Regular readers will recall that last year and earlier this year, plaintiffs’ lawyers filed a series of shareholder derivative lawsuits against the directors of several companies alleging that the lack of diversity on the companies’ boards breached the directors’ fiduciary duties. In the latest ruling to address preliminary motions in these various cases, the court in the board diversity lawsuit filed against directors and officers of Oracle has granted the defendants’ motion to dismiss. As discussed in greater detail below, the plaintiffs’ track record on the board diversity lawsuits is not good so far; the ruling in the Oracle suit represents the third successive dismissal granted in these suits.
As discussed in greater detail 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 Oracle lawsuit was the first of what proved to be about ten board diversity lawsuits filed in late 2020 and early 2021.
The Oracle 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.” Separate plaintiffs later filed substantially similar lawsuits; the various cases were later consolidated and the plaintiffs filed a consolidated amended complaint.
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 defendants filed a motion to dismiss, contending that the plaintiffs had not sufficiently pleaded demand futility and, in light of the forum selection clause in the company’s by-laws, that the plaintiffs’ state law claims must be asserted in the Delaware Court of Chancery.
The forum selection clause in Oracle’s by-laws provides that the Delaware Court of Chancery shall be the “sole and exclusive forum for any actual or purported derivative action brought on behalf of” Oracle.
The May 21, 2021 Order
On May 21, 2021, Northern District of California Magistrate Judge Jacqueline Scott Corley granted the defendants’ motion. A copy of Magistrate Judge Corley’s order can be found here.
Magistrate Judge Corley granted the defendants’ motion with respect to the plaintiffs’ state law claims, holding that in light of the forum selection clause, the plaintiffs must bring their state law claims in the Delaware Chancery Court. Consistent with and in reference to the prior decision in the Facebook board diversity lawsuit, Magistrate Judge Corley severed the plaintiffs’ federal law Proxy misrepresentation claims under Section 14 (a).
With respect to the plaintiffs’ Section 14(a ) claims, she ruled that the plaintiffs had failed sufficiently to plead demand futility. In reaching this conclusion, she found with respect to each of the specific Proxy misrepresentation claims that the plaintiffs asserted that the complaint failed to support an inference that the Proxy statements were false or misleading and therefore that any defendant faces a substantial likelihood of liability. She found further that the Plaintiffs had failed “to allege particularized facts sufficient to show that any director defendant is ‘interested.’”
In recognition of the that she had severed the Section 14(a) claims, Magistrate Judge Corley granted the plaintiffs’ 30 days within which to seek to amend their claims under Section 14(a).
The ruling in the Oracle board diversity litigation represents the third dismissal motion ruling among the numerous board diversity lawsuits filed last year and earlier this year. In this case as in the earlier rulings in the cases involving Facebook (discussed here) and The Gap (discussed here), the courts granted the motions to dismiss in reliance in whole or in part on the presence in the company’s by-laws of forum selection clauses.
Of course, in each of these cases, the plaintiffs retain the option to try to re-file their lawsuits in the Delaware Courts of Chancery, as the companies’ by-laws intended. It remains to be seen whether any of these suits will in fact be re-filed in Delaware. To date, the plaintiffs have not yet re-filed the previously dismissed suits in Delaware.
Magistrate Judge Corley did allow the plaintiffs’ leave to seek to amend their federal securities law claims under Section 14(a). Whether or not the plaintiffs will seek to amend their federal law claims also remains to be seen, but it may be that the plaintiffs could still find a way to pursue at least their federal law claims in their Northern District of California action. The fact that the plaintiffs’ severed Section 14(a) claims may go forward in the Northern District of California– claims that could not be asserted in the Delaware Court of Chancery – presents the plaintiffs with the potential problem that if they seek to pursue the state law claims in Delaware, they could have different but related claims pending in two separate courts.
With the three dismissal motion grants, the plaintiffs’ track record in the board diversity cases so far is not good. The biggest problem for the plaintiffs so far has been the forum selection clauses. To the extent any of the remaining cases involve companies that have not amended their bylaws to add forum selection clauses, the plaintiffs’ claims could fare differently. However, at least at this point, it is fair to say that so far at least, it has been tough sledding for the plaintiffs in these cases.
There may be a theory that even though the claims themselves are not succeeding in court, the claims have had an impact. The lawsuits received a lot of publicity at the time they were filed and they did draw a great deal of attention to board diversity issues. There have of course been a variety of other important recent developments regarding board diversity, including the enactment of the California board diversity legislation (discussed here) and the proposal by Nasdaq of board diversity listing guidelines (discussed here). The plaintiffs may feel that their claims, even if unsuccessful in court, were an important part of highlighting issues and concerns relating to diversity in the corporate board room.
Whatever may be the case, I do think it is worth nothing that it has been months since any more of these board diversity lawsuits have been filed; it could be that would-be claimants are reconsidering the utility and efficiency of these types of litigated efforts, as opposed to other means that might be available to try to address board diversity issues.
Finally, as I noted in connection with the dismissal grant in The Gap’s board diversity lawsuits, the significance of the enforcement of the forum selection clauses in these cases should not be overlooked. Readers will recall that the idea for companies to adopt forum selection clauses gained prominence several years ago when duplicative merger objection litigation was becoming such a problem. Many companies adopted these kinds of provisions to try to ensure that they would not have to fight a multi-front war in the event of an M&A transaction. The presence of these kinds of clauses clearly has proven to be useful in other ways as well, further reinforcing the value of these kinds of provisions for the companies that adopt them. It is an interesting example of the myriad ways that the law affects corporate behavior, and vice versa.