Cisco Beats Board Diversity Shareholder Derivative Suit, for Now

Cisco Systems Inc. is free for now of allegations its leadership made misleading statements about its commitment to corporate diversity, but a federal judge in California gave shareholders permission to fix up their complaint and try again.

The San Jose-based networking giant’s shareholders didn’t adequately plead that the Cisco board of directors “wrongly refused” their pre-suit demand that the company add Black directors to live up to its public statements on diversity, the U.S. District Court for the Northern District of California said.

The shareholder derivative complaint—filed in September 2020, seven weeks after the pension fund behind the suit went to Cisco’s board with its concerns—didn’t argue that the demand request would be futile, according to Judge Jon S. Tigar’s order.

Nor did the complaint acknowledge that the company’s board had “formed a committee to investigate its demand, let alone identify any facts that raise a reasonable doubt” that the board’s rejection was based on a valid business judgment, Tigar said. Cisco added a Black director to its board in January 2021.

The shareholders argued in their response to Cisco’s dismissal motion that there was reason to doubt the independence of the company’s investigation of their claims. But the board’s “ultimate authority” over the demand review committee’s decisions isn’t enough to raise a reasonable doubt about independence, the Tuesday order said.

And contrary to the pension fund’s argument, “reasonable doubts do not arise merely where the Committee comprised two Defendant board members ‘interested in the outcome’ of the investigation,” Tigar said. The allegation that the board “members were ‘fully aware of the charges that the Committee would be investigating’ does not carry any force either.”

Tigar also rejected the shareholders’ claims against the individual defendants. “The aspirational assertions in Cisco’s proxy statements are non-actionable,” and the derivative complaint doesn’t “allege that the proxies were an essential link to a loss-generating corporate action,” the order said.

The shareholders have 28 days to amend their complaint.

Fenwick & West LLP represents Cisco and the individual defendants. Robbins Geller Rudman & Dowd LLP represents the shareholders.

The case is City of Pontiac Gen. Emps.’ Ret. Sys. v. Bush, N.D. Cal., No. 4:20-cv-06651, dismissed with leave to amend 3/1/22.