December 1, 2021

Volume XI, Number 335

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Diversity Derivative Suit Dismissed

A shareholder derivative action which had alleged that Facebook’s lack of diversity caused a negative effect on its stock price was rejected by a California federal magistrate judge last week.

The court held that the shareholder plaintiff had not pled demand futility with particularity, as required by Fed. R. Civ. P. 23.1, because she had not “plausibly alleged any facts about the directors’ actual or constructive knowledge . . . their failure to act, or their lack of independence.” Labeling the plaintiff’s allegations as “conclusory,” the court held that the complaint contained inaccurate factual allegations and that the plaintiff “did not plead plausible facts about discriminatory practices,” of the Company. Because the allegations that Facebook’s directors ignored red flags were “contradicted by the record,” and the alleged events occurred before four of the directors joined Facebook’s board, the court held the complaint was unsustainable.

Notably, the court also held that the forum selection clause in Facebook’s Restated Certificate of Incorporation provided that the exclusive forum for derivative actions and actions asserting breaches of fiduciary duties by directors is the Delaware Court of Chancery. The shareholder plaintiff attempted to avoid the forum selection clause by arguing that, by bringing her suit in Chancery Court, she would not be able to litigate her federal claim (an allegation under Section 14(a) of the Exchange Act.)  She also alleged that she bought her shares before the restated certificate became effective, and therefore the forum selection clause did not bar her claim. The court held that when claims accrue after the effective date of the forum-selection clause, the clause should be enforced. And because the complaint failed to plead demand futility, the court dismissed the 14(a) claim.

This lawsuit was brought amongst a slew of derivative complaints filed by shareholders claiming that a lack of board diversity has affected share prices. The courts, however, seem unmoved by these attempts thus far.

© 2021 Proskauer Rose LLP. National Law Review, Volume XI, Number 88
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About this Author

Joseph S. Hartunian Litigation Attorney Proskauer Law Firm
Associate

Joe Hartunian earned his J.D. from the University of Michigan Law School, where he was an executive editor of the Michigan Journal of Law Reform. While at Michigan, Joe worked as a legal intern for the U.S. Attorney’s Office for the Eastern District of New York.

Prior to law school, Joe served as a legislative aide for Senator Charles E. Schumer on the Senate Judiciary Committee, focusing on issues related to opioid abuse, telecommunications and gun safety. Upon graduation, he returned to the committee as an advisor to Senator Amy Klobuchar on the nomination of now-Justice...

202-416-6859
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