In a derivative lawsuit settlement with one of the highest nominal dollar values ever – and in what is one of the largest #MeToo-related D&O lawsuit settlement ever – Google parent Alphabet has agreed to establish a $310 million diversity, equity, and inclusion fund as part of the settlement of the consolidated derivative litigation relating to the company’s alleged mishandling of sexual harassment allegations against senior executives and the company’s alleged overall culture of sexual discrimination and harassment. The company also agreed to adopt extensive reforms to its employment policies and to implement a number of governance reform measures as part of the settlement. The settlement is subject to court approval.
A copy of the parties’ August 18, 2020 stipulation and settlement agreement can be found here. The parties’ September 25, 2020 memorandum in support of joint motion for preliminary approval of the settlement can be found here. Co-lead plaintiffs’ counsel’s September 25, 2020 press release about the settlement can be found here. Alphabet’s September 25, 2020 SEC filing on Form 8-K announcing the settlement can be found here. The Wall Street Journal’s September 25, 2020 article about the settlement can be found here.
As discussed here, in January 2019 two shareholder derivative lawsuits were filed in California state court against the certain current and former directors and officers of Google parent company Alphabet, as well as against the company itself as nominal defendant. A copy of the initial complaint filed by the Northern California Pipe Trades Pension Plan, an Alphabet shareholder, can be found here. A number of other similar lawsuits against the Alphabet directors and officers were subsequently filed. The various derivative actions ultimately were consolidated, and in August 2019, a consolidated amended complaint was filed (here).
The amended complaint asserts claims against the individual defendants for Breach of Fiduciary Duty, Unjust Enrichment, Corporate Waste, and Abuse of Control. The amended complaint alleges that the company’s actions represent “a pattern of concealment” that was “intended to protect the interests of the Company’s top earning executives and the Board at the expense of its shareholders, employees, and users.” The amended complaint alleges further that “the Board knowingly participated in or acquiesced to conduct by the Company’s senior executives that caused the Company to violate various laws.”
As a result of “the underlying misconduct, the active cover-ups of the misconduct, and retaliation against those who sought to raise awareness about these issues, stockholders and the Company have been damaged financially and reputationally.” The misconduct has cost the company “hundreds of millions of dollars in exit packages to wrongdoers and exposed it to further litigation and a loss of federal contracts.”
The plaintiffs’ amended complaint complaints refers extensively to the revelations in an October 25, 2018 New York Times article (here) about alleged sexual misconduct at the company involving the former Google executive, Andy Rubin, known as the father of Android, and two other male Google executives. The Times article claimed that while senior Google executives were aware of the misconduct allegations and had determined that the allegations were credible, the company did not fire the executives for cause, but rather gave the men significant exit packages while allegedly concealing “true reasons for their departures” – in Rubin’s case, the 2014 exit package reportedly was worth $90 million.
The media reports of sexual harassment and other misconduct led to a mass walkout of Google employees around the globe on November 1, 2018, as discussed in a Wall Street Journal article at the time (here). Among other things, the employees protested the company’s allegedly inadequate approach to sexual harassment and discrimination in the workforce.
The amended complaint allege that Alphabet is a “male-dominated company with a male-dominated culture” and that the company’s management fostered a “brogrammer culture” in which women were harassed and valued less than their male counterparts. The complaint alleges that the company “struggled with other indicators of sex discrimination in its workplace that, among other things, resulted in systemic disparities against women pretty much across the entire workforce.” Employees who sought to call attention to these issues allegedly were subject to retaliation.
The amended complaint alleges that the company maintained a dual and contradictory standard, under which, if you were a high level male executive producing significant revenue, the company would “let you engage in sexual misconduct” and if caught allow you to resign with millions in severance; while, if you were a lower level employee and engaged in the same misconduct, you were fired, which allegedly allowed the company to “maintain optics and superficial compliance” while at the same time “concealing the blatant and widespread sexual harassment by senior Google executives.”
Prior to the filing of the first of the complaints in this action, and in response to pre-suit demands the company’s board had received with respect to the allegations sexual discrimination and harassment at the company, the board had appointed a special litigation committee to investigate the allegations. In December 2019, the special litigation committee issued its report recommending that it was in the best interests of the company for the parties to the litigation to seek to resolve the dispute through mediation.
Following an exchange of information, the parties engaged in a mediation session in January 2020, which established a structure and process for further settlement discussions. In April 2020, the parties entered a Memorandum of Understanding with respect to a proposed settlement, which ultimately led to the final settlement stipulation, which the parties’ counsel signed in August 2020 and which was presented to the court with a motion for preliminary approval on September 25, 2020.
The settlement agreement consists of three essential elements: the company’s agreement to establish a Workplace Initiative, to be supported by a settlement fund; the company’s agreement to reforms of the company’s employment policies and practices; and the institution of certain corporate governance measures.
The fund portion of the settlement stipulation specifies that “Alphabet shall cause to be spent a total of $310 million over the course of up to ten years stating that the starting the first full fiscal year following the Effective Date of the Settlement.” The fund is to be used to support a set of global initiatives – the Workplace Initiative –to expand the pool of technologists, especially those who are “historically underrepresented”; for the hiring, progression, and retention of historically underrepresented talent; fostering a respectful, equitable, and inclusive workplace culture; and for helping historically underrepresented groups and individuals succeed in their businesses and in the digital economy.
