After the recent civil disturbances and social unrest, there has been a renewed focus on equality and diversity issues. Among many other things, investors and activists are raising concerns about the lack of racial diversity on corporate boards. For example, just last week, a California legislator introduced a bill that would require corporations to include on their boards persons from “underrepresented communities.” Now, in addition to these legislative efforts, an activist investor seeking to advance board diversity objectives has launched a shareholder derivative lawsuit against the directors of Oracle Corporation, accusing the board of violating their legal duties by failing to diversify the company’s board and otherwise failing to address diversity and equality issues. A copy of the investor’s complaint can be found here.
On July 2, 2020, an Oracle shareholder filed a derivative lawsuit in the Northern District of California against the 14 members of the company’s board of directors, as well as against the company itself as nominal defendant. The complaint asserts that the company’s board is “one of the few remaining publicly-traded companies without a single African American director.” The complaint alleges further that the directors “repeatedly made gross misrepresentations in the Company’s public statements by claiming to have a multitude of policies, internal controls, and processes designed to ensure diversity both at the management level and the Board itself.”
The Board, the complaint alleges, has “consciously failed to carry out Oracle’s written proclamations about increasing diversity in its ranks.” The directors “have deceived stockholders and the market by repeatedly making false assertions about the Company’s commitment to diversity.” In doing so, the complaint alleges, the directors have “breached their duty of candor and have also violated federal proxy laws,” and have “also irreparably harmed Oracle.”
In support of its claims that the board’s actions and inactions have harmed the company, the complaint references two Congressional inquiries into the lack of diversity on Oracle’s board as well as lawsuit that the U.S. Department of Labor filed against the company alleging that it had engaged in pay discrimination against female, African-American, and Asian employees and seeking damages of $400 million. With respect to the DOL action, the complaint alleges that the defendants “knew of, but failed to disclose, fraudulent business practices at Oracle that put the Company at material risk—namely, discriminatory hiring and compensation practices.”
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 seeks a number of different kinds of relief, including: that at least three directors should resign prior to the company’s November 2020 annual meeting, and the Company should nominate three new persons to serve in their place, with the applicants to include two Black persons and one other minority; that the defendants should return all of the 2020 compensation; that the Company should require its board to receive annual diversity training; that the company should set specific goals on the number of Black individuals and minorities to hire over the next five years; and that the company should publish an annual Diversity Report.
In response to the civil unrest that followed the death of George Floyd, our society has undertaken a renewed examination of diversity and equality issues. A number of entrenched practices and institutions are being subject to scrutiny, and in many instances, change. At some level, given the significance of these social and political phenomena, it should come as no surprise that these dynamics might lead to re-examination of board diversity issues – and that board diversity concerns might in turn result in D&O claims.
The lawsuit against the Oracle board has only just been filed and it remains to be seen how the lawsuit will fare and whether the plaintiff will achieve any of his goals. Regardless of whether the lawsuit succeeds, it seems likely that board diversity issues will remain an important part of the current public dialog about social equality. Specifically, activists are likely to continue to press for great diversity on corporate boards, and the activists’ efforts are likely to take a number of forms, including further lawsuits against corporate boards seeking to advance the activists’ diversity objectives.
While this post is focused in particular on the new lawsuit and its allegations, there are larger issues, such as the general topic of corporate board diversity, that I will have to reserve for another day. I will say that even those who may support board diversity generally may regret that the pursuit of diversity goals should result in litigation. However, regardless of what one may think of the use of this type of litigation to try to advance board diversity goals, it should be recognized there could be more lawsuits of this type and that lawsuits like to one just filed against the Oracle board may represent a new potential area of D&O litigation. At a minimum, the lawsuit shows how concerns raised in the wake of the current social unrest can lead to claims against corporate boards.
It is probably worth noting that while the current social unrest provides important context for this new lawsuit, the connection between the unrest and lawsuit is indirect. The allegations in the complaint relate to alleged circumstances that preceded the current unrest. There are no allegations in the complaint referring to the current civil disturbances or social unrest. Rather, the current social circumstances provide important context for the complaint’s allegations.