The blog has previously covered the ongoing litigation over California’s director diversity statutes, with Ann contributing this insightful writeup of an earlier Ninth Circuit decision.  The case has returned to the Ninth Circuit on appeal again after the District Court denied a motion for a preliminary injunction.   The case involves a shareholder claim challenging SB 826 on the theory that the law exerts pressure on shareholders to unconstitutionally discriminate when they cast their votes for directors in shareholder elections out of fear that electing a board without enough women will subject the corporation to a fine.

I joined with seventeen other securities and business law scholars to file an amicus brief arguing that the shareholder claim should be classified as a derivative claim.  Many thanks to all who joined and many apologies to Faith Stevelman who joined before the filing deadline and sent thoughtful comments.  In the rush to finalize the brief, I didn’t get her name on the final list of amici.  

This is the summary of the argument:

This shareholder derivative litigation should be decided under ordinary rules for shareholder litigation.  Plaintiff has asserted claims and sought a preliminary injunction as a shareholder of OSI Systems, Inc. (OSI).  Plaintiff alleged that he fears California’s law may harm OSI and that this fear might hypothetically influence him to cast his few shareholder votes in some discriminatory way in a corporate election to select a slate of directors.  His alleged injury is nothing more than an abstract “voting consideration” affecting how he might cast his vote to avoid an injury to OSI, and derivatively to the value of his shares.  The Plaintiff’s standing derives from fear of a potential corporate injury.  As Plaintiff’s alleged injury is in no way meaningfully independent from an entirely hypothetical future injury to OSI, this is a derivative claim.

The record makes clear that Plaintiff’s nominal stockholdings give him no meaningful prospect of influencing a director election for OSI’s board.  OSI elects its board through a plurality voting system.  Plaintiff’s paltry holdings have no meaningful prospect of influencing the outcome of any director election. Moreover, OSI’s director elections have been uncontested since it went public.  At the time the Ninth Circuit first considered this litigation, Plaintiff presented his complaint as though his votes might matter in some contested election where he had to make some meaningful decision between rival slates of directors.  Meland v. Weber, 2 F.4th 838, 847 (9th Cir. 2021) (“Meland I”) (“Meland has alleged that he is required or encouraged to make discriminatory decisions in voting for board members”).  The facts now reveal that this is not the case.  Plaintiff has never faced any meaningful choice between different directors implicating his voting decision.  The few votes available to cast from his nominal shareholdings would never have mattered because there were no other candidates.

Ultimately, the right to bring corporate claims properly belongs to the corporation and not to each shareholder.  OSI’s existing board has the authority under Delaware law to decide whether and when to pursue litigation and challenge statutes affecting the corporation.  SB 826 primarily impacts the board because the board makes all the meaningful decisions about whether to remain subject to SB 826 and whom to nominate as a director.  Any fine imposed would fall upon OSI and OSI would have standing to challenge it—if it deemed it in its interest to do so.

Allowing shareholder plaintiffs with nominal stakes to assert claims on the theory that laws encourage them to vote to avoid harm to the corporation risks destroying the distinction between direct and derivative claims.  Granting shareholders standing to litigate these claims would deny the corporate board the ability to maintain exclusive control over the corporation’s litigation assets.