LITTLE ROCK — The Arkansas Supreme Court on Thursday revived Wal-Mart Stores Inc.'s attempt to void a former executive's multimilliondollar retirement deal, finding that Arkansas law requires that top executives and corporate directors must divulge misconduct to their employers when negotiating a compensation agreement with them. This includes any fraud perpetrated against the company, the court said.
It overturned a Benton County Circuit Court judge's dismissal of the suit against Thomas Coughlin, a longtime Wal-Mart official and board member who in January 2006 pleaded guilty in federal court in the theft of more than $13,000 in money and merchandise from the company.
Wal-Mart maintains that itwouldn't have entered the retirement agreement, valued at between $12 million and $16 million, if it had been aware of Coughlin's earlier misdeeds.
Writing for the unanimous court, Associate Justice Robert L. Brown found that executives and directors must disclose facts to the corporations when entering self-dealing contracts if knowledge of those facts would lead the corporation to act differently.
A Wal-Mart attorney who argued the case called the decision "a strong statement by the Arkansas Supreme Court about the need for honesty in corporate governance."
"There is a significant amount of money at stake, but this decision establishes an even larger principle: that corporate officers must treat their companies and shareholders honestly and fairly," said Ted Boutrous of Los Angeles.
"The duty of candor is critical," said Charles Elson, a corporate governance expert anddirector of the Weinberg Center for Corporate Governance at the University of Delaware's Lerner College of Business. "It's obvious that you've got to disclose all you know prior to an agreement."
The decision leaves it to a jury to determine if theft occurred, and if so, whether Coughlin in particular was obligated to disclose it. The case now returns to Benton County Circuit Judge Jay T. Finch for further proceedings. Attorneys familiar with the case said attorneys on both sides will seek evidence and question witnesses, and said the case may go before a jury.
William W. Taylor, a Washington, D.C., attorney representing Coughlin, didn't return a telephone call seeking comment Thursday.
The decision is the latest chapter in the nearly 30-year corporate tale of Coughlin, who rose through the ranks under the tutelage of Wal-Mart founder Sam Walton and became the company's No. 2 executive.
Coughlin joined the company in 1978 as director for loss prevention, investigating theft, fraud and abuse by Wal-Mart employees, according to court records.
He later held various positions in the company's management, eventually joining the board of directors. In 2003, he was named executive vice president and vice chairman of the board of directors.
Wal-Mart is the world's largest retailer, earning $11.3 billion in net income on $349 billion in revenue in the fiscal year that ended Jan. 31.
In 2004, Wal-Mart announced that Coughlin would retire the next year, and in January 2005, the parties struck the retirement agreement. The deal included a clause releasing the two parties from future claims for damages, a provision which, in terms of law, is a contract between Coughlin and Wal-Mart.
The next month, however, an employee at a Wal-Mart store alerted the company that Coughlin made personal purchases with a Wal-Mart gift card issued for business expenses. An investigation followed.
Wal-Mart contended in court filings that Coughlin misappropriated at least $400,000 during his last several years with the company, using bogus invoices to pay for personal expenses including hunting trips, a pair of alligator boots and items for his family pets. The company also said Coughlin used Wal-Mart gift cards for personal expenses and that vendors provided him with goods and services that weren't related to company business.
In February 2006, Coughlin pleaded guilty in federal court to five felony counts of wire fraud and one count of filing a false income tax return.
U.S. District Judge Robert T. Dawson sentenced Coughlin of Centerton to 27 months of house arrest and five years' probation, and fined him $50,000 and ordered him to pay more than $400,000 in restitution.
The company sued Coughlin in July 2005, seeking to cancel his retirement package. The suit alone is noteworthy, said Elson of the University of Delaware.
"A lot of times, companies would try to wash their hands of [the matter] and try to move on," he said. "They obviously believe they were wronged and want their shareholders' money back."
Wal-Mart argued that Coughlin's alleged dishonesty forfeited the contract because the company wasn't aware of what he had stolen when the two parties negotiated and signed the contract. Wal-Mart said Coughlin misrepresented himself to the company by not disclosing the thefts. Although the contract included a clause releasing both parties from future claims of damages, Wal-Mart argued that it wouldn't have signed the release if it had known of the fraud.
Coughlin asked the judge to dismiss the matter, arguing that Wal-Mart hadn't shown it had a case for damages under Arkansas contract law.
"Coughlin, for his part, doesn't dispute he breached his fiduciary duty by stealing from Wal-Mart," Brown wrote. "He contends that Arkansas case law does not support Wal-Mart's position that fiduciaries have a duty to disclose past fraud to corporations before entering into an agreement."
Coughlin argued that Wal-Mart could have excluded from the release clause "claims arising from a breach of the fiduciary's duty to disclose but chose not to do so," Brown wrote. In January 2006, Finch dismissed the suit, finding that Wal-Mart hadn't stated a case it could use to throw out the contract.
On appeal, the Supreme Court disagreed. The court found that Arkansas law obligates fiduciaries - certain high-ranking corporate officers and directors - to disclose pertinent facts before striking a contract that could enrich the employee. Therefore, Wal-Mart has grounds to recover damages if the allegations of Coughlin's misconduct and breach of fiduciary duty bear out.
The court ruled that if the company signed the contract with the release clause because Coughlin had concealed malfeasance, the release is invalid and Wal-Mart can sue him.
According to the decision, Arkansas courts hadn't previously ruled whether high-ranking corporate officers and directors must disclose misconduct to the corporation. Wal-Mart urged the Supreme Court to bring the state "in line with the view held by the vast majority of other state and federal courts."
In its ruling, the court maintains that it's not writing new law but merely "giving voice to an obvious element of the fiduciary's duty of good faith" in line with previous rulings of the court in other cases.
Special Justices Janet Moore and Linda Collier filled in on the case for Justices Donald Corbin and Paul Danielson, who recused themselves.
At the Supreme Court, the case is 06-315, Wal-Mart Stores Inc. v. Thomas M. Coughlin.
Front Section, Pages 1, 13 on 04/13/2007