Shareholder Derivative Complaints Allege Lack Of Board And Senior Executive Diversity

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Shearman & Sterling LLPIn July 2020, shareholders filed three separate but substantially similar derivative suits in U.S. district courts in California against certain directors and officers of three major technology companies, asserting claims related to alleged failures to uphold commitments to diversity.Specifically, plaintiffs allege that defendants breached their fiduciary duties by failing to ensure diversity in particular at the board and executive levels, as well as violations of Section 14(a) of the Securities Exchange Act of 1934 for alleged misrepresentations about the companies’ commitments to diversity.In addition to monetary damages, the complaints seek to compel the companies to advance several wide-ranging proposals regarding diversity initiatives for shareholder votes.

The three complaints were filed against major technology companies—as nominal defendants—and purport to assert derivative claims on their behalf against certain of their directors and officers.Verified Shareholder Derivative Complaint, Klein v. Ellison, No. 3:20-cv-04439 (N.D. Cal. July 2, 2020); Verified Shareholder Derivative Complaint, Ocegueda v. Zuckerburg, No. 3:20-cv-0444-LB (N.D. Cal. July 2, 2020); Verified Shareholder Derivative Complaint, Kiger v. Mollenkopf, No. 3:20-cv-01355-LAB-MDD (S.D. Cal. July 17, 2020).Plaintiffs also claim that the individual defendants breached their fiduciary duties of oversight by failing to monitor and ensure compliance with anti-discrimination laws and assert that this has led to government investigations of and lawsuits against the companies.

Plaintiffs allege, for example, that despite claiming in its proxy statement that “diversity and inclusion in our workforce starts at the top,” one company purportedly “failed to create any meaningful diversity at the very top” and its board “has lacked diversity at all relevant times, and is one of the few remaining publicly‐traded companies without a single African American director.”Similarly, plaintiffs allege that another company’s “approach to diversity has been characterized by tokenism: make a small gesture to satisfy appearances, but don’t make any underlying substantial change” and that although its board “does have one Black member,” its “entire slate of Executive Officers are all white, with no minorities whatsoever.”Likewise, plaintiffs allege that despite the third company’s statement “that diversity and inclusion ‘should be demanded,’ [it] has failed to create any diversity at the very top” and “it is not just the Board that lacks any African American individuals; there are no African Americans among the Company’s executive officers.”The complaints further assert that pre-suit demands on the respective boards were excused as futile because the director defendants did not act in good faith and face a substantial likelihood of liability and are otherwise not independent.

The complaints seek monetary damages from the director and officer defendants derivatively on behalf of the respective companies, as well as disgorgement of profits and benefits.Plaintiffs also seek to compel the companies “to take all necessary actions to reform and improve [their] corporate governance and internal procedures to comply with applicable laws” to address the alleged diversity failures, including to “put[] forward for shareholder vote” several diversity-related initiatives.These include proposals to replace certain directors with Black and other minority directors, create $700 million–$1 billion funds dedicated to hiring and promoting minority employees, publish an annual diversity report, implement annual diversity and anti-discrimination training, link 30% of executive compensation to achievement of diversity goals, and require directors to donate their 2020 compensation to organizations dedicated to advancing diversity.The complaints also seek replacement of the companies’ auditors because of the allegedly “cozy” relationship the audit firms have with each other, respectively, and their alleged failure to effectively audit stated policies and inadequate internal controls with respect to diversity and discrimination.In addition, the proposals also call for the removal of the board chair of two of the companies, as well as the CEO of the third.

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