Starting last summer, a series of derivative cases were filed against boards of a number of public companies alleging that the boards failed to create meaningful diversity in their board rooms and amongst the ranks of senior management. These cases, filed mostly by one law firm and primarily in the Northern District of California, had the markings of becoming a new genre of claim. Two of these cases have now proceeded through their first motion hearing and neither survived intact. Ocegueda v. Zuckerberg et al., No. 20-cv-04444 (the Facebook case) and Lee v. Fisher et al., No. 20-cv-06163 (the Gap case). Although other cases remain pending and perhaps these two will be refiled, judicial reaction so far suggests that other methods to promote diversity may have greater impact.
The complaints have been largely similar, alleging breach of fiduciary duty claims against the directors for failure to constitute a sufficiently diverse board and Section 14(a) of the Securities and Exchange Act of 1934 for alleged false statements about diversity efforts in the companies’ proxy statements. The Section 14(a) claim is the method for creating federal jurisdiction.
The central allegation is that despite the companies’ public statements of commitment to diversity and inclusion, their boards and senior management lack diversity. The case against Facebook also included allegations about the company’s alleged failure to prevent hate speech and discriminatory advertising on its platform.
The Early Rulings
The Facebook case was the first one decided. On March 19, 2021, Magistrate Judge Beeler held that the breach of fiduciary duty claims failed because the plaintiff did not establish that pre-suit demand was excused. In reaching this decision, the court stated that to show that demand would have been futile, the plaintiff needed to plead “actual or constructive knowledge that their conduct was legally improper” and that, in reviewing the actual composition of the board which included two black directors, four women directors and one director who is openly gay, the plaintiff had not satisfied the requirement. These same facts also helped defeat the Section 14(a) claim of misleading statements about diversity in the company’s proxy. In addition, the court found that the statements in the proxy were immaterial as they were inactionable puffery and further, that there was no corporate loss that could be connected to the statements.
Of particular interest to those following Delaware law is that the court also held that the case had been filed in the wrong forum because Facebook had adopted a Delaware Chancery forum selection clause which was applicable to these claims.
The case against the board of Gap Inc. was similarly dismissed on April 27, 2021, on the basis of the company’s forum selection bylaw, which designated the Delaware Court of Chancery as the exclusive jurisdiction for derivative claims or breach of fiduciary duty claims. The plaintiff argued that applying the forum selection bylaw to this case was against public policy as it deprived her of the right to assert her Section 14(a) proxy statement claim, which can be brought only in federal court. Magistrate Judge Sallie Kim rejected the plaintiff’s arguments on the grounds that the plaintiff was not without remedy as she could bring her breach of fiduciary duty state law claims in Chancery Court.
While there are other similar cases pending and these plaintiffs could elect to refile in Chancery Court, these decisions suggest that this group of ESG board derivative cases may well not last for long. But perhaps the more significant aspect of these decisions is that two Northern District of California courts have upheld Delaware forum selection bylaw provisions even when the result was that one of the claims (the Section 14(a) claim) then had no court in which it could be brought.