In a recent post (here), I discussed the shareholder derivative suit filed against the board of directors of Oracle Corporation based on the alleged lack of racial diversity on the company’s board. Turns out that in addition to the lawsuit against Oracle’s board, the law firms that filed the Oracle lawsuit also have filed a shareholder derivative lawsuit against Facebook’s board alleging that the directors had violated their fiduciary duties by their inaction on diversity and inclusion issues; their tolerance of racially discriminatory practices both in its workforce and on its platform; and their failure to take action on hate speech on its platform. Along with the Oracle lawsuit, the new lawsuit against Facebook provides another example of how the current heightened focus on diversity and inclusion issues can translate into D&O claims. A copy of the complaint in the Facebook action can be found here.
On July 2, 2020, a plaintiff shareholder filed a shareholder derivative lawsuit against twelve members of the Facebook board of directors, also naming the company itself as nominal defendant. The complaint asserts claims for breach of fiduciary duty; aiding and abetting breach of fiduciary duty; abuse of control; unjust enrichment; and violation of Section 14(a) of the Securities Exchange Act of 1934.
The complaint asserts that the defendants have “failed to achieve real diversity on the Board and among the senior executive ranks,” noting that following the resignation earlier this year of former Board member Kenneth Chenault, the board currently has only one board member of color, and that Black people and other minorities remain “conspicuously underrepresented on the Board as well as among the Company’s executive officers.” Facebook, the complaint alleges “remains one of the oldest and most egregious ‘Old Boy’s Club’ in Silicon Valley. A sign advising applicants that ‘Blacks Need Not Apply’ might as well hang at the entrance of the Company’s headquarters.”
The complaint also alleges that company CEO Mark Zuckerberg and the company’s directors have “deceived shareholders and the market by repeatedly making false assertions about the Company’s commitment to diversity,” thereby violating their duty of candor and also federal proxy laws.”
The complaint further alleges that the company has for several years been accused of facilitating racial and other forms of discrimination by allowing advertising on its platform which discriminates based on race and other protected categories. These practices alleged “allowed advertisers to unlawfully target protected minorities and protected classes.”
In addition, the complaint alleges that the company has refused to take steps to curb hate speech on its site, citing as a specific example its refusal to take down a post the U.S. President Donald Trump stating that “When the looting starts, the shooting starts.” The company’s advertising practices and alleged refusal to take action on hate speech led to a significant advertiser boycott as well as a Facebook employee walkout.
The complaint asserts that despite the company’s various statements to the contrary, “Facebook has no real commitment to diversity and its Board is turning a blind eye to the Company’s miserable failure to ensure the ‘diversity’ trumpeted by the Directors in the Company’s filings with the SEC and its annual report to shareholders.”
The complaint seeks a number of different remedies, including that at least two of the company’s directors should immediately resign prior to the Company’s next annual meeting and the Company’s should nominate two new candidates to serve in their stead, and that the two persons should include Black and minority persons. The complaint also seeks to have all of the directors’ 2020 compensation returned and donated to organizations working on the advancement of Black people. The complaint also seeks to have the company create a $1 billion fund to hire Black individuals and other minorities, promote minorities within the company, and establish a mentorship program. The company should also require annual training for the Board and senior management on diversity and inclusion issues, and require that up to 30% of executive compensation be tied to the achievement of diversity goals.
The Facebook complaint does not mention the Black Lives Matter movement. It does not refer to the death of George Floyd or the protests and demonstrations that followed his death. The lawsuit does not itself arise directly out of these developments. However, the complaint does follow these events in time, and the events do provide the important context with which the complaint was filed. Like the complaint recently filed against Oracle’s board, the complaint filed against Facebook’s board demonstrates how these social and racial issues can translate into D&O claims against corporate boards. In the current focus on social and racial issues, activists will use a number of means, including claims against corporate boards, to try to advance their diversity and inclusion goals.
The likelihood is that there will be further claims like this to come. Indeed, one of the lawyers responsible for filing both the Oracle and Facebook lawsuits, Frank Bottini of the Bottini and Bottini law firm, is paraphrased in a July 8, 2020 Law.com article about the two lawsuits (here) as saying that he “plans to bring more shareholder derivative lawsuits against Silicon Valley companies who allegedly do not follow through on their diversity initiative.” While Bottini apparently is focused on Silicon Valley firms, there is nothing about his litigation theory and approach that limits the potential litigation exposure to Silicon Valley firms.
Of course, it remains to be seen whether other companies will be sued on similar theories as those raised in these lawsuits or how far the litigation phenomenon might spread. At this point, with only two lawsuits filed, it would be premature to suggest that these diversity and inclusion lawsuits represents an important D&O litigation trend and that the possibility of these kinds of lawsuit represents a significant potential board litigation exposure. Just the same, the filing of these two lawsuits and the possibility for more does suggest that this type of litigation could be an important emerging trend and one that is worth watching.
The other thing that should be emphasized about both of these lawsuits is that they have only just been filed and it remains to be seen how they will fare. The complaints also make quite a number of broad allegations to which the defendants themselves have not yet even had a chance to respond.
However, whatever defenses the defendants may raise and however the cases ultimately turn out, there is no doubt that in the wake of the protests and demonstrations following George Floyd’s death, these lawsuits project differently than they might have before those recent events. The way the companies choose to respond may be different as well. Among the things these companies will have to consider is whether to make concessions and adopt measures the plaintiffs in the respective cases have proposed, in order to try to deflect the attention and adverse publicity these kinds of cases might produce in the current environment. We have already seen a variety of different instances where different organizations have felt compelled to reexamine longstanding practices and approaches as a result of the current circumstances.