(Photo: Mike Mozart of JeepersMedia via Wikimedia Commons.)

A Delaware Court of Chancery order requiring Wal-Mart to release internal documents regarding its directors’ knowledge of alleged wrongdoing by the company’s Mexican affiliate was too broad, the retailer’s attorney told the Delaware Supreme Court last week. But an attorney representing the company’s shareholders said the number of documents it requested was essential for the purpose of pursuing derivative claims against the retailer.

In May 2013, then-Chancellor Leo E. Strine Jr. issued a bench ruling ordering Wal-Mart to provide plaintiff Indiana Electrical Workers Pension Trust Fund IBEW with information about the board’s investigation into whether the Mexican affiliate, Walmex, bribed government officials in order to obtain building permits for desirable locations.

Other Wal-Mart shareholders, including the California State Teachers’ Retirement System and the New York City Employees’ Retirement System, as well as several individual investors, also filed lawsuits in response to the bribery claims. Strine consolidated the complaints in September 2012.

At the time of Strine’s ruling, Wal-Mart charged that shareholders’ books-and-records demand under Title 8, Section 220 of the Delaware General Corporation Law was too broad. The company also claimed a lot of the documents were protected by attorney-client privilege.

Wal-Mart appealed Strine’s ruling in Indiana Electrical Workers Pension Trust Fund IBEW v. Wal-Mart Stores to the state Supreme Court. An en banc court heard oral arguments last week in Wilmington. Superior Court Judges Charles E. Butler and Paul R. Wallace served by designation in place of Strine, who is the current chief justice, and recently retired Justice Jack B. Jacobs.

Mark A. Perry of Gibson, Dunn & Crutcher represented Wal-Mart. He said the plaintiffs’ Section 220 demand is too broad and amounts to a “fishing expedition” for their derivative lawsuit. Perry told the court that the documents from the board investigation that Wal-Mart provided to the plaintiffs are sufficient and Strine should not have authorized the release of records kept by the company’s executives.

“Once you go to the officer level, there is essentially no stopping point,” Perry said. “What Section 220 will become, if this order is affirmed, is full-on merits discovery. The plaintiffs have allegations of wrongdoings and can say we have allegations against Walmex, so we want them all.”

Stuart Grant of Grant & Eisenhofer argued on behalf of the shareholders that they have at least four proper purposes under Section 220 and the document scope is a reflection of each purpose.

“Defendants’ entire appeal is based on a false premise that plaintiffs’ sole purpose in its demand is to establish demand futility,” he said. “It is true that is one of our purposes, but not the only purpose.”

Under Delaware law, Perry said, shareholders pursuing derivative claims have the right to demand books and records related to possible wrongdoing, but they cannot demand such information in order to find other wrongdoing that may be unrelated to the original lawsuit.

“A stockholder has no free-roaming right of investigation,” Perry said. “That is not an interest, as a stockholder, that is protected by Section 220 or anything else in Delaware law.”

Perry added that the documents Wal-Mart provided to the plaintiffs prior to Strine’s ruling were sufficient for the company’s stockholders to investigate the Walmex bribery allegations.

“The only question here is: What did the directors know and when did they know it?” Perry continued. “The Section 220 documents responsive to that request are the original documents. If the court were to read IBEW’s briefs, they would never dispute that [the plaintiffs] have received all the documents that they are entitled to for that reason.”

Grant countered by arguing that the requested books and records are essential for the multiple purposes, including to plead demand futility, before the Chancery Court.

“In our complaint, in paragraph 99, we say that the plaintiffs’ demands for inspection is for proper purposes with an ‘s,’” he responded. “Moreover, the documents identified in the demand letter are essential to those purposes.”

He also accused Wal-Mart of misrepresenting his clients’ claims in their Supreme Court filings.

“Wal-Mart’s counsel makes up a lot of stuff,” Grant added. “Pleadings count and facts count. In your response pleading you say the defendant does not dispute the plaintiffs have stated a proper purpose with no ‘s.’”

Wallace asked Grant what standard the court could apply to create a precedent that it could explain for future companies trying to meet a Section 220 demand. Grant responded that the court doesn’t need an inflexible rule but should review the demand requests on a case-by-case basis.

“I think the court is trying to take on a task that is too great,” Grant said. “You don’t have to come up with a one-size-fits-all rule for every [Section] 220 case. That’s not Delaware law. Delaware law has always been nuanced.”

The justices did not give any indication on when they intend to issue a decision on the case. Under a self-imposed rule, the Delaware Supreme Court typically tries to adjudicate all disputes within 90 days.

Jeff Mordock can be contacted at 215-557-2485 or jmordock@alm.com. Follow him on Twitter @JeffMordockTLI.

This article first appeared in Delaware Business Court Insider, a Legal sibling publication. •