Federal Court Dismisses Derivative Complaint Seeking to Impose ESG Initiatives on a Public Company

In the past year, there has been a concerted effort by certain plaintiff firms to weaponize environmental, social, and governance (“ESG”) principles to attack corporate boards.

On March 19, 2021, the United States District Court for the Northern District of California in Ocegueda v. Zuckerberg, Ca. No. 3:20-cv-04444-LB (N.D. Cal. Mar. 19, 2021), struck a blow against these efforts by granting defendants’ motion to dismiss.

In dismissing plaintiff’s complaint, the Court applied fundamental principles of corporate law which set a high pleading bar a plaintiff must clear to impose ESG initiatives on a public company through litigation. Hopefully, courts will continue to carefully apply these principles to deter this litigation strategy. Indeed, the adoption of ESG initiatives is fundamentally a business decision involving the board of directors and the stockholders, a decision that does not belong in the courtroom.

Federal Court Dismisses Derivative Complaint Seeking to Impose ESG Initiatives on a Public Company

From the decision (emphasis added):

[Plaintiff] challenges Facebook’s alleged lack of diversity (on its board and executive team, and in its workplace), its allegedly discriminatory advertising practices, and its failure to curb hate speech as (1) a violation of the directors’ fiduciary duty to the corporation and its shareholders and (2) false and misleading statements (because they contradict Facebook’s public proxy statements about its commitment to diversity), in violation of § 14(a) of the Exchange Act, 15 U.S.C. § 78n(a), and SEC Rule 14a-9, 17 C.F.R. § 240.14a-9.

The defendants moved to dismiss in part on the following grounds. First, the plaintiff did not make a pre-suit demand on the board or plead with particularity that a demand was excused as futile, as required by Federal Rule of Civil Procedure 23.1. Second, the plaintiff sued in the wrong forum: Facebook’s Restated Certificate of Incorporation has a binding forum-selection clause requiring derivative actions to be filed in the Delaware Court of Chancery. Third, the plaintiff did not plausibly state a § 14(a) claim because she did not identify any materially false and misleading statements, in violation of Rule 8(a) and the heightened pleading standards of Rule 9(b) and the Private Securities Litigation Reform Act of 1995 (PLSRA).

The court grants the motion to dismiss. The plaintiff did not make a pre-suit demand, and her excuses — the defendants’ disregard of unlawful practices, alleged liability for false statements, and lack of independence — do not plausibly plead futility. The forum-selection clause also precludes the lawsuit here. Finally, the plaintiff’s allegations do not plausibly plead a materially false statement under § 14(a) primarily because the aspirational assertions in the proxy statements are non-actionable.

One Comment Add yours

  1. I expect things are just getting started in this area. Expect such suits to be ubiquitous. D&O insurance policies will need to be adjusted.

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