Facebook Defeats Shareholder Suit Challenging Alleged Failures In Its Diversity and Inclusion Practices

Sheppard Mullin Richter & Hampton LLP

In Ocegueda v. Zuckerberg, No. 20-CV-04444, 2021 WL 1056611 (N.D. Cal. Mar. 19, 2021), the United States District Court for the Northern District of California became the first court to rule on a motion to dismiss claims alleging deficiencies in a company’s compliance with policies intended to promote diversity. The plaintiff, a common stockholder of Facebook, Inc. (“Facebook” or the “Company”), alleged claims for breach of fiduciary duty and further alleged defendants made false and misleading statements in the Company’s Proxy Statement in violation of Section 14(a) of the Securities Exchange Act of 1934. The plaintiff alleged that Facebook’s public statements promoting values of diversity and inclusion were at odds with the Company’s alleged practices regarding (i) the hiring and promotion of diverse candidates to senior leadership positions; (ii) purported discriminatory advertising practices; and (iii) alleged hate speech on the Facebook platform. Facebook defeated all of these claims at the motion to dismiss stage largely due to the fact that the complaint did not reflect Facebook’s actual practices of promoting diversity and inclusion—including at the highest levels of the Company. The Ocegueda decision is noteworthy because it provides officers and directors a first glimpse at how a court may approach shareholder claims seeking to hold a corporate board liable for the alleged failed diversity initiatives of a public corporation.

A series of lawsuits in 2018 accusing Facebook of discriminatory advertising served as the genesis for the plaintiff’s claims. In May 2020, Facebook came under public criticism for its refusal to censor a social media post from a prominent politician disparaging the Black Lives Matter movement. Within weeks, more than 100 advertisers (including companies listed on the S&P 500 index) announced a boycott of Facebook and pulled their advertising from the platform. By the end of June, Facebook’s stock dropped 8.3%. Beyond these controversies, the shareholder plaintiff also grounded her claims on the purported lack of diversity on Facebook’s board and among its senior executives. According to the plaintiff, these practices belied statements in Facebook’s 2019 and 2020 Proxy Statements concerning the Company’s “commit[ment] to a policy of inclusiveness and to pursuing diversity in terms of background and perspective” and statement that “[d]iversity and inclusion are core to everything we do at Facebook.”

Despite the incendiary allegations, the district court grounded its order granting defendants’ motion to dismiss on timeworn principles applicable to shareholder claims and claims for fraud under Section 14(a). First, plaintiff failed to make a shareholder demand on the board and failed to plead particularized facts sufficient to show a majority of the directors were capable of exercising their independent business judgment to evaluate the plaintiffs’ claims. The district court supported this finding, holding that: (i) the Company took ample action to combat the allegedly discriminatory advertising practices and the alleged proliferation of hate speech on the platform; and (ii) plaintiff’s allegations concerning the lack of diversity on Facebook’s board and among its senior executives were contradicted by the actual composition of Facebook’s board and senior executives, as the district court recognized: “two of nine directors are Black, a third Black director stepped down in March 2020 to join Berkshire Hathaway, four of nine directors are women, one is openly gay, and, since its adoption of its diversity policy in 2018, a majority of new nominees have been Black or women.” Second, the statements in Facebook’s 2019 and 2020 Proxy Statements could not substantiate a claim under Section 14(a) because they consisted of non-actionable, aspirational “puffery.” Third, the Company’s Certificate of Incorporation provided that the Court of Chancery of the State of Delaware was the “exclusive jurisdiction” for derivative claims and claims of breach of fiduciary duty against Facebook’s officers and directors. Thus, the district court dismissed the derivative breach of fiduciary duty claims on the independent grounds of forum non conveniens.

The decision in Ocegueda is interesting because it shows there is no fundamental hurdle to derivative claims arising for purported corporate harm caused by a company’s non-compliance with diversity and inclusion initiatives. Facebook successfully defeated the derivative claims based, in large part, on the basic principle that courts will not impose derivative liability on corporate directors for an alleged “failure of oversight” over corporate affairs unless a shareholder can allege specific facts showing that a majority of the Company’s directors were aware of serious “red flags” and consciously disregarded them. Looking to the future, California recently signed into law AB 979 (Cal. Corp. Code § 301.4), which requires publicly traded companies located in California to, by the end of 2021, set aside a certain minimum number of director positions for persons from underrepresented communities. Given the high profile nature of this new law, it remains to be seen whether a corporate board that fails to comply with AB 973 may face an increased risk of derivative liability. Until then, there is truly no time like the present for corporations to take a critical eye to their own diversity practices.

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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