On November 15, 2021, Judge Richard G. Andrews of the United States District Court for the District of Delaware dismissed a derivative suit against a company that provides hardware, software, and services for wireless technology (the “Company”), alleging the Company violated Section 14(a) of the Securities Exchange Act of 1934 and breached its fiduciary duty by allegedly allowing “unlawful and discriminatory practices to proliferate at the Company.” Kiger v. Mollenkopf, No. 21-409-RGA (D. Del. Nov. 15, 2021). Plaintiffs alleged that the Company made misrepresentations in 2019 and 2020 proxy statements about its commitment to diversify its board of directors (the “Board”). The Court dismissed the complaint for failure to plead an actionable misstatement or omission and for failure to plead demand futility.
As the Court noted at the outset of the opinion, “there was no specific event involving the Company . . . that gained public notoriety and precipitated the filing” of plaintiffs’ suit. Instead, plaintiffs—shareholders of the Company suing derivatively on behalf of the Company—alleged that certain statements in the Company’s 2019 and 2020 proxy statements concerning the Company’s efforts to increase diversity were misleading. Specifically, plaintiffs alleged that the company made false and misleading statements or omissions when it (1) stated that the “goal” of its governance committee was to assemble a diverse Board; (2) stated that it would instruct search firms to include racially and ethnically diverse candidates in its pool of candidates for the Board; (3) failed to disclose that the “purpose and effect” of the Company’s proxy access rules and term limits was to “inhibit” the nomination and election of diverse candidates to the Board; (4) misrepresented the nature of executive compensation; and (5) failed to disclose failures of oversight related to alleged discriminatory practices. The Company moved to dismiss, arguing that plaintiffs failed to plead an actionable misstatement or omission and failed to demonstrate demand futility.
The Court agreed with the Company and dismissed the complaint. First, the Court dismissed plaintiffs’ claims with respect to the Company’s statement in its 2019 proxy statement regarding its “goal” of assembling a diverse Board. The Court explained that statements about a company’s “goals” constitute inactionable puffery and are subject to dismissal because they involve “subjective analysis or extrapolations.”
Second, the Court dismissed plaintiffs’ claims with respect to the Company’s statement about its governance committee instructions in the 2020 proxy statement on grounds that plaintiffs did not properly allege the challenged statements were misleading. As the Court explained, “[t]he fact that no minority candidate has been elected to the Board in the last six years does not necessarily mean that the Governance Committee did not include or instruct its search firms to include ‘racially/ethnically diverse candidates’ in its pool of candidates.” The Court further rejected plaintiffs’ argument that the 2020 proxy statement was misleading because the governance committee had no “intention” of nominating racially and ethnically diverse candidates to the Board. Rather, the Court held that the challenged statement did not state or suggest the governance committee would in fact nominate racially and ethnically diverse candidates, only that such candidates would be included in the director candidate pool.
As to the remaining categories of alleged misstatements, the Court dismissed plaintiffs’ claims with respect to the proxy access rules and term limits because it found there is no duty to disclose the “purpose and effect” of proxy access rules and term limits. The Court further dismissed plaintiffs’ claims with respect to executive compensation because plaintiffs failed to identify a false statement concerning executive compensation in either of the challenged proxy statements. The Court also dismissed plaintiffs’ claims regarding the alleged omission of inadequate oversight because it found that plaintiffs were merely “bootstrapping a federal securities claim to a [state law] cause of action for breach of fiduciary duty,” which “is not permissible.” The Court added that plaintiffs had failed to “convince the Court that their Section 14(a) [claim] based on oversight failures fits within the exception where such claims can proceed in parallel to a fiduciary duty claim.”
Finally, the Court dismissed plaintiffs’ breach of fiduciary duty claims because the complaint lacked “the particularized allegations necessary to pass muster under Rule 23.1.” Specifically, the Court held that plaintiffs’ allegations “failed to create a reasonable inference that there is pervasive illegal racial discrimination at [the Company] that the Board either consciously disregarded or tacitly endorsed.” Without such particularized allegations, the Court noted that plaintiffs had failed to adequately allege that the directors “face[d] a substantial likelihood of liability on the fiduciary duty claims such that demand should be excused.”
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Kiger v. Mollenkopf