January 31, 2023

District of Delaware dismisses lawsuit against wireless technology company for failure to plead actionable misrepresentation

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On November 15, 2021, Judge Richard G. Andrews of the United States District Court for the District of Delaware dismissed a derivative lawsuit against a company that provides hardware, software, and services for wireless technology (the “ Company”), alleging that the Company violated Section 14(a) of the Securities Exchange Act of 1934 and breached its fiduciary duty by allegedly allowing “unlawful and discriminatory practices to proliferate within the Company”. Kiger v. Mollenkopf, No. 21-409-RGA (D. Del. 15 Nov. 2021). The plaintiffs alleged that the company made misrepresentations in the 2019 and 2020 proxy statements regarding its commitment to diversifying its board of directors (the “Board”). The Court dismissed the complaint for failing to plead an actionable inaccuracy or omission and for failing to plead the futility of the claim.

As the Court noted at the start of the notice, “there was no specific event involving the Company. . . which gained public notoriety and precipitated the filing of a legal complaint. Instead, plaintiffs – the Company’s shareholders suing derivatively on behalf of the Company – alleged that certain statements in the Company’s 2019 and 2020 proxy statements regarding the Company’s efforts to increase diversity were misleading. Specifically, the plaintiffs alleged that the company made false and misleading statements or omissions when it (1) stated that the “purpose” of its governance committee was to build a diverse board; (2) said it would ask search firms to include racially and ethnically diverse candidates in its pool of board candidates; (3) failed to disclose that the “purpose and effect” of the company’s proxy access rules and term limits was to “prevent” the nomination and election of various nominees to the board; (4) distorted the nature of executive compensation; and (5) failed to disclose oversight failures related to the alleged discriminatory practices. The company sought dismissal, arguing that the plaintiffs had failed to plead an actionable inaccuracy or omission and failed to demonstrate the futility of the claim.

The Court agreed with the Company and dismissed the complaint. First, the Court dismissed plaintiffs’ claims regarding the Company’s statement in its 2019 proxy statement regarding its “objective” to be a diverse board. The Court explained that statements about a company’s “objectives” constitute unassailable buffoonery and are subject to rejection because they involve “subjective analysis or extrapolations”.

Second, the Court dismissed plaintiffs’ claims regarding the company’s statement regarding its governance committee’s instructions in the 2020 proxy statement on the basis that plaintiffs had failed to properly allege that the disputed statements were misleading. . As the Court explained,[t]The fact that no minority candidates have been elected to the board in the past six years does not necessarily mean that the Governance Committee has not included or instructed its search firms to include “candidates of racial/ethnic diversity” in its candidate pool. The court further rejected plaintiffs’ argument that the 2020 proxy statement was misleading because the governance committee had no “intent” to appoint racially and ethnically diverse candidates to the board. To the contrary, the Court found that the impugned statement did not state or suggest that the Governance Committee would in fact nominate racially and ethnically diverse candidates, only that such candidates would be included in the director candidate pool.

With respect to the other categories of alleged inaccuracies, the Court dismissed the plaintiffs’ claims regarding proxy access rules and term limits because it concluded that there was no obligation to disclose the “purpose and effect” of proxy access rules and term limits. The Court further dismissed the plaintiffs’ claims regarding executive compensation because the plaintiffs did not identify a misrepresentation regarding executive compensation in either of the challenged proxy statements. The Court also dismissed the plaintiffs’ claims of alleged omission of inadequate supervision because it found that the plaintiffs were only “starting a federal securities claim at a [state law] cause of action for breach of fiduciary duty”, which “is not permitted. The Court added that the plaintiffs had not “convinced[] the Court that their Article 14(a) [claim] based on breaches of supervision falls within the exception where such claims can be dealt with alongside a claim of fiduciary duty.

Finally, the Court dismissed the plaintiffs’ claims of breach of fiduciary duty because the complaint did not contain “the detailed allegations necessary to be accepted under Rule 23.1.” Specifically, the Court held that the plaintiffs’ allegations “failed to reasonably infer that there is pervasive unlawful racial discrimination in the [the Company] which the Council knowingly ignored or tacitly approved”. In the absence of such specific allegations, the Court noted that the plaintiffs had not sufficiently alleged that the directors[d] a substantial likelihood of liability on claims of fiduciary duty such that the claim should be excused.

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