Client Advisory: Diversity and Derivatives

A greater wave of derivative litigation expected in the months and years ahead

Oracle. Facebook. Qualcomm. The Gap. NortonLifeLock. Danaher. Monster Beverage Corp. Google/Alphabet. These companies have at least two things in common:

  1. A record of past public statements concerning the importance and need for diversity and inclusion at their companies; and
  2. Their directors are now being sued for a lack of diversity in the boardroom and, in some cases, the C-suite and overall workplace.

Seven of the eight companies are facing lawsuits brought by the same firm, Bottini & Bottini. The Danaher matter was filed by Robbins Gellar Rudman and Dowd, which is also the only case not filed in California. Let’s take a look at each one.

Oracle Corporation

On July 2, 2020, Bottini & Bottini filed a derivative complaint in the United States District Court (USDC) for the Northern District of California in the name of R. Andre Klein derivatively on behalf of Oracle Corporation and Oracle America, Inc., and naming the Oracle directors individually as defendants. The lawsuit alleges that the board breached its fiduciary duties of candor, good faith and loyalty to the company by failing to have a sufficiently diverse workforce and for a lack of “underrepresented minorities” on the board (other than one, Vishal Sikka.). The complaint further alleges that each individual director defendant “aided and abetted” the other individual defendant’s breaches of fiduciary duties, that such conduct was an abuse of their ability to control and influence the company, that the individuals were unjustly enriched by virtue of their executive compensation and that each violated section 14(a) of the Exchange Act and SEC Rule 14a-9 for making false and misleading statements in the company’s 2019 and 2020 proxies. 

Facebook

On July 2, 2020, Bottini & Bottini filed a derivative complaint against the directors of Facebook, Inc. The plaintiff, Natalie Ocegueda, also filed in the USDC for the Northern District of California. This complaint also alleges a lack of diversity on the board, but goes further to include the senior management group alleging in part, that Facebook’s hiring of an African-American CFO was “a token hire not to be taken seriously.” In fact, not long after he was hired, the CFO resigned, alleging that Facebook CEO Mark Zuckerberg “did not listen to him.” He was replaced by a white male. As with Oracle, the Facebook complaint alleges false and misleading statements in the 2019 and 2020 proxy statements, violations of section 14(a) of the Exchange Act and SEC Rule 14a-9. Allegations related to executive compensation, breach of fiduciary duties and abuse of control are also similar to the Oracle matter. 

Qualcomm

On July 17, 2020, a derivative complaint was filed in the USDC, Southern District of California. It was filed by Bottini & Bottini on behalf of Becky Kriger, a shareholder on behalf of Qualcomm. It alleges that the Board breached its fiduciary duties of to the Company in failing to have a sufficiently diverse workforce and for not having “underrepresented minorities” (primarily African Americans) on the board. The Complaint further alleges that each individual defendant aided and abetted the other individual defendants’ breaches of fiduciary duties, that such conduct was an abuse of their ability to control and influence the company, that the individuals were unjustly enriched by virtue of their executive compensation and violated section 14(a) of the Exchange Act and SEC Rule 14a-9 pertaining to misleading statements that comprised a part of the 2019 and 2020 proxy statements.

Norton LifeLock

On August 5, 2020, the directors of NortonLifeLock, Inc. were sued in the USDC for the Northern District of California. The suit was filed by Elliemaria Toronto Esa derivatively on behalf of the company. The suit was filed by Bottini & Bottini, alleging that—other than one Asian male appointed to the board by his employer, Silver Lake, an investor of the company—the board and senior executive team lack racial (African-American) diversity. As with the cases noted above, the allegations against the individual board members are: breach of fiduciary duties, aiding and abetting, abuse of control, unjust enrichment, and violations of section 14(a) of the Exchange Act and Rule 14a-9. The complaint generally asserts that African-Americans make up approximately 2% of the NortonLifeLock workforce.

