diversity

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Another diversity-based derivative suit was dismissed this week by a federal district court, joining a list of decisions that have rejected similar shareholder allegations.

This most recent decision, from the District of Delaware, dismissed claims alleging Qualcomm Inc. had allowed unlawful and discriminatory practices to exist within its executive ranks.  Though the complaint was initially filed in the Southern District of California, Qualcomm’s Bylaws contain a forum-selection provision designating Delaware as the exclusive forum for derivative litigation, and thus the case was transferred to Delaware in March 2021.

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.

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.

In December, the NASDAQ proposed new listing rules that—if implemented—would require companies to (i) disclose information about the diversity of their directors on an annual basis and (ii) have at least two diverse directors, or else provide an explanation why they do not.

By “diverse directors,” the rules contemplate “one [director] who self-identifies as female and one who self-identifies as either an underrepresented minority or LGBTQ+.”  In turn, underrepresented minorities, as defined by the proposed rules, encompass as individuals who self-identify as: Black or African American, Hispanic or Latinx, Asian, Native American or Alaska Native, Native Hawaiian or Pacific Islander, or two or more races or ethnicities.