Lenza H. McElrath, III v. Travis Kalanick
This text of Lenza H. McElrath, III v. Travis Kalanick (Lenza H. McElrath, III v. Travis Kalanick) is published on Counsel Stack Legal Research, covering Court of Chancery of Delaware primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.
Opinion
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
LENZA H. MCELRATH, III, ) derivatively on behalf of UBER ) TECHNOLOGIES, INC., ) ) Plaintiff, ) ) v. ) C.A. No. 2017-0888-SG ) TRAVIS KALANICK, GARRETT ) CAMP, RYAN GRAVES, ARIANNA ) HUFFINGTON, YASIR AL- ) RUMAYYAN, WILLIAM GURLEY, ) DAVID BONDERMAN, and SALLE ) YOO, ) ) Defendants, ) -and- ) ) UBER TECHNOLOGIES, INC., ) ) Nominal Defendant. )
MEMORANDUM OPINION
Date Submitted: December 4, 2018 Date Decided: April 1, 2019
Michael J. Barry, Jeff A. Almeida, and Rebecca A. Musarra, of GRANT & EISENHOFER P.A., Wilmington, Delaware, Attorneys for Plaintiff.
R. Judson Scaggs, Jr., Susan W. Waesco, and Sabrina M. Hendershot, of MORRIS, NICHOLS, ARSHT & TUNNELL LLP, Wilmington, Delaware; OF COUNSEL: Susan S. Muck, Kevin P. Muck, and Marie C. Bafus, of FENWICK & WEST LLP, San Francisco, California, Attorneys for Defendants Garrett Camp, Ryan Graves, Arianna Huffington, Yasir Al-Rumayyan, William Gurley, and David Bonderman.
Donald J. Wolfe, Jr., T. Brad Davey, J. Matthew Belger, and Jacob R. Kirkham, of POTTER ANDERSON & CORROON LLP, Wilmington, Delaware; OF COUNSEL: Joseph G. Petrosinelli and Kenneth J. Brown, of WILLIAMS & CONNOLLY LLP, Washington, District of Columbia, Attorneys for Defendant Travis Kalanick.
Jody C. Barillare, of MORGAN, LEWIS & BOCKIUS LLP, Wilmington, Delaware; OF COUNSEL: Susan D. Resley, of MORGAN, LEWIS & BOCKIUS LLP, San Francisco, California; Marc J. Sonnenfeld, of MORGAN, LEWIS & BOCKIUS LLP, Philadelphia, Pennsylvania, Attorneys for Defendant Salle Yoo.
A. Thompson Bayliss and Michael A. Barlow, of ABRAMS & BAYLISS LLP, Wilmington, Delaware; OF COUNSEL: Mark P. Gimbel and C. William Phillips, of COVINGTON & BURLING LLP, New York, New York; Bryant Pulsipher, of COVINGTON & BURLING LLP, San Francisco, California, Attorneys for Nominal Defendant Uber Technologies, Inc.
GLASSCOCK, Vice Chancellor In the popular fable often attributed to Aesop,1 a scorpion stings a frog that is
ferrying it across a river, dooming both scorpion and frog. “Why would you do
that?” asks the frog, dying. “It is my nature,” replies the drowning scorpion, “as you
knew yourself when you let me on your back.” The Plaintiff in this unusual
derivative action blames the Defendant directors of Uber Technologies, Inc.
(“Uber”) on similar grounds, with then-CEO Travis Kalanick cast as the scorpion.
According to the Plaintiff, Kalanick wanted to boost Uber’s development of a
self-driving car by hiring former Google employees, one of whom, Anthony
Levandowski, had recently been employed at Google working on that firm’s self-
driving car project. Levandowski had formed his own firm in the same field,
Ottomotto, LLC (“Otto”). Uber management began to investigate acquisition of
Otto. Despite the fact that, per the Plaintiff, Kalanick knew that Levandowski had
purloined intellectual property and trade secrets from Google, Uber management
hired an outside firm, Stroz Friedberg (“Stroz”), to investigate whether such a taking
of IP had occurred. Eventually, management recommended acquisition of Otto to
the directors, at an April 11, 2016 meeting of Uber’s Board of Directors (the
“Board”). By that time, Stroz had already conducted some diligence review and
reached preliminary conclusions as to whether Levandowski and his associates at
Otto had retained Google IP when they left that company. Some report of Stroz’
1 In fact, per Wikipedia, the fable is of Russian origin. diligence was made by management to the Board, apparently satisfying the Board.
The Board also discussed the Merger Agreement, which indemnified Otto
employees for prior bad acts to the extent those had been truthfully disclosed to Stroz
and did not require Otto to indemnify Uber for any liability Uber acquired. The
Amended Complaint is silent as to the nature or contents of management’s
presentation to the Board on the Stroz investigation, but the complaint does allege
that the directors failed to ask to see the materials Stroz produced or otherwise gather
information, independent of management, regarding the diligence. At the April 11,
2016 meeting, the Board approved the transaction. After Uber acquired Otto, a
Google employee noticed that Otto was using what appeared to be Google
technology. Google sued Otto and Uber for intellectual property (“IP”)
infringement, and Uber ultimately settled for $245 million.
The Plaintiff brings this suit, purportedly on behalf of Uber, against Kalanick,
the directors who approved the transaction, and others, and seeks damages arising
from the Otto acquisition. He argues that Kalanick’s promotion of the Otto merger,
in light of what he asserts is Kalanick’s essentially bad character, should have been
a red flag to the directors. The Plaintiff points to Kalanick’s alleged history as a
copyright infringer and the fact that, under his control, Uber had acquired a
reputation for breaching local taxi regulations in its ride-share business. As a result,
the Plaintiff argues, the Board must have been well aware that Kalanick was a
2 scofflaw. The Plaintiff posits, therefore, that the Board must have known that
whatever the management representations regarding Stroz’ findings, those
representations were unreliable. As a consequence, by not insisting to read Stroz’
preliminary findings before entering the merger agreement, and in not reading the
final Stroz report before the closing of the merger, the directors breached fiduciary
duties. Further, noting that breaches of the duty of care are exculpated by Uber’s
charter, the Plaintiff alleges that the directors’ failure to insist on reading the reports
was an omission in bad faith, and that the directors who approved the merger
agreement (or failed to stop the merger from closing) are accordingly liable for
breach of the duty of loyalty.
