share

Mr. Halter’s reports with the other

members of the Audit Committee.”

(¶ 135; see also ¶¶ 10, 265.)

Because Burns served on the 2005/06

Board she was “either directly

informed of the wrongdoing or [was]

informed through the proper



systems.” (¶ 278; see also ¶¶ 152,

261, 265.)













Burns served on Audit

Committee in May, 2005, when

investors sent letter to Chair of

Audit Committee (Hernandez)

demanding stronger internal

controls in wake of Coughlin

scandal. (¶ 212.)















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James I. Cash

Roger C. Corbett

Douglas N. Daft Because Daft served on the 2005/06

Board he was “either directly






261, 265.)































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Michael T. Duke “[O]n October 15, 2005, a Wal-

Mart attorney sent Mr. Duke an e-

mail containing a detailed

description of whistleblower Mr.

Cicero’s allegations. In November

2005, Mr. Duke traveled to

Mexico City to reassure Walmex

officials who were unhappy that

Mr. Halter was investigating the

gestor payments.” (¶ 271; see also

¶¶ 11, 24.)

“In the 2005-2006 period Defendant

Duke’s position was Vice Chairman

of the International Division and he

was charged with overseeing

international operations, including

those in Mexico.” (¶ 271.)

Duke “received an anonymous

e-mail saying Walmex’s top

real estate executives were

receiving kickbacks from

construction companies.”

(¶ 158.)

Gregory B. Penner As the son-in-law of R. Walton,

he “is disabled from making a

decision on a shareholder

demand that exposes his father-

in-law and fellow Board

member to a substantial

likelihood of civil or criminal

liability.” (¶ 276.)

Steven S. Reinemund

H. Lee Scott A “confidential report” concluded

that “[t]here is a reasonable

suspicion . . . to believe that

Mexican and USA laws have been

violated,” and this “information

was reported to . . . CEO Scott.”

(¶¶ 151-152.)

“Scott called a meeting for

February 3, 2006, to discuss

revamping Wal-Mart’s internal

“Halter began making reports to Mr.

Hernandez, the Chairman of Wal-

Mart’s Audit Committee, and the

‘Bentonville management,’

presumably including Messrs. Scott

and Mars.” (¶ 135.)

Because Scott served on the 2005/06

Board he was “either directly



Scott “received an anonymous

e-mail saying Walmex’s top

real estate executives were

receiving kickbacks from

construction companies.”

(¶ 158.)






5

investigations and to resolve the

question of what to do about Mr.

Cicero’s allegations.” (¶ 166.)

“They did not care for Mr. Lewis’s

‘law enforcement approach,’ and

the fact that Mr. Scott convened a

meeting to express these concerns

only underscored ‘the importance

placed on these topics by senior

executives.’” (¶ 167.) “Scott had

spear-headed Wal-Mart’s response

to the evidence uncovered by Mr.

Halter and had inappropriately

decided to transfer control of Wal-

Mart’s investigation to Mr.

Rodriguezmacedo, thereby

ensuring that investigation would

be buried.” (¶ 227; see also

¶¶ 10, 13, 23, 176, 270.)




261, 265.)











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Arne M. Sorenson

S. Robson Walton “[A]s a member of the Executive

Committee during 2005 and 2006, he

was responsible to act on behalf of

the Board between Board meetings, a

managerial role that necessitated his

being aware of the problems at

Walmex, which was Wal-Mart’s

largest subsidiary and accounted for

twenty percent of its stores.” (¶ 273.)

Because R. Walton served on the





R. Walton “received an

anonymous e-mail saying

Walmex’s top real estate

executives were receiving

kickbacks from construction

companies.” (¶ 158; see also

¶ 25.) “Walton suppressed the

email and did nothing to

investigate the wrongdoing,

despite his position of authority

on the Board.” (¶ 273.)

He is brother of Jim Walton and

father-in-law of Penner. “These

familial ties disqualify him


6



261, 265.)


















from considering demand.”

(¶ 274.)















complaints of angry





Jim C. Walton “As a member of the Board, he

received regular reports from Wal-

Mart’s Audit Committee…. Halter

made reports on his investigation to

the Chairman of Wal-Mart’s Audit

Committee, Mr. Hernandez, and

therefore the Audit Committee

reports to the Board included the

information about the serious

allegations against Mr. Castro-Wright

and the extensive evidence of

wrongdoing compiled by Mr.

Halter’s investigation.” (¶ 275.)















7

“Jim Walton would have also learned

about the evidence of bribery at

Walmex from CEO Scott and

General Counsel Mars, both of whom

were directly involved in covering up

the evidence of wrongdoing.”

(¶ 275.)

Because J. Walton served on the







261, 265.)



















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8

Christopher J. Williams Williams served on Audit Committee

since March 2005 (¶ 29), and must

have received the reports that the

Chair of the Audit Committee

(Hernandez) was receiving from

Halter, because Hernandez was

“obligated to share Mr. Halter’s

reports with the other members of the

Audit Committee.” (¶ 135; see also

¶¶ 10, 265.)

Because Williams served on the







261, 265.)

Williams served on Audit

Committee in May, 2005, when

investors sent letter to Chair of

Audit Committee (Hernandez)

demanding stronger internal

controls in wake of Coughlin

scandal. (¶ 212.)

Williams attended a meeting

with investors in wake of

Coughlin scandal and “rejected

an idea of a special committee

arguing with the investors that it

would be ‘redundant’ because

the Audit Committee already

provided an independent voice

for oversight.” (¶ 216.)

After the Coughlin scandal,

Williams received a letter from

investors regarding lack of

internal controls. (¶ 218.)












Linda S. Wolf Because Wolf served on the 2005/06

Board she was “either directly






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101746080.3





261, 265.)





























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