Client Alerts
March 25, 2021

Diversity in the Boardroom: A Litigation Update

In a prior alert, we noted that a number of shareholder lawsuits were brought during 2020 in which large corporations and their directors were accused of fiduciary breaches and securities law violations tied to the alleged failure to fulfill companies’ diversity aspirations. On March 19, 2021, in the first ruling on a motion to dismiss in these actions, a California federal court dismissed claims against Facebook and its directors as failing to meet both substantive and procedural pleading standards.

The decision by Magistrate Judge Laurel Beeler in Ocegueda v. Zuckerberg, Case No. 20-cv-04444-LB (N.D. Cal. March 19, 2021), dismissed the federal claims with leave to amend and dismissed the state claims without prejudice to reassertion in the Delaware Court of Chancery. The decision is an initial indication that these suits face traditional hurdles to assertion of shareholder claims. Moreover, it raises questions as to whether the novel assertion of misrepresentation claims regarding corporate discussions of diversity will withstand these tests.

In the Facebook suit, plaintiff alleged derivatively that Facebook’s proxy statement violated Section 14(a) of the Exchange Act and SEC Rule 14a-9 because it included materially false assertions that the company is committed to diversity. Plaintiff asserted that in making these statements, Facebook’s directors ignored, among other red flags, Facebook’s lack of diversity on its board and within its management, and its purported discriminatory advertising practices. In so doing, plaintiff alleged, the directors also breached their fiduciary duties.

In its most significant ruling, the court dismissed plaintiff’s proxy claims on the basis that:

  • Plaintiff failed to identify any actionable false or misleading statements because the court found that Facebook’s statements about diversity were aspirational and not the basis for a securities claim.
  • Plaintiff failed to plead plausible facts about Facebook’s practices that rendered the statements about diversity and inclusion misleading.
  • Plaintiff failed to adequately plead that any assertions about diversity and inclusion in Facebook’s proxy statement, even if rendered materially false, caused any loss to the corporation.

The court also dismissed the claims on the basis that plaintiff did not make a pre-suit demand or plausibly allege that such demand would have been futile. In addition, the court held that the forum selection clause in Facebook’s certificate of incorporation required that any state law claims be brought in the Delaware Court of Chancery and severed those state law claims without prejudice to their reassertion in the Delaware Court of Chancery.

This decision may lead the way for other courts set to address motions to dismiss still pending in comparable cases and to adopt a similar approach to alleged misleading statements related to diversity and inclusion.

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