The Defendants have moved to dismiss. Under our well-known model, it is
the province of the directors to deploy corporate assets, including choses-in-action
like the one the Plaintiff attempts to plead derivatively here. The Plaintiff did not
make a demand on the Board to pursue this litigation; therefore, under Court of
Chancery Rule 23.1, his derivative complaint must be dismissed unless he
demonstrates that demand would have been futile on account of the directors’
inability to exercise business judgment in regard to the matter. According to the
Plaintiff, addressing a demand to those directors who approved or failed to stop the
transaction, and who remain on the Board, would be futile because of the likelihood
of their liability. While the majority of the directors who would evaluate a demand
3 joined the Board after the Otto acquisition, the Plaintiff alleges that a majority lacks
independence from Kalanick, and therefore could not bring their business judgment
to bear, excusing demand. The Defendants disagree.
I find that a majority of the Board who would evaluate a demand is
disinterested and independent, and thus the action must be dismissed under Rule
23.1.
My reasoning follows a recitation of the background facts, below.
I. BACKGROUND
The Defendants moved to dismiss the Plaintiff’s Verified Amended
Stockholder Derivative Complaint (the “Amended Complaint”) under Court of
Chancery Rule 12(b)(6), failure to state a claim, and Rule 23.1, failure to make a
pre-suit demand. As a result, the background facts below are drawn from the
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IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
LENZA H. MCELRATH, III, ) derivatively on behalf of UBER ) TECHNOLOGIES, INC., ) ) Plaintiff, ) ) v. ) C.A. No. 2017-0888-SG ) TRAVIS KALANICK, GARRETT ) CAMP, RYAN GRAVES, ARIANNA ) HUFFINGTON, YASIR AL- ) RUMAYYAN, WILLIAM GURLEY, ) DAVID BONDERMAN, and SALLE ) YOO, ) ) Defendants, ) -and- ) ) UBER TECHNOLOGIES, INC., ) ) Nominal Defendant. )
MEMORANDUM OPINION
Date Submitted: December 4, 2018 Date Decided: April 1, 2019
Michael J. Barry, Jeff A. Almeida, and Rebecca A. Musarra, of GRANT & EISENHOFER P.A., Wilmington, Delaware, Attorneys for Plaintiff.
R. Judson Scaggs, Jr., Susan W. Waesco, and Sabrina M. Hendershot, of MORRIS, NICHOLS, ARSHT & TUNNELL LLP, Wilmington, Delaware; OF COUNSEL: Susan S. Muck, Kevin P. Muck, and Marie C. Bafus, of FENWICK & WEST LLP, San Francisco, California, Attorneys for Defendants Garrett Camp, Ryan Graves, Arianna Huffington, Yasir Al-Rumayyan, William Gurley, and David Bonderman.
Donald J. Wolfe, Jr., T. Brad Davey, J. Matthew Belger, and Jacob R. Kirkham, of POTTER ANDERSON & CORROON LLP, Wilmington, Delaware; OF COUNSEL: Joseph G. Petrosinelli and Kenneth J. Brown, of WILLIAMS & CONNOLLY LLP, Washington, District of Columbia, Attorneys for Defendant Travis Kalanick.
Jody C. Barillare, of MORGAN, LEWIS & BOCKIUS LLP, Wilmington, Delaware; OF COUNSEL: Susan D. Resley, of MORGAN, LEWIS & BOCKIUS LLP, San Francisco, California; Marc J. Sonnenfeld, of MORGAN, LEWIS & BOCKIUS LLP, Philadelphia, Pennsylvania, Attorneys for Defendant Salle Yoo.
A. Thompson Bayliss and Michael A. Barlow, of ABRAMS & BAYLISS LLP, Wilmington, Delaware; OF COUNSEL: Mark P. Gimbel and C. William Phillips, of COVINGTON & BURLING LLP, New York, New York; Bryant Pulsipher, of COVINGTON & BURLING LLP, San Francisco, California, Attorneys for Nominal Defendant Uber Technologies, Inc.
GLASSCOCK, Vice Chancellor In the popular fable often attributed to Aesop,1 a scorpion stings a frog that is
ferrying it across a river, dooming both scorpion and frog. “Why would you do
that?” asks the frog, dying. “It is my nature,” replies the drowning scorpion, “as you
knew yourself when you let me on your back.” The Plaintiff in this unusual
derivative action blames the Defendant directors of Uber Technologies, Inc.
(“Uber”) on similar grounds, with then-CEO Travis Kalanick cast as the scorpion.
According to the Plaintiff, Kalanick wanted to boost Uber’s development of a
self-driving car by hiring former Google employees, one of whom, Anthony
Levandowski, had recently been employed at Google working on that firm’s self-
driving car project. Levandowski had formed his own firm in the same field,
Ottomotto, LLC (“Otto”). Uber management began to investigate acquisition of
Otto. Despite the fact that, per the Plaintiff, Kalanick knew that Levandowski had
purloined intellectual property and trade secrets from Google, Uber management
hired an outside firm, Stroz Friedberg (“Stroz”), to investigate whether such a taking
of IP had occurred. Eventually, management recommended acquisition of Otto to
the directors, at an April 11, 2016 meeting of Uber’s Board of Directors (the
“Board”). By that time, Stroz had already conducted some diligence review and
reached preliminary conclusions as to whether Levandowski and his associates at
Otto had retained Google IP when they left that company. Some report of Stroz’
1 In fact, per Wikipedia, the fable is of Russian origin. diligence was made by management to the Board, apparently satisfying the Board.
The Board also discussed the Merger Agreement, which indemnified Otto
employees for prior bad acts to the extent those had been truthfully disclosed to Stroz
and did not require Otto to indemnify Uber for any liability Uber acquired. The
Amended Complaint is silent as to the nature or contents of management’s
presentation to the Board on the Stroz investigation, but the complaint does allege
that the directors failed to ask to see the materials Stroz produced or otherwise gather
information, independent of management, regarding the diligence. At the April 11,
2016 meeting, the Board approved the transaction. After Uber acquired Otto, a
Google employee noticed that Otto was using what appeared to be Google
technology. Google sued Otto and Uber for intellectual property (“IP”)
infringement, and Uber ultimately settled for $245 million.
