## Facts

- News reports alleged bribery by Wal‑Mart’s Mexican subsidiary and an internal cover-up, prompting multiple stockholder derivative suits asserting fiduciary breaches by Wal‑Mart directors and officers; Wal‑Mart was a nominal defendant.
- One set of stockholders filed a derivative action in federal court in Arkansas without first pursuing a books-and-records demand.
- Another group of stockholders, led by California State Teachers’ Retirement System, pursued a Delaware books-and-records action under 8 Del. C. § 220 for internal documents before filing a Delaware derivative complaint.
- The Arkansas federal court dismissed the Arkansas derivative complaint under Federal Rule of Civil Procedure 23.1 for failure to plead demand futility with particularity.
- Defendants in the Delaware action argued the Arkansas dismissal barred relitigation of demand futility and required dismissal on issue-preclusion grounds.

## Issues

1. Whether a federal Rule 23.1 dismissal for failure to plead demand futility precludes a later Delaware derivative action brought by different stockholders.
2. Whether binding nonparty stockholders to that prior demand-futility determination violates due process absent a showing of inadequate representation.

## Decision

- The Delaware Supreme Court affirmed dismissal of the Delaware derivative action.
- The Court held the Arkansas Rule 23.1 dismissal had issue-preclusive effect on the demand-futility question in Delaware.
- The Court held applying preclusion did not violate due process because the Arkansas plaintiffs adequately represented the corporation and stockholders in the prior derivative action.
- The Court declined to adopt a rule that a first-filed derivative action must survive a Rule 23.1 motion to dismiss before it can bind other stockholders.

## Legal Principles

- In derivative litigation, the corporation is the real party in interest; stockholders sue in a representative capacity, and a judgment can bind other stockholders if due process requirements for adequate representation are satisfied.
- Issue preclusion applies when the same issue was actually litigated and decided in a final, valid judgment, and the party to be bound was a party or in privity; for demand futility, the corporation and its stockholders are treated as in privity once the issue is adjudicated in a derivative suit.
- Due process permits nonparty preclusion in recognized forms of representative litigation (including derivative actions) absent a showing of inadequate representation, conflict of interest, fraud, or similar defect.
- Disagreement with prior counsel’s litigation choices (including not pursuing a books-and-records inspection before filing) does not, without more, establish inadequate representation.
- Stockholders cannot avoid preclusion on demand futility merely by later pleading additional facts or using documents obtained after the first action’s final dismissal.

## Conclusion

The court held that a final Rule 23.1 dismissal for failure to plead demand futility in one stockholder derivative action bars later derivative suits by different stockholders on the same demand-futility issue, so long as the prior action provided adequate representation consistent with due process.


Cal. State Tchrs.’ Ret. Sys. v. Alvarez, 179 A.3d 824 (Del. 2018)