All-Seeing Bylaws Help Block Diversity Suit

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Proskauer - Corporate Defense and Disputes

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.

Late last month, yet another action alleging that a company’s directors and officers failed to instill sufficient diversity within its ranks was dismissed due to the company’s use of a forum selection clause in its certificate of incorporation.  This case was brought against directors and officers of Oracle, and the complaint alleged the defendants “consistently refused to appoint Black individuals and minorities to [Oracle’s] Board and to management positions within the company.”  In addition to the variety of state law claims brought in the lawsuit, including breach of fiduciary duty, the plaintiffs also asserted a claim under Section 14(a) of the Securities Exchange Act.

Like the Gap and Facebook cases, the court found that (a) the plaintiffs had failed to properly allege demand futility and (b) the plaintiffs’ state law claims must be brought in the Delaware Court of Chancery pursuant to the valid forum selection clause in the company’s bylaws.  As highlighted before in this space, companies have begun adopting such clauses in recent years.

Because the plaintiffs declined to serve a demand on Oracle’s Board before bringing suit, the Court first analyzed whether at least 7 of the company’s 14 directors would be potentially liable under Section 14(a), such that they could be deemed interested.

The court found that the plaintiffs failed to plead particularized facts showing that the defendants faced a substantial likelihood of liability.

Perhaps more interestingly, the court held that the forum selection clause in Oracle’s bylaws was binding and required dismissal of the plaintiffs’ state law claims.  Though the plaintiffs argued that the court should not dismiss those claims if it upheld the federal claim brought under section 14(a) claim, the court deemed that argument “unpersuasive” and held that – even though it was dismissing the 14(a) claim – the state claims remained severable.

While the court granted the plaintiffs leave to amend the section 14(a) claim with particularized facts, it remains to be seen whether they will elect to do so.  The plaintiffs appear to have used the section 14(a) claim simply to keep the case in California federal court.  As with other recent cases, that effort appears to have failed.

Check back here for updates on other diversity suits and for any updates on Oracle’s case.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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