The Gap

On September 1, 2020, the board of The Gap, Inc. was sued derivatively by Noelle Lee on behalf of the company in the USDC for the Northern District of California. The plaintiff’s firm is Bottini & Bottini. The allegations are the same as the ones mentioned above against Oracle, Facebook, Qualcomm and NortonLifeLock. As for the section 14(a) claims, the plaintiff alleges the false and misleading statements were set forth in the company’s 2018 and 2019 proxy statements. The plaintiff further alleges that African-Americans make up only 4% of the workforce at the company’s headquarters while comprising 23% of the workforce at the company’s distribution centers. 

Danaher Corporation

On September 1, 2020, the first institutional plaintiff, City of Pontiac General Employees Retirement System, filed a derivative complaint on behalf of Danaher Corporation alleging breach of fiduciary duties, unjust enrichment and violation of section 14(a) of the Exchange Act and Rule 14a-9 against many—though not all—directors. In this matter, the filing firm is Robbins Gellar Rudman & Dowd, and the suit has been filed in the USDC for the District of Columbia. As to the 14(a) claims, Robbins Gellar asserts that the false and misleading statements appear in the company’s annual proxy statements from 2016 to 2020. 

Monster Beverage Corp.

On September 18, 2020, the board of directors of Monster Beverage Corp. was sued derivatively in the USDC for the Central District of California. The plaintiff is Frank Falat, who has filed derivatively on behalf of Monster Beverage Corporation and retained the services of Bottini & Bottini. As with the complaints referenced above, the complaint alleges that the company is lacking in racial diversity with no African-Americans on the board or executive team. The complaint notes that the two top executives at Monster are from South Africa where “apartheid and racial discrimination persisted until the 1990s.” It also notes that false and misleading statements were made in the 2019 and 2020 proxy statements in violation of section 14a of the Exchange Act and Rule 14a-9. Different from the foregoing complaints however, are additional allegations against the Monster board pertaining to sexual harassment, sexual assault, sexual discrimination, retaliation against female workers, and fostering a “testosterone-charged culture which protected male executives who engaged in” such conduct. This is not the first such gender-based derivative complaint filed by Bottini & Bottini, though the other case has gone largely unnoticed.

Google/Alphabet

In January 2019, Bottini & Bottini filed a derivative complaint against the board of Directors of Google/Alphabet. The allegations of the Consolidated Stockholder Derivative Complaint, in which the named plaintiffs were institutional and individuals, involved severance pay and favorable treatment of alleged sexual harassers, and “a male-dominated company with a male-dominated culture, like the tech industry at large.” Plaintiffs further alleged that the directors of the company fostered a "brogrammer culture, where women are sexually harassed and valued less than their male counterparts.” This statement is much like the “testosterone-charged culture which protected male executives” that appears in the Monster complaint. The complaint also alleged that company executives and the board hid a cyber-breach for fear regulatory bodies would investigate them. According to the Consolidated Derivative Complaint, a group of U.S. Senators wrote a letter to the Federal Trade Commission asking for an investigation into alleged wrongdoing at Alphabet. The letter characterized the claims of sexual harassment and the non-disclosure of the cyber breach as representative of “a culture of concealment and opacity set from the top of the company.” The letter also noted a pending securities class action suit against Alphabet involving these same allegations. When the allegations of the defendants’ misconduct were publicly revealed in the Wall Street Journal and New York Times, the letter pointed out, the stock price declined 6% and 7% respectively.

In a recently announced settlement, Alphabet has agreed in part, to set aside $310M in funding (not payable by insurance), toward diversity initiatives and prohibit severance packages to employees who are the subject of any pending investigation for sexual misconduct or retaliation. Alphabet has also agreed to establish a diversity, equity and inclusion advisory council with external experts and company leadership. Significantly, details of the settlement do not include information about what the fee is for plaintiff’s counsel if indeed, a fee has been agreed upon.

What’s ahead

These eight cases are only the start of what is expected to be a much greater wave of derivative litigation. The underlying premise is that there are many published reports stating that diversity in boardrooms leads to greater prosperity and performance. The suits allege that—although the companies themselves have affirmed their commitment to their diversity practices (through proxy statements and other means)—on closer examination the companies are falling far short of their public statements.