The Workplace Initiative is to overseen by an Advisory Council composed of several specifically identified distinguished persons and luminaries, including a retired federal judge, a prominent attorney, a former member of the EEOC, as well as several internal members.
The reforms to the company’s employment practices and policies are, according the plaintiffs’ lawyers’ press release about the settlement, aimed at “eliminating practices that silence victims and implementing measures for fairly apply workplace policies even for the most senior executives.” Among other things, the reforms end mandatory arbitration in harassment, discrimination, and retaliation related disputes; limits Google’s use of non-disclosure agreements, so that employees are able to discuss the facts and circumstances of an incident; and aligns corrective action recommendations across business units to ensure consistent consequences for the same misconduct.
The governance measure in the settlement are, according to the plaintiffs’ lawyers’ press release, designed to ensure that “Alphabet’s board is informed and accountable for overseeing risks arising from sexual harassment by executives and, more broadly, fostering a diverse, equitable, and inclusive culture.” Among other things, the governance reforms include expanding the Audit Committee’s charter, with quarterly reports to the full board on legal and regulatory compliance; and preventing employees with 10b5-1 plans from amending the plans while the employees are subject to investigations or a lawsuit for sexual misconduct.
The stipulation of settlement does not specify any specific amount to be paid to the plaintiffs’ attorneys; the settlement stipulation states only that the lead plaintiffs’ counsel intend to seek approval of the court for a fee and expense award. The stipulation does provide with respect to the planned fee request that the defendants “agree that the Settlement confers substantial benefits on Alphabet and its stockholders” and that agree that counsel “are entitled to awards of reasonable attorneys’ fees and expenses for their roles in creating such benefits of the Settlement.” Curiously, the stipulation does not specify who is to pay the amount of any award or how the award amount is to be funded.
It is not unusual for the settlement of shareholder derivative litigation to include the company’s agreement to adopt a number of corporate therapeutic measures. However, the employment practices and corporate governance reforms adopted proposed in this settlement are quite broad, reaching far beyond just the specific practices and issues that were the subject of the litigation in the first place. The elements of agreed-upon reforms as documented in the settlement stipulation are unusually detailed as well.
The cash portion of the settlement is also interesting, and not just because of its impressive size. It is also interesting because of the way it is structured. The pay out over a period of up to ten years represents a significant commitment, not just of dollars but also of time – the agreement is intended to be of an extensive duration.
Deciding where the agreement to set up the $310 million Workplace Initiative fund puts this settlement on the various rankings of largest derivative lawsuit settlements in terms of dollar value depends in part on how you value the amount to be paid into the fund. The fact that the fund is to be paid out over a ten year period means that its present value is actually somewhat less that the nominal $310 million value. Indeed, if the amount were to be paid into the fund more significantly in the backend years, the present value of the fund could be substantially less than $310 million.
However, even if a substantial present value discount is applied to the nominal $310 million value, the settlement still ranks as one of the largest derivative lawsuit settlements of all time. As readers will recall, I have been attempting to track the largest derivative settlements; my updated list can be found here. The Alphabet settlement’s nominal $310 million value would rank the settlement as the largest-ever shareholder derivative settlement in dollar terms, ahead of the $286 million settlement in the Vereit/American Realty Capital Properties settlement (about which refer here).
The $310 million nominal value of the settlement also puts the settlement among the largest settlements in dollar value terms of #MeToo-related D&O lawsuits. The largest prior #MeToo-related D&O lawsuit settlement was the March 2020 $240 million settlement of the Signet Jewelers #MeToo-related securities class action lawsuit. The Signet Jewelers securities settlement is discussed in detail here. However, it should be noted for comparison purposes that the Signet Jewelers securities suit involved substantial allegations of financial and accounting misrepresentations, as well as the allegations relating to sexual misconduct at the company, which makes any comparison to the Signet Jewelers settlement complicated. After the Signet Jewelers settlement, the next largest #MeToo-related D&O claim settlement was the settlement of the shareholder derivative lawsuit filed against company officials of 21st Century Fox, which settled for $90 million.
While the comparisons may be difficult, there is no doubt that the size of the monetary portion of this settlement makes this, by any measure, a significant settlement. One curious detail about the settlement not addressed in the settlement stipulation is the question of settlement funding – who is funding the $310 million amount? The stipulation’s wording about the fund is very peculiar; it says that “Alphabet shall cause to be spent a total of $310 million.” This is notably different than a statement that “Alphabet shall pay,” leaving open the possibility – indeed, actively suggesting — that the funds are actually coming from somewhere other than Alphabet’s own coffers, at least in part.
The stipulation and the company’s 8-K about the settlement are silent about any contribution of D&O insurance to the settlement, and there is nothing in the settlement stipulation that affirmatively suggests that, say, individuals are contributing to the settlement. However, the stipulation’s odd and awkward statement that the company will “cause to be spent” the specified amount really does raise the question of where the money is coming from.
Special thanks to a loyal reader for providing me with a copy of the settlement stipulation and related documents.