The Plaintiff brings this suit, purportedly on behalf of Uber, against Kalanick,
the directors who approved the transaction, and others, and seeks damages arising
from the Otto acquisition. He argues that Kalanick’s promotion of the Otto merger,
in light of what he asserts is Kalanick’s essentially bad character, should have been
a red flag to the directors. The Plaintiff points to Kalanick’s alleged history as a
copyright infringer and the fact that, under his control, Uber had acquired a
reputation for breaching local taxi regulations in its ride-share business. As a result,
the Plaintiff argues, the Board must have been well aware that Kalanick was a
2 scofflaw. The Plaintiff posits, therefore, that the Board must have known that
whatever the management representations regarding Stroz’ findings, those
representations were unreliable. As a consequence, by not insisting to read Stroz’
preliminary findings before entering the merger agreement, and in not reading the
final Stroz report before the closing of the merger, the directors breached fiduciary
duties. Further, noting that breaches of the duty of care are exculpated by Uber’s
charter, the Plaintiff alleges that the directors’ failure to insist on reading the reports
was an omission in bad faith, and that the directors who approved the merger
agreement (or failed to stop the merger from closing) are accordingly liable for
breach of the duty of loyalty.
The Defendants have moved to dismiss. Under our well-known model, it is
the province of the directors to deploy corporate assets, including choses-in-action
like the one the Plaintiff attempts to plead derivatively here. The Plaintiff did not
make a demand on the Board to pursue this litigation; therefore, under Court of
Chancery Rule 23.1, his derivative complaint must be dismissed unless he
demonstrates that demand would have been futile on account of the directors’
inability to exercise business judgment in regard to the matter. According to the
Plaintiff, addressing a demand to those directors who approved or failed to stop the
transaction, and who remain on the Board, would be futile because of the likelihood
of their liability. While the majority of the directors who would evaluate a demand
3 joined the Board after the Otto acquisition, the Plaintiff alleges that a majority lacks
independence from Kalanick, and therefore could not bring their business judgment
to bear, excusing demand. The Defendants disagree.
I find that a majority of the Board who would evaluate a demand is
disinterested and independent, and thus the action must be dismissed under Rule
23.1.
My reasoning follows a recitation of the background facts, below.
I. BACKGROUND
The Defendants moved to dismiss the Plaintiff’s Verified Amended
Stockholder Derivative Complaint (the “Amended Complaint”) under Court of
Chancery Rule 12(b)(6), failure to state a claim, and Rule 23.1, failure to make a
pre-suit demand. As a result, the background facts below are drawn from the
Amended Complaint and documents incorporated therein. 2
2 The parties disagree on what documents are incorporated by reference into the Amended Complaint. See Docket Item [hereinafter, “D.I.”] 96–100. The Plaintiff agrees that the following documents are incorporated by reference: Uber’s charter for the purpose of taking judicial notice of Uber’s exculpatory provision; the Stroz Friedberg final report; a redacted version of the Merger Agreement between Uber Technologies, Inc. (“Uber”) and Ottomotto, LLC (“Otto”); a redacted version of the indemnification agreement between Uber and Otto that accompanied the Merger Agreement; and a redacted version of a slide deck used in Uber management’s presentation to the Board on the Otto acquisition. See D.I. 96. The Plaintiff contests the incorporation of the testimony of Uber director William Gurley in another litigation. See D.I. 96, at 3. The Plaintiff himself quotes (and references) parts of Gurley’s testimony in the Amended Complaint. Gurley’s entire testimony is not incorporated; however, I find it appropriate to consider the full questions and answers from which the Plaintiff quotes. 4 A. Parties
Plaintiff Lenza A. McElrath, III is a California resident and a stockholder of
Uber.3
Nominal Defendant Uber is a privately held company incorporated in the State
of Delaware.4 Defendants Garrett Camp and Travis Kalanick co-founded Uber in
2009.5 Both Camp and Kalanick have served as Uber directors since Uber was
founded.6 Kalanick also served as Uber’s CEO from December 2010 until June
2017.7 Kalanick previously founded a company called “Scour,” which facilitated
the sharing of music and theatrical film releases in violation of copyright, and which
eventually declared bankruptcy. 8
Defendant Ryan Graves has served as an Uber director since 2010. 9 Graves
briefly served as Uber’s first CEO, but at all times relevant to this litigation, Graves
was Uber’s head of global operations.10
3 Am. Compl. ¶ 16. McElrath “has been a stockholder of Uber at all material times alleged in this Complaint.” Id. 4 Id. ¶ 17. Uber’s corporate headquarters are located in San Francisco, California. Id. 5 Id. 6 Id. ¶¶ 18–19. 7 Id. ¶ 18. 8 Id. ¶¶ 27, 28. 9 Id. ¶ 20. 10 Id. 5 Defendant William Gurley served as an Uber director from 2011 until June
21, 2017.11 Gurley is a partner of Benchmark Capital Partners VII, L.P.
(“Benchmark”). 12 Benchmark is an Uber stockholder. 13
Defendant David Bonderman served as an Uber director from 2011 through
June 13, 2017.14 Bonderman is a partner of TPG Capital L.P. (“TPG”). 15 TPG is an
Uber stockholder. 16
Defendant Arianna Huffington has served as an Uber director since April 27,
2016.17 Kalanick unilaterally appointed Huffington to Uber’s Board. 18
Defendant Yasir Al-Rumayyan has served as an Uber director since June 1,
2016.19 Al-Rumayyan is the managing partner of Saudi Arabia’s Public Investment
Fund, which is an Uber stockholder.20
Defendant Salle Yoo served as Uber’s General Counsel until May 2017,21 and
was Uber’s General Counsel during the events that led to this litigation.
