Recent derivative shareholder suits alleging that tech companies failed their fiduciary duty in not hiring Black board members face high hurdles in court, but could add timely pressure for real action on diversity.
Since July 2, California law firm Bottini & Bottini Inc. has filed derivative shareholder suits in two California federal courts against Facebook Inc. and Oracle Inc.—as well as chipmaker Qualcomm Inc. and most recently NortonLifeLock Inc., filed Aug. 5. The Renne Public Law Group joined in two of the filings.
The complaints landed as the Black Lives Matter movement and ongoing protests over police brutality and social justice have resurged following the death of George Floyd in Minneapolis.
“You can’t ignore the timing and context” of the events, said Kevin LaCroix, an attorney and executive vice president of R-T Specialty LLC, an insurance intermediary firm focused on management liability issues. “The social context puts a lot of pressure on corporations to reexamine past practices” on diversity.
Shareholder derivative lawsuits face both procedural and substantive barriers in moving forward, and tough counterarguments are expected. But the topic of corporate boardroom diversity has increasingly surfaced in legislatures in recent years and lawsuits’ outcomes could advance the discussions.
“Many companies are paying lip service, but now it’s time to actually act on it,” said Alice Korngold, chief executive officer of Korngold Consulting, which specializes in corporate governance and diversity and inclusion.
The suits allege the companies’ boards of directors violated federal securities laws and breached fiduciary duty by making misrepresentations about their commitment to diversity and inclusion on boards and in senior ranks.
“These policies existed on paper, but were knowingly disregarded,” the NortonLifeLock complaint said. The board members’ failure to diversify despite claims to the contrary deceived shareholders and the stock market, the suits allege.
LaCroix said the suits are a new trend in directors’ and officers (D&O) liability suits. Jamillah Bowman Williams, an associate professor at Georgetown Law School and faculty director of the Workers’ Rights Institute. sees the trend growing as more shareholders demand change.
“The public is speaking loud through protests, fundraising, and other activism and people of all ages, races, and walks of life are expressing the need to hold corporate leaders more accountable for their role in perpetuating bias and systemic racism,” she said.
The suits demand a variety of remedies, including current board members’ resignation before the companies’ next annual shareholder meetings to make way for Black directors in their spots.
The suits also call for a portion of executive compensation to be tied to specific goals for hiring Blacks and other minorities over the next five years.
The plaintiffs are seeking current board members to donate their 2020 compensation to charity groups supporting Blacks or minorities in corporate America.
The plaintiffs face significant hurdles in the court proceedings, LaCroix said.
Derivative shareholder suits generally must show they’ve asked a board to remediate an issue before taking legal action. In these cases, the plaintiffs allege such demands would be futile.
“The first obvious move for these defendants is to file a motion showing that because the shareholders failed to make a requisite demand on the board,” the case shouldn’t proceed, he said.
The second major hurdle for the plaintiffs is overcoming the “business judgment” defense, in which companies’ business decisions aren’t questioned by a court so long as they’re in compliance with the standards of care and loyalty that fiduciary duties require, LaCroix said.
“That’s a tough argument to overcome,” he said.
Even without those challenges, the cases are far more likely to end in settlement than a court ruling.
The plaintiffs “aren’t looking to win in court, they’re looking to start the conversation among the shareholders” about corporate diversity, said Peter Rasmussen, a senior analyst in securities law at Bloomberg Industrial Group.
These suits serve to focus their attention on companies that are not doing well in diversifying their leadership, Rasmussen said. “The momentum for change is going to come from the institutional investors,” he said.
Oracle and Qualcomm were recently included in a list of the 20 largest publicly-traded companies without a single Black board member.
Lawsuits or legislative action are more likely to drive change than counting on predominantly white boards to voluntarily give up economic and political privileges, Georgetown Law’s Bowman Williams said.
Gender diversity requirements for corporate boards, such as those enacted in California and Europe, could serve as a model for corporate racial diversity, she said.
Korngold said there’s a “preponderance of evidence” that shows companies perform better financially when they have age, gender, racial and international diversity in their leadership ranks.
She suggested term limits for corporate board members as another potential avenue to bring in more diversity.
“How does a board imagine what’s possible and know what questions to ask” without members with different life experiences? Korngold said.
--With assistance from Andrea Vittorio
The cases are Esa v. NortonLifeLock Inc., N.D. Cal., No. 20-cv-05410, complaint filed 8/5/20, Klein v. Ellison, N.D. Cal., No. 20-cv-04439, 7/2/20, Nelson v. Mollenkopf, S.D. Cal., No. 20:-cv-01417, complaint filed 7/23/20 and Ocegueda v. Zuckerberg, N.D. Cal., No. 20-cv-04444, complaint filed 7/2/20