Regarding the “Prayer for Relief,” each complaint seeks similar relief: compensatory damages, corporate governance reform, reformation and/or implementation of internal controls, punitive damages and disgorgement. In terms of governance and internal controls, the following are proposed:

  • Removal of directors
  • Creation of a fund (ranging from $500 million to $1 billion, depending on the complaint) to promote the hiring of black and minority employees
  • Establishment of a mentorship program for minorities
  • Annual training for board and executive personnel focusing on diversity, affirmative action, anti-discrimination and anti-harassment conduct
  • Greater transparency, and revision of executive compensation to be tied, in part, to achievement of diversity goals and other relief

These changes are not just the concern of plaintiff lawyers; government executives and lawmakers at the state level are also taking up these issues. In September 2018, SB-826 was signed into law in California, requiring publicly traded companies with principle offices in California (regardless of the state of incorporation), to place or increase the number of women on boards or face escalating monetary penalties.

Currently in California, AB-979 is awaiting Gov. Gavin Newsom’s decision on whether or not he will sign it into law. The bill would require companies with a principal office in California to have a minimum of one director “from an underrepresented community, as defined.” The definition is as follows: “Director from an underrepresented community” means an individual who self-identifies as Black, African-American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian, or Alaska Native, or who self-identifies as gay, lesbian, bisexual, or transgender.”

California is not alone here. Hawaii, Massachusetts, Michigan, New Jersey, Washington, Illinois and New York have, or are considering, some type of diversity law for public corporations.

In Europe, gender diversity is given even greater attention. Norway was the first country to adopt a quota for female participation on boards. In 2003, they mandated a 40% requirement for public corporations. Failure to comply meant the company could be shut down. Germany, France, Malaysia, Belgium, Iceland and Italy also adopted mandatory quotas. Denmark is currently working on a mandatory quota law requiring at least 30% of its board to be made up of female members. Spain has a “soft” or recommended quota of 40%.

Other countries such as Austria, Finland, Sweden and the United Kingdom adopted voluntary quotas between 25% - 40%. The European Union has revived a 2012 proposal mandating a quota. A 40% quota that year faced heavy opposition from several countries, most notably the U.K, which wanted a suggested or recommended figure. Now that the U.K. has left the EU, members are much more optimistic that a quota will be established.

Back in the United States, Newsweek published an article in June 2020 entitled, “The 20 Largest U.S. Public Companies Without a Black Person On Their Board.”(opens in a new tab) Considering this article, and noting plaintiff’s statements within the various complaints relating to a lack of diversity, more of these suits should be expected.

Companies also should be aware of business relationships and the investment community as it relates to this topic. Institutional investors such as Blackrock, Fidelity, Vanguard, Carlyle Group and others are speaking out. Institutional Advisors such as Lewis Glass and ISS are promoting research and proxy voting recommendations for institutional investors, and have asked public companies to disclose the “self-identified” race or ethnicity of the company’s directors and named executive officers.

While board composition will not change quickly, we recommend companies consider their composition, engage their institutional investors on this issue, and be cognizant, especially in this social climate of change.

To learn more about this topic, please contact:

Kieran P. Hughes
Executive Risk Advisors
Senior Vice President, Senior Claims Counsel
404-497-7515
kieran.hughes@McGriff.com  

To learn more about McGriff Executive Risk Advisors, please contact:

David Sellars
Executive Risk Advisors
Executive Vice President, Co-Division Leader
404-497-7582
dsellars@McGriff.com  

Dusty Cahill
Executive Risk Advisors
Executive Vice President, Co-Division Leader
404-497-7537
dcahill@McGriff.com

Insurance products and services offered through McGriff Insurance Services, Inc., a subsidiary of Truist Insurance Holdings, Inc., are not a deposit, not FDIC insured, not guaranteed by a bank, not insured by any federal government agency and may go down in value.

McGriff Insurance Services, Inc. CA License #0C64544