11 Id. ¶ 23. 12 Id. 13 Id. 14 Id. ¶ 24. 15 Id. 16 Id. 17 Id. ¶ 21. 18 Id. ¶ 110. 19 Id. ¶ 22. 20 Id. 21 Id. ¶ 26. Yoo also served as Uber’s Chief Legal Officer until November 2017. Id. 6 B. Uber Acquires Otto
Uber “operates the world’s dominant ride-sharing mobile app.”22 It generated
$7.5 billion in revenue in 2017.23 Per the Amended Complaint, Uber’s business
practices have come under scrutiny since its founding for ignoring or thwarting local
regulations that conflicted with Uber’s business, specifically local taxi or car-for-
hire service laws.24
Otto was founded by Anthony Levandowski, a former employee of
“Waymo.”25 Waymo is a subsidiary of Google, 26 and is engaged in developing self-
driving technology.27 Uber sought to jumpstart its own efforts to develop self-
driving vehicles by acquiring Otto. 28 Uber executives began efforts to recruit
Levandowski in June 2015, when he still worked for Google.29 In one meeting with
Uber executives, Levandowski purportedly asked “what Uber would be willing to
pay for the entire Google self-driving staff.”30 During the “recruitment period,”
Kalanick personally exchanged text messages with Levandowski. 31
22 Id. ¶ 17. 23 Id. ¶ 1. 24 Id. ¶¶ 29–33. 25 Id. ¶ 2. 26 For simplicity, I use “Google” to collectively refer to Google (now known as Alphabet) and Waymo (which has had different names in the past). See id. ¶ 38 n.3. 27 Id. ¶ 2. 28 Id. ¶ 1. 29 Id. ¶ 39. 30 Id. 31 Id. ¶ 40. 7 Levandowski founded the precursor to Otto on January 14, 2016, while still
employed at Google. 32 Levandowski then left Google on January 27, 2016. 33 At the
time Levandowski resigned, he possessed tens of thousands of files containing
Google trade secrets and confidential information, and he retained those files after
he resigned.34 Following his resignation from Google, Levandowski continued to
exchange text messages with Kalanick, in which they discussed Otto’s status and
poaching other Google employees to join Otto.35 Levandowski and Kalanick also
met personally on multiple occasions to discuss the acquisition of Otto by Uber,
purportedly during a series of long nighttime walks.36
On February 22, 2016, less than a month after Levandowski left Google, Otto
and Uber signed a Term Sheet for Uber to acquire Otto. 37 The acquisition valued
Otto at $680 million. 38 In the less than one month between Levandowski leaving
Google and Otto signing the Term Sheet, Otto also hired dozens of other former
Google employees.39 At the time it was acquired, Otto operated out of
32 Id. ¶ 44. 33 Id. 34 Id. ¶ 42. These files included technical drawings and diagrams, texts and notes, e-mails, source code files, and pictures and videos. Id. 35 Id. ¶ 45. 36 Id. ¶ 40. 37 Id. ¶ 46. 38 Id. ¶ 57. 39 Id. ¶ 4. 8 Levandowski’s house and had no real operations. 40 Kalanick testified in a different
litigation that “[Uber] basically [was] hiring [Levandowski] and his team.” 41
C. Uber Hires Stroz Friedberg to Investigate Otto
In March 2016, as part of its due diligence on Otto, Uber hired Stroz, a
forensic firm, to conduct an independent investigation under the supervision of
Uber’s outside counsel, Morrison & Foerster.42 Stroz was primarily tasked with
determining whether Levandowski and other former Google employees at Otto
“took with them or retained confidential and/or proprietary information from their
former employer, Google.”43
Uber executives, including Kalanick, knew that Levandowski had retained
confidential information from his time at Google. 44 At a March 11, 2016 meeting,
Levandowski told Kalanick and other Uber executives that he possessed proprietary
and confidential information on Google’s self-driving vehicle technology on his
personal storage device or disks.45 An Uber executive told Levandowski not to
40 Id. ¶ 47. 41 Id. 42 Id. ¶ 49. 43 Id. ¶¶ 5, 49; see also Transmittal Aff. of Andrew J. Peach, Esq. in Support of Opening Br. in Support of Nom. Def. Uber’s Mot. to Dismiss [hereinafter, “Peach Aff.”] Ex. 5, at 3, “Scope of Engagement.” 44 Am. Compl. ¶ 50. 45 Id. 9 destroy his storage device, and Kalanick told Levandowski that “he wanted nothing
to do with the disks” and to “do what [Levandowski] needed to do.”46
In April 2016, Stroz delivered its preliminary findings to Morrison & Foerster,
Salle Yoo (then Uber’s General Counsel), and Otto.47 Yoo received the preliminary
findings no later than April 10, 2016.48 After receiving the preliminary findings,
Yoo expressed “serious reservations” to Kalanick regarding the acquisition of Otto. 49
Yoo did not inform or otherwise speak to Uber’s other directors about Stroz’
preliminary findings. 50 Stroz’ preliminary findings included that Levandowski and
others at Otto possessed confidential and proprietary Google information. 51 Stroz
continued its investigation and, as discussed below, later delivered a final report on
August 5, 2016.52
D. Uber’s Board of Directors Approves the Otto Acquisition on April 11, 2016
Uber’s Board of Directors met on April 11, 2016.53 Kalanick, who was both
a director and CEO of Uber at the time, presented the transaction to acquire Otto to
46 Id. 47 Id. ¶ 52. 48 Id. ¶ 53. 49 Id. 50 Id. 51 Id. ¶ 55. 52 Id. 53 Id. 10 the Board on the same day.54 Although he was aware of them, 55 Kalanick did not
specifically present Stroz’ preliminary findings. 56 A slide deck shown to the Board
detailed Uber’s agreement, as part of the merger, to indemnify Otto from certain IP
and employment liability; indemnification was conditional, and varied by
circumstance.57 After Kalanick’s presentation, the Uber Board approved Uber
entering into a merger agreement with Otto (the “Merger Agreement”).58 The
Merger Agreement valued the Otto acquisition at $680 million. 59
Uber’s directors were aware that Stroz, a forensic investigative firm, had been
hired to conduct diligence on Otto. 60 However, none of the directors asked
specifically about the results of the Stroz investigation before approving the merger
with Otto.61 The risk of litigation brought by Google regarding IP or the solicitation
of Google employees was discussed, as was the importance of due diligence. 62 The
Amended Complaint makes no allegation regarding a discussion of due diligence at
54 Id. ¶¶ 54, 78. 55 Id. ¶ 10. 56 Id. ¶ 54. 57 Id. ¶ 78; see also Peach Aff. Ex. 8. Again, the Plaintiff acknowledges that the slide deck used by management, in its redacted form, is integrated into the Amended Complaint. D.I. 96. 58 Am. Compl. ¶ 57. 59 Id. 60 Id. ¶ 5 61 Id. ¶¶ 53, 54. 62 Id. ¶ 75. The Plaintiff makes no other allegations regarding management’s presentation or the Board’s approval process. As a result, there are no allegations from which to infer that the Board’s approval of the Otto merger was lacking in any regard other than that Kalanick did not specifically share Stroz’ preliminary findings or that the Board did not specifically ask about Stroz’ preliminary findings. 11 the April 11 meeting. 63 However, one director later testified in a different litigation:
