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Here’s a recent blog that my colleague Mike Melbinger ran on

I have written about corporations’ recent efforts to improve DE&I by the one method most likely to produce improvements:  linking executive compensation to achieving DE&I goals.  However, along with corporations’ efforts to improve DE&I has come a spate of lawsuits  (mostly filed by the same law firms) against corporations that publicly disclosed aspirational goals on DE&I improvements, but allegedly fell short of those goals.  Plaintiffs’ firms have filed lawsuits against several companies, including Oracle, Facebook, Qualcomm, the Gap, Cisco, and Monster Beverage.  The lawsuits seek to hold the board of directors and top executives at each corporation liable for making misleading statements about diversity, which allegedly led to reputational and financial damage.

In mid-March, the United States District Court for the Northern District of California (San Francisco) granted Facebook’s motion to dismiss the lawsuit filed against it [Ocegueda v. Zuckerberg, et. al.]  The court’s opinion includes helpful guidelines.  In Ocegueda the plaintiffs’ lawyers make a variety of fanciful claims against the board and its members, including breach of fiduciary duty, aiding and abetting the breach of fiduciary duty, and unjust enrichment, and also claimed an abuse of control against Zuckerberg.  But the claim I am focusing on in this post is that Facebook made false and misleading statements in its proxy statements, in violation of § Section 14(a) of the Exchange Act.

The plaintiffs’ lawyers argued that statements in the 2019 and 2020 proxy statements — that Facebook is committed to diversity — were materially false because Facebook in fact was not committed to diversity, and the directors knew it.  As to this claim, the court found that:

Even under a Rule 8(a) standard, the plaintiff does not plausibly plead a materially false statement because the aspirational assertions in the proxy statements are non-actionable, the allegations do not support the claim of widespread unlawful practices, and she does not allege that the proxies were a causal link to a loss-generating corporate action.

It did not help that the plaintiffs’ allegations were patently false (“two of nine directors are Black, a third Black director stepped down in March 2020 to join Berkshire Hathaway, four of nine directors are women, one is openly gay, and, since its adoption of its diversity policy in 2018, a majority of new nominees have been Black or women”), as observed by the court and as would have been clear to any elementary school student who had actually read Facebook’s proxy statement or looked at its website.

The court’s opinion then goes on to provide an excellent summary of the cases considering whether statements in a proxy or other SEC filings are in the nature of “non-actionable puffery or aspirational,” referencing statements such as:

  • Statements to commit to certain “shared values;” not capable of objective verification
  • Statements about commitment to a “diverse workforce” and “an inclusive and positive working environment” were “immaterial puffery”
  • Commitment to ethical practices “inherently aspirational and hence immaterial”
  • Commitment to highest standards of governance is “quintessential, non-actionable puffery”

Separately, on March 29, the United States Supreme Court heard oral argument in Goldman Sachs Group, Inc., et al. v. Arkansas Teacher Retirement System, which considers whether general, aspirational statements regarding compliance and internal controls are sufficient to certify a securities class action in situations where a company’s stock price declines due to the negative news.  The type of generic disclosure in the Goldman case does not relate to DE&I, but it does implicate statements of the type noted above.  Many companies also make disclosures on ESG and HCM that probably should be viewed as aspirational.  The outcome of this case will be very important.

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On April 9, 1942, Major General Edward P. King Jr. surrendered 78,000 troops (66,000 Filipinos and 12,000 Americans) to the Japanese in Bata ‘an [Bataan] in the Philippines, the largest contingent of U.S. soldiers ever to surrender.  Japanese troops immediately led the prisoners 55 miles from the southern end of the Bataan peninsula, to San Fernando, on what became known as the “Bataan Death March.”  The route of the march is marked by mile marker monuments and a visitor can follow most of it, as I did for short stretches, during my visit.  At least 600 Americans and 5,000 Filipinos died during the march because of the brutality of the Japanese soldiers, their lack of training, and a lack of food and medical supplies.

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