DEI Policy Disclosure Failures Leaving Companies at Risk of Suit

Public company adoption and abandonment of diversity, equity and inclusion initiatives in the face of President Donald Trump‘s anti-DEI stance has drawn investor backlash, raising the prospect of lawsuits over corporate failure to disclose associated risks to share value.

A high-profile lawsuit against Target Corp., filed by Trump adviser Stephen Miller’s legal group, accused the company of failing to adequately disclose to investors the risk that its 2023 Pride-themed marketing campaign could turn off customers.

A Florida federal judge in December ruled the investors sufficiently alleged the retailer’s disclosures were inadequate, creating a template for making such claims stick. While Target has since shifted toward settlement, Republican-led Florida has joined in the fray, filing its own suit in February.

Since that ruling, consumers and shareholders have chastised companies for revoking, not just invoking, DEI measures, suggesting investor interest in policy changes in both directions.

“With the rise of social media, companies can’t just switch up on their employees, their customers, etc., and not expect consequences,” said Hyewon Han, a director of shareholder advocacy at Trillium Asset Partners in a call about initial proxy season data.

Rattled companies now may want to consider what and how potential risk generally needs to be shared, lawyers say.

The Target cases highlight that “increasingly political and controversial policies like those around DEI and ESG carry complex risks to companies, and that companies need to be thoughtful about how and whether to disclose them,” said Cleary Gottlieb Steen & Hamilton LLP’s Roger Cooper, referencing allied controversies over environmental and social governance initiatives.

“Some companies are presenting a more comprehensive description of risks around DEI and ESG than we have seen in the past, and also highlighting the changing assumptions and expectations of their stakeholders on these issues,” Cooper said.

Corporate Machinations

DEI strategies can refer broadly to campaigns for social awareness, such as selling merchandise or promoting statements in support of underrepresented communities, or narrowly to internal company hiring policies.

Companies should definitely be looking at the Target case, said Joseph Motto of Winston & Strawn LLP, which published a client alert about DEI disclosures on April 28. But there are similar instances where courts have found DEI statements aren’t actionable, he said.

“We think there’s going to be a lot of defenses there for sure, if they’re appropriately identified as forward-looking, companies should be absolutely identifying them as such. We certainly wouldn’t want to scaremonger based on the Target case,” Motto said.

Target’s foot traffic declined after rolling back three-year DEI goals, reports to diversity surveys, and a program to boost merchandise from minority-owned businesses in January, sending its share prices sliding. Walmart Inc.'s shareholders and Democratic state attorneys general called on that retailer in January to explain why it scaled back DEI commitments amid right-wing backlash this fall.

Target and its counsel in the Florida suit didn’t respond to emails seeking comment, nor did the office of Florida Attorney General James Uthmeier. America First Legal Foundation, which represents the plaintiffs among other counsel, declined to comment.

Meanwhile Costco Wholesale Corp. doubled down on DEI efforts in January and garnered near-unanimous shareholder support in rejecting a proposal to cull it. While the wholesaler has retained consumer business, it’s received a letter from Republican attorneys general urging it to revoke what they said were “illegal” policies following Trump’s anti-DEI executive orders.

There are multiple ways companies could face securities litigation if they choose to disclose DEI risks, such as after revelations from the filing of employee discrimination suits or those from states attorneys general, Motto said.

Shareholder derivative actions, which are filed on a company’s behalf against its corporate leaders, “could be even the more frequent route,” he said. “I think it’ll just depend on if you see a major movement in the stock, you’re going to see the direct action. If you don’t, you see other negative consequences, you’ll see the derivative actions.”

Risk Disclosures

The Target decision is broader than DEI, said A&O Shearman’s Lyle Roberts. “The question is whether companies need to specifically disclose their future business plans if those plans might increase the chance that a stated risk will come to fruition.”

He said that “companies haven’t generally understood that they need to provide that type of information in their risk disclosures.”

Shortly before that Target ruling, the US Supreme Court declined to address an investor suit over risk disclosures against Meta Platforms Inc. arising from its feeding data to Cambridge Analytica before the 2016 presidential election. Revelation of the data harvesting caused the social network’s stock price to take a historic plunge.

Risk disclosures gained prominence after the justices reversed their decision to weigh in on that Meta suit. The high court’s determination that it improvidently granted review let stand a US Court of Appeals for the Ninth Circuit split ruling reviving the case claiming Meta presented breaches and improper data sharing hypothetically when it had already happened.

The high court opt out and the December Target ruling “suggest that courts are requiring companies to be more detailed in their risk disclosures, including providing specific information about both whether the stated risk already has materialized and about future events the company has reason to know may cause the stated risk to materialize,” Roberts said.

But the Target case appears to be an outlier, said Tom Laughlin of Scott & Scott Attorneys at Law LLP. There needs to be some intent to conceal to carry securities fraud claims, the plaintiffs’ attorney said.

“Talking about including other people and programs being inclusive, that’s generally not something that companies keep a secret,” Laughlin said. “If they’re doing it, there’s generally not a motive to lie about wanting to be more inclusive.”