“There was a discussion about the indemnity. There was a discussion about it being
atypical. That led to questions about why we were okay with that. That led to a
discussion about the due diligence that had been done. And we as a group made a
decision that we’re going to move forward because the due diligence was okay.” 64
As a result, the record at this pleading stage shows that there was, at least, a cursory
discussion of diligence in general, and a representation by management that due
diligence was “okay.”65 Inferences that that diligence was discussed (however
briefly), that management represented diligence to be okay, and that the directors
63 The Amended Complaint does not allege that the Board was told nothing about diligence, nor does it allege what the Board was told. 64 Am. Compl. ¶ 63; Peach Aff. Ex. 6, at 953:17–954:6. The Amended Complaint quotes Gurley as saying that the indemnification terms were “atypical.” While the full transcript of Gurley’s testimony is not incorporated into the Amended Complaint, the question and answer from which the Plaintiff quotes Gurley must be. Gurley says the word “atypical” on three occasions in his testimony. Peach Aff. Ex. 6, at 949:7, 951:19, 954:1. On the third occasion, the question was: “And, Mr. Gurley, as to the assertion that the diligence effort had been positive, you are not completely sure if Mr. Kalanick made that statement or if that statement had been made by one of the deal team members, possibly Mr. Percher; isn't that right?” Peach Aff. Ex. 6, at 953:17–21. Gurley’s full response was: In an effort to be as helpful as possible, I’ll state generically what happened, and then we can get into esoteric details if we want to. There was a discussion about the indemnity. There was a discussion about it being atypical. That led to questions about why we were okay with that. That led to a discussion about the due diligence that had been done. And we as a group made a decision that we're going to move forward because the due diligence was okay. Peach Aff. Ex. 6, at 953:22–954:5. Gurley was then cut off. Peach Aff. Ex. 6, at 954:7. 65 In addition to Gurley’s testimony, management’s slide deck, even in its shortened and redacted form, references “Pre-Signing Due Diligence,” and notes, either summarizing historical events or detailing planned events, that a forensic expert was hired, that Uber received a report from the forensic expert, and that based on Uber’s review of facts, Uber decided to move forward. Peach Aff. Ex. 8. 12 failed to ask further questions about Stroz’ findings or demand the primary
documents from Stroz, are, under the circumstances, the most favorable that can be
drawn for the Plaintiff. 66
The Merger Agreement excluded post-closing indemnification to Uber for
breaches of representations and warranties by the seller, Otto. 67 Relatedly, the
Merger Agreement contained no post-closing indemnification remedy for Uber, the
buyer, for Otto’s liabilities.68 The Directors were specifically made aware that a
post-closing indemnification remedy for Uber was omitted. 69 According to the
Amended Complaint, the Merger Agreement also included representations by Otto
regarding its ownership of IP; however, the Amended Complaint lacks specifics.70
According to side agreements to the Merger Agreement, Levandowski (and
other Otto employees) received indemnification from Uber for “bad acts” committed
pre-signing that “reasonably [arose] or result[ed] from any facts, circumstances,
activities or events contained or disclosed on the face of” the final report by Stroz. 71
66 At Oral Argument, the Plaintiff argued that the directors did not ask specifically about the Stroz investigation but were told by Kalanick that due diligence was “clean,” but because this representation came from Kalanick, who was known to be of bad character, the Board could not rely on Kalanick’s representations; to fulfill their fiduciary duties, the directors needed to inquire specifically about Stroz’ findings. Oral Argument Tr. 63:11–67:9, 72:11–76:12, 92:1–3. 67 Am. Compl. ¶ 59. 68 Id. ¶ 62. 69 Id. ¶ 63. 70 Id. ¶ 81; see also id. ¶ 62 (“[T]he Merger Agreement contains customary representations regarding Otto’s ownership of IP . . . .”). 71 Id. ¶ 65. 13 Post-signing bad acts, and undisclosed pre-signing bad acts, were not indemnified. 72
These side indemnification agreements were discussed at the April 11, 2016 Board
meeting. 73 The Merger Agreement itself provides that “any Pre-Signing Bad Acts
. . . shall be disregarded in determining whether any of the conditions set forth in this
Section 6 have been satisfied.”74 Section 6 contained the closing conditions of the
merger.75 Pre-signing “Bad Acts” was defined in the Merger Agreement to include
fraud and intentional conduct that constituted IP infringement, among other things. 76
As a result, bad acts committed by Levandowski and other Otto employees before
the Merger Agreement was signed would be indemnified by Uber if disclosed to
Stroz, and, furthermore, those bad acts could not be used to find that a closing
condition in the Merger Agreement had not been met.
At the time the Board approved the Merger Agreement, the Board was
comprised of Camp, Kalanick, Graves, Gurley, and Bonderman.
E. The Stroz Final Report on August 5, 2016
Stroz’ final report was “delivered” on August 5, 2016.77 The passive voice is
intentional; the Amended Complaint does not state who at Uber reviewed the final
72 See Peach Aff. Ex. 7 § 2.1(b)(iii). The Plaintiff has agrees that the Indemnification Agreement can be considered in its redacted form. D.I. 96. 73 Am. Compl. ¶ 78. 74 Id. ¶ 79; see also Peach Aff. Ex. 9 § 6. The Plaintiff agrees that the Merger Agreement can be considered in its redacted form. D.I. 96. 75 Am. Compl. ¶ 79. 76 Id. 77 Id. ¶ 69. 14 report. The final report revealed that Levandowski and other former Google
employees at Otto, at the time Stroz had conducted its investigation, retained
hundreds of thousands of files, documents, and e-mails from their time at Google.78
According to Stroz’ final report, Levandowski had dramatically understated the
amount of Google e-mails on his laptop and had recently accessed several of the e-
mails; Stroz found it “difficult to believe that Levandowski was not . . . fully aware
of the extent of the data that he had retained [from Google].”79 Stroz also found that
Levandowski had researched how to securely wipe files from his computer and had
attempted to empty the trash folder on his computer during an interview with Stroz. 80
F. The Otto Transaction Closes, Google Files Suit, and Changes to the Uber Board of Directors
As mentioned, Uber’s Board of Directors approved the merger with Otto on
