Court Dismisses Lack of Diversity Allegations Against Facebook

On Friday, Magistrate Judge Laurel Beeler of the Northern District of California issued an order granting Facebook’s motion to dismiss a shareholder derivative action brought against nominal defendant Facebook and members of its board of directors and executive team over the company’s purported lack of diversity and alleged misleading statements in its proxy statements to the Securities and Exchange Commission about its diversity.

According to the order, the plaintiff challenged “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,” which alleged violated the Securities Exchange Act of 1934.

Specifically, the order noted that Facebook moved to dismiss the suit on the following grounds: “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”; “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”; and the plaintiff did not state a plausible claim under § 14(a) of the Act “because she did not identify any materially false and misleading statements.”

Magistrate Judge Beeler granted the defendants’ motion to dismiss finding that the plaintiff did not make a pre-suit demand, and “her excuses – the defendants’ disregard for unlawful practices, alleged liability for false statements, and lack of independence – do not plausibly plead futility.” For example, the court said that the plaintiff failed to plausibly allege “any facts about the directors’ actual or constructive knowledge of illegal conduct, their failure to act, or their lack of independence.” 

Lastly, the court stated that the plaintiff’s claims do not plausibly plead a materially false statement under § 14(a) because “the aspirational assertions in the proxy statements are non-actionable” and the “allegations do not support the claim of widespread unlawful practices.”

As a result, the court granted the motion to dismiss the federal claim under Rule 23.1 and Rule 12(b)(6) but gave the plaintiffs leave to amend within 21 days. The court granted the motion to dismiss the remaining state claims without prejudice to reassert the claims in the Delaware Court of Chancery.

Facebook is represented by Latham & Watkins LLP. The plaintiff is represented by Bottini & Bottini Inc.