In late 2020 and early 2021, plaintiffs’ lawyers filed as many as ten shareholder derivative suits against the boards of U.S. publicly traded companies alleging that the director defendants violated their legal duties by failing to nominate, elect or appoint African American individuals to their boards. So far, these suits have not fared well. In the latest of these cases to fail to clear the initial pleading hurdles, the court in the board diversity lawsuit filed against Qualcomm’s board has granted the defendants’ motion to dismiss. The decision in the Qualcomm case is noteworthy because, unlike many of the prior dismissal motion rulings, the court addressed the merits of the plaintiff’s Section 14(a) claims. A copy of the court’s November 15, 2021 opinion can be found here.



As discussed here, in July 2020, a plaintiff shareholder filed a derivative suit against Qualcomm’s board. The plaintiff’s complaint alleged that the defendant directors violated their duties to the company and shareholders by falling short of stated objectives on diversity and inclusion and by falling to include a single African American either on the board or among the company’s senior officers. A separate complaint was subsequently filed and the two cases were consolidated in the District of Delaware. The Delaware complaint asserted substantive claims against the defendant directors for breach of fiduciary duty; abuse of control; unjust enrichment; and based on alleged violations of Section 14(a) pertaining to alleged misrepresentations and omissions in the company’s proxy documents.


The defendants filed a motion to dismiss, arguing that all of the plaintiff’s claims should be dismissed based on the plaintiff’s failure to make the requisite pre-suit demand on the company’s board and failure to plead sufficient facts to establish demand futility. The defendants further argued that the plaintiff’s Section 14(a) claims should be dismissed for failure to state a claim upon which relief could be granted.


The November 15, 2021 Opinion

In a November 15, 2021 opinion, District of Delaware Judge Richard Andrews granted the defendants’ motion to dismiss, although with respect to certain of the plaintiff’s claims, the dismissal was without prejudice.


In ruling on the defendants’ motion to dismiss, Judge Andrews first took up the defendants’ argument that the plaintiff had failed to state a claim under Section 14(a). Judge Andrews separately considered each of the proxy statements that the plaintiff claimed to be misleading.


First, he found that the statement in the proxy materials that the board’s governance committee’s goal was to assemble a diverse board was “inactionable puffery,” with respect to which he granted the dismissal motion with prejudice.


Second, he found with respect to the statement in the proxy materials that the governance committee instructs its search firm to include diverse candidates in the board candidate pool that the plaintiff had failed to adequately allege that the statement was false and misleading, dismissing the claim without prejudice.


Third, with respect to the plaintiff’s allegation that the purpose and effect of the company’s proxy access rules was to inhibit the nomination of Black board candidates and entrench existing board members, Judge Andrews found first that no SEC rule required disclosure of the supposed purpose and effect of proxy access rules and that plaintiff had failed to allege sufficient facts to establish that the allegedly omitted information made the proxy statement false or misleading. He dismissed the allegations without prejudice.


Fourth, with respect to the plaintiff’s allegations that the proxy materials misrepresented the weight given in executive compensation to the achievement of the company’s diversity goals, Judge Andrews found that the plaintiff had failed to adequately allege that the proxy misrepresented executive compensation decisions, and these allegations were dismissed, but without prejudice.


Fifth, with respect to the plaintiff’s allegations that proxy materials failed to disclose that the board was overlooking unlawful and discriminatory practices at the company, Judge Andrews said that the allegation “rehashes the same allegations Plaintiffs assert under their breach of fiduciary duty claims,” and that “boostrapping a federal securities claim to a cause of action for breach of fiduciary duty is not permissible.” Judge Andrew granted the motion to dismiss as to these allegations, without prejudice.


Finally, Judge Andrews took up the question with respect to the plaintiffs’ state law claims whether the plaintiff had adequately alleged demand futility. In granting the defendants’ motion to dismiss for failure to adequately plead demand futility, Judge Andrews noted that the plaintiffs’ allegations “lack the particularized allegations necessary to pass muster under Rule 23.1.” Without particularized allegations, the plaintiffs have “failed to create a reasonable inference that there is pervasive illegal discrimination at Qualcomm that the Board either consciously disregarded or tacitly endorsed.” Therefore, Judge Andrews found, the plaintiffs have “failed to plead that the Director Defendants face a substantial likelihood of liability on the fiduciary duty claims such that demand should be excused.”



There are early signs in Judge Andrews’s opinion, before he even gets to the substance of the defendants’ dismissal motion, that the plaintiffs’ claims are in trouble. Thus, at the outset, he comments that “unlike the typical derivative action, there was no specific event involving the Company or Defendants that gained public notoriety and precipitated the filing of these complaints. Accordingly, there is little background for the Court to provide.” Judge Andrews further signaled what he thinks of plaintiffs’ claims when, in granting the dismissal motion without prejudice with respect to several of plaintiffs’ claims, he added the comment that “although I doubt the Plaintiff can assert” a claim sufficient to pass muster, he was granting the motion to dismiss without prejudice.


There is one other thing the plaintiffs’ lawyers in the Qualcomm case will have to consider in trying to decide whether to attempt to file an amended complaint in order to try to address the pleading deficiencies Judge Andrews noted in granting the defendants’ motion to dismiss. And that is that in every single one of these board diversity lawsuits that have reached the motion to dismiss stage, the dismissal motion has been granted. Not a single claim in a single lawsuit has survived the initial pleading hurdle. With a track record like that, the plaintiffs’ lawyers have to seriously question whether there is any point in even trying to file an amended complaint. There is certainly nothing in Judge Andrews’s opinion that would give them any reason to think an amended complaint would fare better than the initial complaint.


The poor track record for the board diversity lawsuits at the dismissal motion stage could be taken to mean that the lawsuits were (or at least so far have been) a failure. But calling them a failure may be overlooking the point of these lawsuits in the first place. Although I am sure the plaintiffs’ lawyers filing these suits had multiple motivations, one of the primary reasons these suits were filed was to produce publicity – that is, to draw attention to the lack of diversity on corporate boards. To be sure, the plaintiffs’ lawyers also wanted to try to get to the point where they could collect a fee, and so far they have failed to do that. But at least to some extent, the lawsuits arguably have achieved their publicity goal.


The board diversity lawsuits also have been overtaken by other events. The enactment in September last year of the California board diversity statute and Nasdaq’s proposed board diversity listing requirements (which the SEC approved in August 2021) clearly have superseded the plaintiffs’ lawyers’ case-by-case, company-by-company approach to addressing board diversity. The California law and the Nasdaq rule arguably make these various individual board diversity lawsuits superfluous. Changes in board composition and in board culture are already underway, without respect to these lawsuits.


Nevertheless, the lawsuits do show how changing social circumstances and cultural developments can affect the liability risk environment in which corporate boards operate. And all of the recent board diversity developments — including not just the California statute and the Nasdaq rule but also including the board diversity lawsuits as well – highlight the fact for well-advised boards, diversity and inclusion issues (including diversity and inclusion on the board itself) are board-level issues.