April 11, 2016. Following approval of the merger, but prior to closing, Uber added
two director seats to its Board of Directors—expanding the number of directors from
five to seven. On April 27, 2016, Huffington was added as a director. 81 Following
which, on June 1, 2016, Al-Rumayyan was added as a director. 82
Therefore, Uber’s Board of Directors after June 1, 2016, and before closing
of the merger on August 18, 2016, consisted of Camp, Kalanick, Graves, Gurley,
78 Id. ¶¶ 70–72. 79 Id. ¶ 72. 80 Id. ¶ 73. 81 Id. ¶ 21. 82 Id. ¶ 22. 15 Bonderman, Huffington, and Al-Rumayyan. Stroz’ final report was delivered on
August 5, 2016, prior to closing. The Uber directors did not read Stroz’ final report
or otherwise learn of its findings,83 and the Amended Complaint makes no allegation
as to who at Uber may have read the final report or whether anyone made the
directors aware that the final report was available.84 The findings in Stroz’ final
report indicated that Otto’s employees possessed Google IP; according to the
Plaintiff, this IP retention may have been in breach of Otto’s representations in the
Merger Agreement regarding IP ownership.85 Again per the Plaintiff, if Otto had
breached its IP ownership representations, Uber had the right not to close the
transaction with Otto (based on an interpretation of the Merger Agreement that the
Defendants contest).86 None of the Uber directors attempted to prevent closing of
the acquisition of Otto.87 I infer that none of the directors inquired whether the final
83 Id. ¶¶ 56, 111, 112. The Amended Complaint only alleges with particularity that Gurley did not read Stroz’ final report (or learn of its findings), and that Huffington and Al-Rumayyan allowed the merger to close without reference to the final report (or without insisting on an explanation of its findings). Id. However, it is reasonable to infer (and is central to the Plaintiff’s argument) that none of the directors read (or learned the findings) of the final report, and the Defendants do not argue that they did. See generally Oral Argument Tr. 84 The Amended Complaint simply alleges that the final report was available to the directors. Am. Compl. ¶ 68. However, with no allegations of who at Uber actually received the final report, it is not reasonable to infer that the directors were made aware that the report was available to them. It is a fair inference that the Defendant directors failed to inquire if the final report was available. 85 Id. ¶ 81. 86 Id. ¶ 82. 87 Id. ¶ 83. 16 report was available. The transaction subsequently closed on August 18, 2016; Uber
and Otto announced the merger only after the deal closed.88
On December 13, 2016, a Google employee was inadvertently copied on an
e-mail from one of Google’s vendors that also served Otto and Uber.89 Attached to
the e-mail was a drawing of an Otto circuit board, which Google believed resembled
a Google circuit board, the design of which Levandowski had downloaded before
resigning from Google. 90 Google then brought suit against Uber and Otto on
February 23, 2017 in the U.S. District Court for the Northern District of California.91
Uber disclosed Stroz’ final report in connection with that action. 92 Uber had
terminated Levandowski’s employment by that point, having discharged him on
May 30, 2017.93 The presiding judge referred the case to the U.S. Attorney’s Office
in May 2017, “for investigation of possible theft of trade secrets.”94 Uber later
settled the case with Google and paid Google $245 million. 95 The Plaintiff’s theory
of damages derives, in part, from this settlement; according to the Plaintiff, the
Defendants breached their fiduciary duties, which led to the acquisition of Otto, the
88 Id. ¶ 84. 89 Id. ¶ 86. 90 Id. ¶ 87. 91 Id. ¶ 88. 92 Id. ¶ 92. 93 Id. ¶ 94. 94 Id. ¶ 90. 95 Id. ¶ 95. 17 purported use of stolen technology, and the ultimate settlement with Google for $245
million.96
In June 2017, Defendants Gurley and Bonderman both resigned from the Uber
Board of Directors. 97 Gurley was replaced as director by non-party Matt Cohler;
Cohler, like Gurley, is a partner at Benchmark.98 Bonderman was replaced as
director by non-party David Trujillo; Trujillo, like Bonderman, is a partner at TPG.99
Kalanick was ousted by the Board as CEO in June 2017. 100
On September 29, 2017, two additional members were appointed by Kalanick
to the Uber Board of Directors; they are non-parties Ursula Burns and John Thain. 101
Kalanick appointed Burns and Thain after Kalanick was ousted as CEO of Uber in
2017.102 The Amended Complaint does not state from where Kalanick derived the
ability to appoint directors; presumably, Kalanick appointed Burns and Thain (and
previously Huffington) consistent with Uber’s Certificate of Incorporation.103
96 Id. The Plaintiff’s theory of damages also includes money “paid and wasted” to acquire Otto and the “massive amounts of attorneys’ fees” Uber paid to defend itself in the Google litigation. Id. 97 Id. ¶¶ 23–24. 98 Id. ¶ 115. 99 Id. ¶ 116. 100 Id. ¶¶ 18, 117. 101 Id. ¶¶ 117–118. 102 Id. ¶ 117. 103 Id.; see also Oral Argument Tr. 86:9–87:9. 18 The Plaintiff brought this action shortly thereafter, on December 13, 2017. I
note, in light of certain lacunae in the pleadings, that the Plaintiff did not bring a
Section 220 books and record demand before filing this derivative suit.
G. Procedural History
On December 13, 2017, Plaintiff Lenza H. McElrath, III, filed this derivative
action on Uber’s behalf. The Plaintiff amended his complaint on April 3, 2018. On
April 17, 2018, Nominal Defendant Uber, Defendants Camp, Graves, Huffington,
Al-Rumayyan, Gurley, and Bonderman, and Defendant Kalanick separately filed
Motions to Dismiss. Defendant Yoo also filed a Motion to Dismiss on May 7, 2018.
On November 13, 2018, I heard Oral Argument on the outstanding Motions to
Dismiss. After Oral Argument, I received supplemental letters on November 21 and
December 4, 2018, and thereafter considered the matter submitted for decision.
II. ANALYSIS
The Plaintiff’s initial Complaint detailed a derivative claim for breach of
fiduciary duty against Defendants Kalanick, Camp, Graves, Huffington, Al-
Rumayyan, Gurley, and Bonderman (collectively the “Director Defendants”), who
were Uber directors either at the time the Otto merger was approved and/or served
as directors between the transaction’s approval and closing. The Plaintiff’s
Amended Complaint added a derivative claim for breach of fiduciary duties against
Kalanick and Yoo (the “Officer Defendants”) as officers of Uber, and a claim for
19 corporate waste against all the Defendants. The Defendants moved to dismiss all the
claims brought against them under both Court of Chancery Rule 23.1, failure to
make a demand, and Rule 12(b)(6), failure to state a claim. I turn first to the Motions
to Dismiss under Rule 23.1, which I find are dispositive.
