Recent legal filings referencing National Center for Public Policy Research (NCPPR) v. Schultz (the Starbucks case), are advancing a dangerous notion: that non-profit advocacy groups cannot be proper plaintiffs in shareholder derivative suits. This interpretation of the law, if left unchecked, fundamentally undermines shareholder democracy and corporate accountability, creating a convenient shield for boards to evade scrutiny over potentially harmful or illegal conduct. (Full disclosure: I am an employee of NCPPR.)
In NCPPR v. Schultz, the judge dismissed the National Center for Public Policy Research's complaint against Starbucks' officers and directors, which alleged the company’s Diversity, Equity, and Inclusion (DEI) policies amounted to illegal racial discrimination. The court concluded that NCPPR "did not file this action to enforce the interests of Starbucks, but to advance its own political and public policy agendas," and therefore was not a "fairly and adequately representative" shareholder. The judge even went so far as to suggest that if NCPPR was "so concerned," it should simply "reallocate [its] capital elsewhere."
As I have argued elsewhere, this reasoning is deeply flawed. NCPPR’s concerns about DEI aligned perfectly with the interests of Starbucks and its shareholders because illegal discrimination, even under the guise of DEI, poses a significant financial risk to the company's bottom line. Indeed, Starbucks had recently lost a roughly $25 million reverse-discrimination lawsuit, a clear indicator of such financial harm. By dismissing the case, the judge essentially declared that allegations of illegal discrimination have "no business being before this Court," despite legislatures having clearly spoken on the illegality of racial discrimination. Furthermore, the judge’s ruling failed to acknowledge that knowingly engaging in illegal conduct is generally not protected by the business judgment rule, which NCPPR explicitly alleged Starbucks was doing by adopting policies known to violate state and federal civil rights laws. The judge's subsequent invitation for Rule 11 sanctions effectively put a "price tag" on NCPPR's right to appeal, forcing them to drop the case.
This troubling precedent is now being cited as good law. In the recent motion to dismiss filed by Smith & Wesson (S&W) Brands, Inc. against the Adrian Dominican Sisters and other plaintiffs, the defendants invoked NCPPR v. Schultz to argue that the Sisters, a consortium of social activists, were not adequate shareholder representatives because they held a "small number of shares" for the "sole purpose of stopping the manufacture, marketing, and sale of modern sporting rifles". S&W claimed the Sisters had a "unique non-economic motivation" that set them apart from the majority of stockholders who invest for financial gain.
Rather than argue that the court should reject the reasoning of NCPPR v. Schultz, the S&W plaintiffs tried to argue it was inapplicable to them because, among other things, they had filed successful proposals in the past. However, the status of a shareholder as a proper representative of shareholder interests does not require prior successful proposals.
Dismissing derivative suits simply because a plaintiff identifies as an "activist" or has a "social agenda" is a dangerous oversimplification. When that agenda directly intersects with a corporation's legal compliance, financial well-being, or long-term value creation, it is a proper corporate purpose. As corporate governance expert Prof. Stephen Bainbridge recently noted:
In the well-known State ex rel. Pillsbury v. Honeywell, Inc. decision, plaintiff belonged to an antiwar group trying to stop Honeywell from producing anti-personnel fragmentation bombs for the military. After buying some Honeywell stock, plaintiff requested access to Honeywell’s shareholder list and to corporate records relating to production of such bombs. In denying plaintiff access to those records, the court emphasized that plaintiff’s stated reasons were based on his pre-existing social and political views rather than any economic interest. Accordingly, the court carefully limited its holdings to the facts at bar: “We do not mean to imply that a shareholder with a bona fide investment interest could not bring this suit if motivated by concern with the long-or short-term economic effects on Honeywell resulting from the production of war munitions.”
Importantly, the Honeywell court rested its conclusion in part on the fact that “petitioner was not interested in even the long-term well-being of Honeywell or the enhancement of the value of his shares. His sole purpose was to persuade the company to adopt his social and political concerns, irrespective of any economic benefit to himself or Honeywell.” This is in stark contrast to a shareholder like NCPPR, which created its Free Enterprise Project precisely to promote the economic well-being of corporations that is critical to optimizing the value-creation of our free-market capitalism. In other words, as opposed to being indifferent to the economic well-being of the corporations we own, our core mission is to keep corporations from going broke by going woke.
Ultimately, shareholder democracy thrives when diverse voices can hold management accountable. To shut the courthouse doors to non-profit advocacy groups, particularly when they allege systemic failures in oversight or knowing violations of law that lead to corporate harm, is to endorse a system where corporate boards operate with less transparency and less accountability. It is to say that if a shareholder wants to ensure a company adheres to the law, or protects its reputation and finances from self-inflicted wounds, they must do so without any reference to ethical concerns. This is not good corporate governance; it is a retreat from it.