Federal district court denies Target’s motion to dismiss securities claims related to one of its ESG and DEI Initiatives

Plaintiff sued Target for violations of the Securities and Exchange Act of 1934 under Section 10(b), Rule 10b-5, Section 14(a), Rule 14a-9, and Section 20(a). Specifically, Plaintiffs alleged that Target, its CEO, and former and current members of the board of directors (the Board) failed to adequately disclose the risks associated with the 2023 Campaign, despite that Target’s prior similar efforts had been met with customer and investor backlash.

According to Target’s proxy statements, its Board is responsible for overseeing Environmental, Social, and Governance (ESG) strategy, risks, and reputation management. Target also maintains a Governance & Sustainability Committee (GSC) to which the Board delegates responsibility for social and political issues and risks.

Following the re-election of Target’s Board, Target implemented the 2023 Campaign as part of its ESG and Diversity, Equity, and Inclusion, or “DEI,” initiatives. This campaign included sales of LGBT+ focused products across Target’s stores, and resulted in customer backlash, threats that led to employee safety concerns, and a boycott that allegedly led to the loss of $10 billion in market valuation from May 18–23, 2023. Target ultimately pulled the 2023 Campaign collection from many of its stores. Plaintiffs allege that between May 17 and October 6, 2023, Target lost more than $25 billion in market capitalization.

As to Plaintiffs’ 10(b) claim, Defendants argued that Plaintiffs had failed to plead (1) a material misrepresentation or omission, (2) scienter, or (3) loss causation.

With respect to Plaintiffs’ pleading of a material misstatement or omissions, Defendants argued that the Complaint failed to plead any false statement.  The Court disagreed and focused its analysis on (i) risk warnings in Target’s 2021 and 2022 Annual Reports and (ii) oversight statements within the 2022 and 2023 proxy statements.  The Court explained that Target’s general risk warnings could be materially misleading because they were not specifically tailored to the Campaign.  The court also found that the risk warnings could be misleading because Target had failed to mention to shareholders its plans for a “new and aggressive” campaign, which could be construed as a change to prior campaigns. The Court likewise declined to dismiss the Complaint under the safe harbor provision that protects forward looking statements because it pleaded facts showing that Defendants’ statements were made with actual knowledge that they were false and misleading.

For the oversight statements in Target's 2022 and 2023 proxy statements, the Court noted that the Board was monitoring social and political risks and delegated responsibility for “social and political issues and risks” to the GSC, Plaintiffs had plausibly alleged that Target may have ignored social and political risks related to the Campaign. Plaintiffs had alleged that the GSC either did not monitor social or political risks or, in the alternative, only monitored risk from one side of the political spectrum.

Defendants next argued that the Complaint failed to plead particularized facts supporting an inference that the CEO acted with scienter. The Court was unable to determine how much DEI incentives factored into the CEO’s compensation, and therefore found that Plaintiffs did not plead a strong inference of scienter on that basis. Likewise, the CEO’s public statements committing to Target’s stakeholders also was insufficient to give a strong inference of scienter. However, the Court found that Defendants had adequately pleaded severe recklessness based on allegations that the CEO had knowledge that prior LGBT campaigns led to backlash. Because Defendants had adequately pleaded scienter as to the CEO, it also adequately pleaded scienter to Target.

Finally, Defendants argued that Plaintiffs failed to plead loss causation because they did not allege a stock drop immediately following the backlash to the Campaign. The Court agreed with Plaintiffs that they were not required to show that Target’s stock price immediately dropped; rather, it is sufficient that a plaintiff allege a “gradual leak” of the truth as it spread across media outlets several days and weeks leading to a drop in stock price.

The Court also addressed Plaintiffs’ claim under Section 14(a), which prohibits the use of false statements in proxy solicitations. The Court found that scienter is not a necessary element of Section 14(a) and that Plaintiffs pleaded negligence adequately because they identified misleading statements in the 2022 and 2023 annual proxy statements. Further, Plaintiffs pleaded that Defendants were also aware or should have been aware of red flags and were on notice of the risk of its activism on LGBT issues based on similar backlash Target had received in the past.

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This decision highlights the importance of well-articulated and specific disclosures, particularly when a company’s past experience may indicate the possibility of future risks.

Authored by Allison M. Wuertz, Courtney Devon Taylor, Christine Jiha, Sean MacDonald, and Jacey Gottlieb.