One of the focal points in the scrutiny that has followed in the wake of the current social justice movement has been the question of diversity at America’s companies, including the lack of diversity on corporate boards. Among other things, a number of boards of public companies lacking Black directors have been sued in a series of shareholders derivative lawsuits alleging that the board members violated their fiduciary duties by failing to live up to state diversity objectives, as discussed most recently. Now, in the latest example of this type of litigation, a plaintiff shareholder has filed a derivative lawsuit against the board of Monster Beverage Corporation, alleging that the directors breached their fiduciary duties and deceived investors by claiming to have diversity and inclusion programs while have no Black directors on the board. A copy of the complaint can be found here.
The Lawsuit
On September 18, 2020, a plaintiff shareholder filed a derivative lawsuit in the Central District of California against the individual members of the board of directors of Monster Beverage, as well as against the company itself as nominal defendant. The crux of the complaint is the plaintiff’s allegation that “despite Monster’s statement that it is committed to diversity and inclusion, Monster has failed to create any diversity at the very top of the Company – the Board of Directors.” The company, the complaint alleges, is one of the few publicly traded companies lacking an African-American director. The complaint also alleges that there are no African-Americans among the company’s senior executives.
The complaint alleges that Monster’s board, “wishing to avoid public backlash,” has “repeatedly made misrepresentations in the Company’s public statements by claiming to have a policy of being committed to diversity,” but “in reality, Monster has made no real efforts to promote diversity on its Board and among its senior executives.” The board has done so, the complaint alleges, despite increasing scrutiny of companies lacking African-American directors and even though, the complaint alleges, greater diversity would be in the company’s own interest, as “greater diversity is associated with increased profits.”
In addition to these allegations relating to lack of board diversity, the complaint also diverts into an extended series of allegations relating to discrimination and harassment of women and minorities at the company, including detailed references to allegations raised in prior litigation in which female employees sued the company over its allegedly “discriminatory, abusive culture.” The complaint also alleges that female employees at the company were paid less than men and passed over for promotions, while the company’s executives used the money save to pay themselves huge amounts.
The complaint asserts substantive claims against the defendants for breach of fiduciary duty; aiding and abetting breach of fiduciary duty; abuse of control; unjust enrichment; and violation of federal proxy disclosure requirements under Section 14(a) of the Securities Exchange Act of 1934. The complaint further alleges that the defendants’ conduct “constitutes bad faith and disloyal conduct, giving rise to claims that fall outside the scope of the business judgment rule and outside of permissible indemnification, and owing to the directors’ substantial likelihood of liability, “any demand on them to bring this case would be a futile and useless act.”
The complaint seeks the following as relief from the defendants: the company should immediately create a plan for diversity and inclusion for the board and senior management; the company should replace the director of Human Resources, “who has allowed unlawful sexual harassment and discrimination, and retaliation for reporting wrongdoing” to persist for years; at least one director should resign prior to the company’s April 2021 annual meeting, to be replaced by a black person nominated to the Board; the directors should return their 2020 compensation, and donate the money to a charity that advances Blacks and minorities; the company should publish an annual diversity report; the company should create a $800 million fund to promote hiring and advancement of minorities; the company should require annual board diversity training; the company should create a board-level diversity and inclusion program, and establish a Chief Diversity Officer; and the company should set specific diversity goals, with executive compensation tied to the achievement of the goals.
Discussion
This latest board diversity lawsuit against the Monster board is, by my count, the seventh of these lawsuits to be filed in recent weeks, with six of them filed by the same plaintiffs’ attorney (with all six of those lawsuits involving companies based in California). Although the complaints largely do not mention the current racial justice protests or the Black Lives Matter movement, the complaints clearly are connected to these developments, as I have noted in my prior posts discussing the earlier lawsuits.
It is important to note in light of the larger social context that companies lacking Black board members may not only attract the unwanted attention of plaintiff’s bar, but could also face investor scrutiny. As Lynn Jokela detailed in a September 15, 2020 post on TheCorporateCounsel.net blog (here), institutional investors such as Vanguard and State Street are seeking to have companies disclose board and work force racial diversity information and also using their proxy votes to push for diversity disclosure. The blog post observes that in its most recent Investment Stewardship Report, Vanguard noted that it “expects companies to make significant progress on boardroom diversity across multiple dimensions and to prioritize adding diverse voices to their boards in the next few years.”
In addition to this investor pressure, companies also face legislative pressure for board diversity. As noted in an August 31, 2020 Wall Street Journal article (here), the California legislature recently passed a bill mandating that publicly traded companies headquartered in the state must by the end of 2021 have a minimum of one director from an underrepresented community. A director from an “underrepresented community” means a director who self-identifies as Black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian, or Alaska Native. California Governor Gavin Newsome must sign or veto the bill by the end of September. According to the Journal article, a number of other states are considering racial diversity legislation.
The likelihood is that public companies lacking racial diversity will face scrutiny from a number of different directions. In any event, it certainly seems likely that the plaintiff’s attorney that has been the primary actor pursuing this litigation will file more lawsuits against other companies that lack diverse boards. The attorney seems to be taking something like an assembly line approach, where the complaint in each new lawsuit incorporates numerous substantially identical components, with extra bits added to reflect the particular circumstances of specific company involved. Given this approach, it seems likely we will see more of these kinds of lawsuits.
Indeed, it isn’t hard to speculate about what companies might get hit with one of these lawsuits, as there are published lists of the largest publicly traded companies that do not have any Black directors – although the lists are not all-inclusive; Monster, for example, is not listed among the 20 largest public companies without a Black director, suggesting that the plaintiff’s lawyers range is more extensive than just the largest companies.
In reading these complaints as they have come in, I have found myself wondering about the basic theory of wrongdoing involved; is the plaintiff’s lawyer saying that it is breach of fiduciary duty not to have a Black director? Or is he saying something slightly different, as in, it is a breach of the duty of candor to pretend the company supports diversity and inclusion while failing to promote and achieve diversity in the company’s senior most ranks?
While one might well reasonably question the merits of these lawsuits, it seems likely that the plaintiff’s real objective is not necessarily to win the lawsuits in adversarial proceedings after full consideration of the merits, but rather to use the litigation to compel the companies to take remedial and therapeutic actions – thus also allowing the plaintiff’s attorney to claim a fee.
With the investor scrutiny, the legislation, and the threat of litigation, it would seem prudent of companies lacking a Black director to proactively take steps to address the issue. Indeed, as I noted in a recent post (here), a number of companies have acted proactively and taken a pledge to add a Black director to their boards within a year.
As I have noted in my prior posts about these board diversity lawsuits, the plaintiff lawyers involved have concluded that, in light of the current racial justice movement, these kinds of lawsuits represent an opportunity to pursue claims against corporate boards based on long-standing corporate practices – or perhaps long-standing corporate inaction. The current heightened focus on diversity and inclusion issues casts a harsh light on the lack of African Americans in corporate leadership and put pressure on companies and other organizations to take remedial steps.