In the latest in a series of lawsuits against high-profile companies alleging that the companies’ boards lack African-American directors, a plaintiff shareholder has filed a shareholder derivative lawsuit against the board of directors of the clothing retailer, The Gap. The lawsuit is substantially similar to the lawsuits filed by the same plaintiffs’ law firm against Oracle (here), Facebook (here), Qualcomm (here), and NortonLifeLock (here). A copy of the lawsuit against The Gap’s board can be found here.
On September 1, 2020, a plaintiff shareholder filed a shareholder derivative lawsuit in the Northern District of California against the fourteen members of the board of directors of The Gap, as well as against the company itself as nominal defendant. The gist of the complaint is that despite numerous public statements about the company’s commitment to diversity, “Gap failed to create any meaningful diversity at the very top of the Company,” as the company’s board “lacks a single African American director.”
The directors, “wishing to avoid a public backlash,” have “repeatedly” made “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 complaint alleges that the board “consciously failed to carry out” the company’s “proclamations” about diversity, and as a result both the board and the company’s executive offices remain “devoid” of Black people and other minorities. According to the complaint, when the company does hire African Americans and other minorities, it is at the lower levels; thus, the complaint alleges, African American’s comprise only 4% of employees at the company’s headquarters, but 23% of employees in the company’s distribution centers.
The complaint alleges that the company’s directors “deceived stockholders and the market by repeatedly making false assertions about the Company’s commitment to diversity,” and by doing so, the directors “breached their duty of candor and have also violated the federal proxy laws.” The board’s actions, the complaint alleges, have “irreparably harmed” Gap.
The complaint singles out the company’s controlling shareholders, the Fisher family, which controls 43% of the company and three board seats. The Fisher family has “breached their fiduciary duties by siphoning off billions of dollars for themselves while failing to ensure diversity at the top of the Company and failing to ensure diversity at the top of the Company and failing to ensure equal opportunities for Black and other minority workers at the Company.”
The complaint asserts claims against the director defendants for breach of fiduciary duty; aiding and abetting breach of fiduciary duty; abuse of control; unjust enrichment; and violation of the proxy provisions of the federal securities laws.
By way of relief, the complaint seeks a number of actions: the resignation prior to the company’s May 2021 board meeting of two directors and the nomination of two Black persons in their place; return of all of the directors’ 2020 compensation; agreement to publish an annual report on hiring, promotion, and advancement of all minorities at Gap; agreement to annual board training on diversity; the setting of specific hiring goals for black and other minorities, with 30% of executive compensation tied to these goals; and the replacement of the company’s auditor.
Discussion
This latest board diversity lawsuit is in many respects substantially similar to the prior lawsuits filed against Oracle, Facebook, Qualcomm, and NortonLifeLock. All of the lawsuits were filed by the same plaintiffs’ firm. All of the lawsuits have been filed against California-based companies. All of the lawsuits were filed against companies that lack African American directors.
There are some respects in which this latest lawsuit is different from the prior lawsuits. For example, The Gap is the first company to get hit with one of these board diversity lawsuits that is not a technology company. There is another important respect in which The Gap is different from the other companies that have been targeted by these kinds of suits, and that is that The Gap’s board actually reflects very substantial diversity of a particular type – the company’s board is as gender diverse as just about any company you might find. Half of the company’s board is female, with seven women among the board’s 14 directors. In that respect, at least, it is entirely inaccurate to say that The Gap has utterly failed to achieve its diversity goals.
As a general matter, the need for greater African American representation at the board level is not a new issue; commentators and observers have long noted the absence of African Americans in the board room. The obvious reason these lawsuits are being filed now is the social justice movement that arisen this year following the murder of George Floyd. 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.
The Gap itself has publicly acknowledged the need for further actions in this area. The company has publicly stated, with respect to the racial justice movement, “We believe our teams should look like the communities we serve. While we are well represented by gender, we have work to do across all levels and functions to fully represent Black and Latinx employees.” The complaint seeks to use these words against the defendants by alleging that “In the wake of the Black Lives Matter movement, Gap has admitted that it has failed to achieve diversity with respect to minorities.”
As I noted in connection with the filing of the prior lawsuits, the filing of this lawsuit does show how the current racial justice movement in the U.S. not only has important implications for the social and political context for businesses in this country, but also creates dynamics – including the threat of litigation—that put pressure on business to reexamine past practices. In particular, the racial justice movement does shine a harsh light on the absence of African Americans on the boards of many companies and does put pressure on companies to increase board diversity, in ways that may not have existed in the past. At a minimum, these lawsuits demonstrate that among other things lack of board diversity may represent a D&O claim risk.
Even though this rash of lawsuits is the handiwork of a single lawyer self-appointed to carry out this mission, these board diversity lawsuits arguably represent one of this year’s most important D&O liability trend, particularly in the context of the current racial justice movement. I suspect we will see more of these types of lawsuits in the weeks and months ahead.