board diversity disclosures

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After much debate, the SEC on Friday approved a Nasdaq proposal that will require listed companies to adopt several diversity-related measures.  Nasdaq first made this proposal, which requires listed companies to publicly disclose diversity information about their board members and either hire “diverse” members to their boards or explain why they do not in writing, last December.  Under SEC regulations, self-regulatory organizations such as Nasdaq must formally submit proposed rule changes to the Commission.  Nasdaq made some minor revisions to the proposed rule in February that granted smaller boards and newly listed companies some compliance leeway, but the proposal has otherwise survived scrutiny from conservatives, corporate interests, and popular newspaper editorial boards.

The rash of shareholder derivative actions alleging violations of fiduciary duties tied to companies’ diversity measures are continuing to take a beating in the Northern District of California.  We previously posted about the dismissal on forum selection clause grounds of a derivative action brought in that court by a shareholder of The Gap, Inc. alleging the company’s directors and officers failed to instill meaningful diversity within its leadership.  We also reported on a similar suit brought against Facebook, which was dismissed because, among other reasons, the forum selection clause in Facebook’s certificate of incorporation provided that the exclusive forum for derivative actions was the Delaware Court of Chancery.

This week, another shareholder derivative suit was dismissed based on a forum selection clause contained in the company’s bylaws. In November 2020, a shareholder filed a derivative action alleging that directors and officers of The Gap, Inc., an apparel company, had failed to create meaningful diversity on the Board of Directors on within the company’s leadership roles. The plaintiff also alleged that Gap made false statements about the diversity of the company’s workforce, as well as its efforts to increase diversity among its employees.

A shareholder derivative action which had alleged that Facebook’s lack of diversity caused a negative effect on its stock price was rejected by a California federal magistrate judge last week.

The court held that the shareholder plaintiff had not pled demand futility with particularity, as required by Fed. R. Civ. P. 23.1, because she had not “plausibly alleged any facts about the directors’ actual or constructive knowledge . . . their failure to act, or their lack of independence.” Labeling the plaintiff’s allegations as “conclusory,” the court held that the complaint contained inaccurate factual allegations and that the plaintiff “did not plead plausible facts about discriminatory practices,” of the Company. Because the allegations that Facebook’s directors ignored red flags were “contradicted by the record,” and the alleged events occurred before four of the directors joined Facebook’s board, the court held the complaint was unsustainable.