Shareholder Complaints Seek To Hold Directors Liable For Lack Of Diversity

Earlier this month, three separate shareholder derivative lawsuits were filed in California federal court against the directors and officers of Oracle Corporation, Facebook, Inc., and Qualcomm, Inc., respectively.¹

The three complaints, filed by the same lawyers, contain intentionally provocative allegations that, despite public statements emphasizing the importance of diversity within their respective organizations, the boards and executive management teams of Oracle, Facebook, and Qualcomm, remain largely white and male, and have failed to deliver on their commitments to diversity. While calls to strengthen commitments to diversity at public companies have steadily increased, these complaints go a step further and seek to reshape the boards and executive teams through litigation and hold directors and executive officers personally liable for perceived diversity shortcomings.

The plaintiffs will need to overcome a number of hurdles in order to sustain their novel claims. But the complaints touch upon serious issues at the center of a broader conversation, and similar lawsuits are likely to come. Many organizations have stated publicly that they are committed to improving racial, gender, ethnic, sexual and other forms of diversity. Last year's Business Roundtable Statement on the Purpose of a Corporation also included a "fundamental commitment" to "foster[ing] diversity and inclusion, dignity and respect" among corporate employees.² Such statements, however, have not always translated into results. The complaints against the Oracle, Facebook, and Qualcomm boards thus serve as a reminder that stakeholders of companies making public commitments to diversity are increasingly expecting those companies to follow through, and for their boards to focus on diversity and inclusion at all levels within their organizations. The recent complaints also serve as a reminder that those stakeholders - including stockholders - may pursue litigation in their attempts to hold directors and officers accountable.

BACKGROUND

The facts alleged in the Oracle, Facebook, and Qualcomm complaints differ, but the core claims and requested relief are similar. In each case, a shareholder seeks to assert derivative claims on behalf of the company against its directors and certain officers on the alleged basis that they, among other things:

1. breached their Caremark duty of oversight by failing to monitor the companies' compliance with anti-discrimination laws;³
2. authorized allegedly false statements in proxy statements - such as avowing a "commitment to diversity" - on which shareholders relied in reelecting the directors, approving executive compensation, and rejecting shareholder proposals concerning diversity issues;
3. breached their fiduciary duties by failing to ensure diverse candidates are selected to sit on the board; and
4. overcompensated themselves at the expense of minority and women employees and in light of the other alleged breaches.⁴

Caremark Claim. In the Oracle case, the complaint alleges that the directors failed to monitor the company's compliance with anti-discrimination laws, and as a result the company is embroiled in a pending wage and hiring discrimination lawsuit by the U.S. Department of Labor, in which the Department of Labor calculated that Oracle's alleged discriminatory practices had cost its employees over $400 million in lost wages over a four-year period,⁵ as well as a pending class-action alleging gender-based wage discrimination.⁶

In the Facebook case, the complaint similarly alleges that the board's failure to monitor the company's actions relating to hate speech and housing discrimination has resulted in the ongoing boycott by Facebook advertisers and lawsuits against the company, including one by the U.S. Department of Housing and Urban Development.⁷

The complaint against Qualcomm's directors alleges that in 2016, the company settled a class action lawsuit concerning gender-based pay disparities, and that four years later, the company was rated poorly in an equity report as a result of the same lingering disparities.⁸

Proxy Statement Disclosures. All three complaints allege that the boards authorized false statements to be included in annual proxy statements filed between 2018 and 2020 in violation of Section 14(a) of the Exchange Act. In particular, the complaints point to statements about the companies' commitment to diversity in their workforce and on their boards,⁹ which they allege were materially false or misleading¹⁰ when measured against the lack of racial diversity among directors and executive...