A. Rule 23.1
According to Court of Chancery Rule 23.1, a derivative plaintiff must “allege
with particularity the efforts, if any, made by the plaintiff to obtain the action the
plaintiff desires from the directors or comparable authority and the reasons for the
plaintiff’s failure to obtain the action or for not making the effort.” 104 The Plaintiff
here has alleged that such demand would be futile. 105 Nominal Defendant Uber
disagrees, and has moved to dismiss the Amended Complaint under Court of
Chancery Rule 23.1 for failure to make a demand. The Director Defendants
(excluding Kalanick), Defendant Kalanick, and Defendant Yoo have joined Uber in
its Motion. Yoo also proposes that regardless of whether demand is excused as to
claims against the other Defendants, demand should not be excused as to the claims
brought against her.106 I start with the legal standard underlying Rule 23.1, before
applying it.
104 Ct. Ch. R. 23.1(a). 105 Am. Compl. ¶¶ 99–119. 106 Def. Yoo’s Opening Br. in Support of Her Mot. to Dismiss, at 8–9. 20 1. The Rule 23.1 Legal Standard
The demand requirement in Rule 23.1 is an extension of the fundamental
principle that “directors, rather than shareholders, manage the business and affairs
of the corporation.” 107 As a result, “the demand requirement serves to ‘insure that a
stockholder exhausts his intracorporate remedies,’ ‘provide a safeguard against
strike suits,’ and ‘assure that the stockholder affords the corporation the opportunity
to address an alleged wrong without litigation and to control any litigation which
does occur.’”108 Where, as here, a derivative plaintiff did not make a pre-suit
demand on the board, 109 the Court must dismiss the complaint “unless it alleges
particularized facts showing that demand would have been futile.” 110 Under the
heightened pleading requirements of Rule 23.1,111 conclusory “allegations of fact or
law not supported by allegations of specific fact may not be taken as true.”112 In
other words, “Rule 23.1 is not satisfied by conclusory statements or mere notice
107 Aronson v. Lewis, 473 A.2d 805, 811 (Del. 1984) (citing 8 Del. C. § 141(a)), overruled on other grounds by Brehm v. Eisner, 746 A.2d 244 (Del. 2000). 108 Inter-Mktg. Grp. USA, Inc. v. Armstrong, 2019 WL 417849, at *3 (Del. Ch. Jan. 31, 2019) (first quoting Aronson, 473 A.2d at 811; then quoting Aronson, 473 A.2d at 812; and then quoting Kaplan v. Peat, Marwick, Mitchell & Co., 540 A.2d 726, 730 (Del. 1988)). 109 Am. Compl. ¶ 100. 110 Ryan v. Gursahaney, 2015 WL 1915911, at *5 (Del. Ch. Apr. 28, 2015), aff’d, 128 A.3d 991 (Del. 2015) (TABLE). 111 Brehm, 746 A.2d at 254 (“[P]leadings must comply with stringent requirements of factual particularity that differ substantially from the permissive notice pleadings governed solely by Chancery Rule 8(a).”). 112 Grobow v. Perot, 539 A.2d 180, 187 (Del. 1988), overruled on other grounds by Brehm, 746 A.2d 244. 21 pleading.”113 Furthermore, I am limited to “the well-pled allegations of the
complaint, documents incorporated into the complaint by reference, and judicially
noticed facts.”114
Our Supreme Court laid out the test for determining demand futility in Rales
v. Blasband: a court must “examine whether the board that would be addressing the
demand can impartially consider its merits without being influenced by improper
considerations.”115 The application of Rales depends on context. For example, our
Supreme Court’s guidance in Aronson v. Lewis116 is applicable where “a decision of
the board of directors is being challenged in the derivative suit”117—in other words,
when the business decision at issue is “an action taken by the board that would
consider the demand.”118 Rales itself applies, by contrast, where “the board that
would be considering the demand did not make a business decision which is being
challenged in the derivative suit.”119 That includes the situation “where a business
decision was made by the board of a company, but a majority of the directors making
the decision have been replaced . . . .”120 It also includes, as here, the comparable
113 Brehm, 746 A.2d at 254. 114 Breedy-Fryson v. Towne Ests. Condo. Owners Ass’n, Inc., 2010 WL 718619, at *9 (Del. Ch. Feb. 25, 2010). 115 634 A.2d 927, 934 (Del. 1993). 116 473 A.2d 805 (Del. 1984), overruled by Brehm, 746 A.2d 244. 117 Rales v. Blasband, 634 A.2d 927, 933 (Del. 1993) (discussing Aronson). 118 Inter-Mktg. Grp. USA, Inc. v. Armstrong, 2019 WL 417849, at *4 (Del. Ch. Jan. 31, 2019). 119 Rales, 634 A.2d at 933–34. 120 Id. at 934 (Del. 1993) (internal citations omitted). 22 situation where members of the board who made the business decision in question
remain on the board but are now in the minority.121 The central question of a Rales
inquiry, no matter the context, is the same: “whether the board can exercise its
business judgment on the corporate behalf in considering demand.” 122
The business decision at issue here, made by Uber’s Board, is the acquisition
of Otto. At the time the Plaintiff filed his Complaint on December 13, 2017,123
Uber’s Board of Directors had been expanded to eleven members (the “Demand
Board”).124 Only three members of the current Demand Board were directors when
121 Teamsters Union 25 Health Servs. & Ins. Plan v. Baiera, 119 A.3d 44, 56–57 (Del. Ch. 2015) (“[T]he Rales test applies where a derivative plaintiff challenges a decision approved by a board committee consisting of less than half of the directors who would have considered demand, had one been made.”). 122 Inter-Mktg. Grp. USA, Inc., 2019 WL 417849, at *4 (quoting In re Duke Energy Corp. Deriv. Litig., 2016 WL 4543788, at *14 (Del. Ch. Aug. 31, 2016)). 123 There is no allegation that the composition of the Demand Board changed between December 13, 2017, when the original Complaint was filed, and April 3, 2018, when the Amended Complaint was filed. Neither do the Defendants contend that the Amended Complaint necessitated a “new” demand. See Braddock v. Zimmerman, 906 A.2d 776, 786 (Del. 2006); In re Fitbit, Inc. Stockholder Derivative Litigation, 2018 WL 6587159, at *11 (Del. Ch. Dec. 14, 2018). 124 Am. Compl. ¶ 104. 23 Uber’s Board voted to approve the merger with Otto.125 As a result—with the
agreement of the parties 126—I apply Rales.
