directors and officers

Well – this took four months. The U.S. Court of Appeals for the Fifth Circuit ordered en banc rehearing of an unsuccessful challenge to the Securities and Exchange Commission’s approval of the Nasdaq Stock Market’s rules concerning diversity of directors on boards of Nasdaq-listed companies. The rules – which a panel of the Fifth Circuit upheld in October 2023 – require listed companies to disclose director-diversity information and either to have a certain number of diverse directors or to explain why not. We blogged about that decision here.

The U.S. Court of Appeals for the Fifth Circuit denied review of the Securities and Exchange Commission’s approval of proposed rules promulgated by the Nasdaq Stock Market concerning the diversity of directors on Nasdaq-listed companies’ boards. The rules require listed companies to disclose director-diversity information and either to have a certain number of diverse directors or to explain why not. The decision in Alliance for Fair Board Recruitment v. SEC held that the rules do not violate the Constitution and that the SEC did not violate its statutory obligations in approving them.

The Nasdaq rules do not require board diversity; they require only disclosures and explanations. But the need to comply with the rules could have the practical effect of increasing diversity on boards of Nasdaq-listed companies.

A federal District Court in Washington recently dismissed a shareholder derivative action by a conservative advocacy group challenging Starbucks’ initiatives relating to diversity, equity, and inclusion (“DEI”). The decision in National Center for Public Policy Research v. Schultz held that the plaintiff did not fairly and adequately represent the interests of Starbucks and its shareholders in launching the challenge and had not pled particularized facts showing that Starbucks’ Board of Directors had wrongfully refused the plaintiff’s demand to dismantle the company’s DEI initiatives.

In an era of politicization of DEI and other ESG-related concerns, the ruling sends a signal that at least some courts will refuse to become “political attachés” in the culture wars and will not involve themselves with partisan attacks on “reasonable and legal decisions made by the board of directors of public corporations.” Decisions of this type should provide some comfort to corporations and boards as they consider how to address those complicated social and workplace issues.

On December 14, 2022, the SEC adopted amendments to Rule 10b5-1 under the Securities Exchange Act of 1934 and added related new disclosure requirements. Rule 10b5-1 provides an affirmative defense to insider trading liability for individuals and companies in circumstances where, subject to certain conditions, the trade was pursuant to

While we are growing accustomed to pandemic-based shareholder actions relating to improper health and safety disclosures or misrepresentations relating to COVID-19 treatments and tests, this month brings a novel variant of the COVID-19 lawsuit. A Universal Health Services Inc. investor has filed a derivative suit against company officers and directors, claiming they took advantage of a pandemic-related drop in the company’s stock price to grant and receive certain stock options that were unfair to the company and its stockholders. The plaintiff investor claims that “company insiders took advantage of the temporary drop in the company’s stock price to grant and receive options to buy the company’s stock at rock bottom prices, thereby showering themselves in excessive compensation.” The complaint alleges that the drop in stock price was “not caused by any changes in the company’s fundamentals or business prospects,” but instead was entirely attributable to the effect of the pandemic on the markets writ large.

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.