As readers of this blog know, the various board diversity lawsuits that the plaintiffs’ lawyers filed in late 2020 and early 2021 have uniformly fared poorly in the courts. In the latest dismissal motion ruling in one of these suits, the court in the board diversity suit filed against the directors of Cisco Systems has granted the defendants’ motion to dismiss, albeit without prejudice. The court’s ruling in the Cisco Systems board diversity suit is noteworthy because the court addressed the merits of the plaintiff’s Section 14(a) claims. A copy of the court’s March 1, 2022 dismissal order can be found here.
As discussed here, on September 23, 2020, the City of Pontiac General Employees’ Retirement System, a Cisco Systems shareholder, filed a derivative lawsuit in the Northern District of California against the company’s board of directors, as well as against the company itself as nominal defendant. The crux of the lawsuit is that there are no African-Americans on the company’s board.
The basic allegation against the company is that “while Cisco’s publicly facing communications state that the Company is ‘committed to’ and ‘embraces’ diversity at Cisco, including at the very top, Defendants have declined to carry out the Company’s policies and proclamations and have failed to increase racial diversity at Cisco.”
Notably, the complaint alleges that on August 5, 2020 the plaintiff sent the company’s board a pre-suit demand letter (copy here), in which the plaintiff demanded that the company’s board “immediately commence legal action against certain current and former Cisco directors and/or officers for breach of fiduciary duty and federal proxy law violations.”
The complaint asserts substantive claims against the defendants for breach of fiduciary duty; unjust enrichment; and violation of the federal securities laws’ proxy disclosure requirements under Section 14(a) of the Securities Exchange Act of 1934.
The defendants filed motions to dismiss. In support of their motion, the defendants argued, among other things, that the complaint failed to mention that Cisco’s board formed a committee to investigate the pre-suit demand and that the complaint, which was filed seven weeks after the investor made its demand request, does not argue that demand was futile.
The Court’s March 1, 2022 Order
In his March 1, 2022 order, Northern District of California Judge Jon S. Tigar granted the defendants’ motion to dismiss, holding both that the plaintiff had failed to state a claim up on which relief may be granted and that the plaintiff had failed to plead sufficient facts to establish that the board had failed to respond properly to the plaintiff’s pre-suit demand.
Judge Tigar first addressed the plaintiff’s claims that the defendants had violated Section 14(a) through misleading statements in the company’s proxy documents. The plaintiff basically alleged that the defendants had failed in increase racial diversity at Cisco and knew that statements about Cisco’s commitment to diversity were false and misleading. Judge Tigar said that the statements on which the plaintiff sought to rely are “not actionable” because “they are neither misleading nor material to investors.” At most, the statement about the company’s commitment to diversity provide only a “vague statement of optimism not capable of objective verification” that are “immaterial because they are quintessential, non-actionable puffery.”
Judge Tigar added that even if the diversity statements were actionable, the Section 14(a) complaint would fail because the complaint does not plead “the requisite essential link between the statements and loss-generating corporate action.” The plaintiffs’ “multi-step” theory that the allegedly false statements misled shareholders into re-electing directors who fail to nominate a black director and thus harm the company “is too tenuous to arise to the level of the essential link.” Because he concluded that the diversity statements in the company’s SEC filings were neither false or misleading, the plaintiff’s breach of fiduciary claims and unjust enrichment claims premised on the same allegations also fail.
Finally, with respect to the defendants’ motion premised on the plaintiff’s alleged failure to sufficiently allege demand futility, Judge Tigar found that the plaintiff did not “adequately plead either that the Board wrongly refused its demand or that the demand was futile.” Here, Judge Tigar specifically noted that, in response to the pre-suit demand, the Cisco board had formed a special committee of independent directors, which had investigated the demand and concluded that the company had accurately described its diversity initiatives and concluded that pursuing the claim would not be in the company’s interests.
The plaintiff, Judge Tigar said, does not “adequately allege a reasonable doubt as to whether the Board’s investigation was properly the product of sound business judgment.” The complaint, Judge Tigar said, “had not sufficiently alleged facts from which to conclude that there is reasonable doubt that the board acted independently or with due care in responding to the demand.”
It is of course significant that Judge Tigar’s grant of the dismissal motions here was without prejudice. The plaintiff may seek to replead in order to try to address the various shortcomings Judge Tigar found in the initial complaint. In considering whether to try to file an amended complaint, the plaintiff will want to consider 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 Tigar’s opinion that would give them any reason to think an amended complaint would fare better than the initial complaint. Indeed, the special committee’s investigation and rejection of the plaintiff’s allegations and call for litigation would seem to represent a formidable hurdle to any further attempts to revive this suit.
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 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 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.