According to Rales, “a court must determine whether or not the particularized
factual allegations of a derivative stockholder complaint create a reasonable doubt
that, as of the time the complaint is filed, the board of directors could have properly
exercised its independent and disinterested business judgment in responding to a
demand.”127 A director is considered interested—as the Plaintiff alleges here—
where she would “face a substantial likelihood of personal liability for the conduct
described in the complaint,”128 among other circumstances.129 A director is
125 Even if I were to accept, as I do not, the Plaintiff’s framing that allowing the Otto acquisition to close was an affirmative action by Uber’s Board of Directors, only two additional members of the current Demand Board would be implicated, which is still short of a majority. See, e.g., id. ¶ 111 (“the Board . . . agreed to close and consummate the Uber-Otto transaction”) (emphasis added). The distinction between affirmative action by a board and inaction by the board is important when considering how to apply Rales and whether to apply Aronson. See, e.g., Wood v. Baum, 953 A.2d 136, 140 (Del. 2008) (distinguishing between a business decision and a violation of oversight duties). 126 See Opening Br. in Support of Nom. Def. Uber’s Mot. to Dismiss, at 17; Pl.’s Omnibus Answering Br. in Opp’n to Defs.’ Mots. to Dismiss [hereinafter, “Pl.’s Omnibus Answering Br.”], at 30. 127 Rales v. Blasband, 634 A.2d 927, 934 (Del. 1993). 128 In re Oracle Corp. Deriv. Litig., 2018 WL 1381331, at *10 (Del. Ch. Mar. 19, 2018) (citing Park Emps.’ & Ret. Bd. Emps.’ Annuity & Benefit Fund of Chi. v. Smith, 2017 WL 1382597, at *6 (Del. Ch. Apr. 18, 2017)). 129 A director is also considered interested where, for example, “he or she will receive a personal financial benefit from a transaction that is not equally shared by the stockholders.” Rales, 634 A.2d at 936 (citing Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984) overruled on other grounds by Brehm v. Eisner, 746 A.2d 244 (Del. 2000)). “Directorial interest also exists where a corporate decision will have a materially detrimental impact on a director, but not on the corporation and the stockholders.” Rales, 634 A.2d at 936. 24 independent when “a director’s decision is based on the corporate merits of the
subject before the board rather than extraneous considerations or influences.” 130
The Plaintiff claims that nine of the eleven directors on the Demand Board
“are incapable of impartially considering demand”131 and that therefore, demand is
futile. The Plaintiff does not allege that two of the directors on the Demand Board,
Ling Martello and Dara Khosrowshahi, are not impartial or otherwise
unconflicted.132 According to the Plaintiff, five of the nine challenged members of
the Demand Board face a substantial likelihood of liability for the conduct described
in the Amended Complaint, and seven133 of the nine challenged members lack
independence.134 I first examine whether the five directors identified by the Plaintiff
face a substantial likelihood of liability. I then turn to the Plaintiff’s arguments on
director independence.
2. No Member of the Demand Board (Other Than Kalanick) Faces a Substantial Likelihood of Liability
Uber’s Certificate of Incorporation exculpates its directors from monetary
liability for breach of fiduciary duty “[t]o the fullest extent permitted by the
130 Aronson, 473 A.2d at 816, overruled on other grounds by Brehm, 746 A.2d 244. 131 Am. Compl. ¶ 104. 132 Id. 133 The Plaintiff alleges that five of the seven Demand Board directors lack independence from Kalanick. The remaining two are alleged to lack independence from Gurley and Bonderman. I have not included Kalanick when counting which directors lack independence. 134 Am. Compl. ¶¶ 106–110. Per the Plaintiff, three directors—Camp, Graves, and Huffington— are both interested and lack independence. 25 Delaware General Corporation Law.” 135 Therefore, to adequately allege that an
Uber director faces a substantial likelihood of liability, the Plaintiff must plead “a
non-exculpated claim against the directors based on particularized facts.”136 The
Plaintiff argues that five members of the Demand Board failed to act in good faith137
and committed corporate waste138 by approving the Otto merger or by allowing the
merger to close. The Plaintiff also pled a claim against Kalanick in his capacity as
an officer of Uber. I examine first the Plaintiff’s arguments against Kalanick (as
both an officer and a director), before turning to the Plaintiff’s arguments against the
other directors for bad faith and waste.
a. Kalanick Faces a Substantial Likelihood of Liability as a Director and Officer of Uber
At the time Uber acquired Otto, Kalanick was both a director and the CEO of
Uber. In his Amended Complaint, the Plaintiff alleges that Kalanick personally
helped to poach Levandowski from Google and that Kalanick was present in
meetings where Levandowski admitted to retaining confidential information from
Google. The Plaintiff also alleges that, prior to the Board’s approval of the Otto
135 Peach Aff. Ex. 4, at 42. 136 See Teamsters Union 25 Health Servs. & Ins. Plan v. Baiera, 119 A.3d 44, 62–63 (Del. Ch. 2015) (quoting Wood v. Baum, 953 A.2d 136, 141 (Del. 2008)). 137 According to 8 Del. C. § 102(b)(7)(ii), an exculpatory provision limiting the personal liability of a director for breach of fiduciary duty cannot eliminate liability for “acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law.” 8 Del. C. § 102(b)(7)(ii). 138 See Pl.’s Omnibus Answering Br., at 33. 26 acquisition and based upon a forensic investigation of Levandowski’s retention of
Google IP, Uber’s General Counsel told Kalanick that she had serious reservations
about the acquisition. From these allegations, a reasonable inference can be drawn
that Kalanick was aware of Stroz’ preliminary and final findings, or, at least, that he
had knowledge of their substance (i.e., that Levandowski and others at Otto
knowingly retained Google IP). The Plaintiff alleges that Kalanick did not
specifically share the results of Stroz’ preliminary findings with Uber’s Board when
Kalanick presented the acquisition. According to the Plaintiff, this was a breach of
Kalanick’s fiduciary duties of loyalty and care as an officer of Uber, and it was also
a breach of his non-exculpated fiduciary duties as a director.
At this pleading stage, I must accept the Plaintiff’s assertion that Kalanick was
aware that the Otto transaction would result in misappropriation of IP from Google,
but that he did not inform the Board in either his capacity as an officer of Uber or as
a director. Withholding such information would be a violation of Kalanick’s
fiduciary duty of loyalty as an officer of Uber. The fiduciary duties of officers
generally mirror those of directors; 139 however, shareholders cannot indemnify
officers for breaches of fiduciary duties under Section 102(b)(7).140 Kalanick was
139 Gantler v. Stephens, 965 A.2d 695, 708–09 (Del. 2009) (“In the past, we have implied that officers of Delaware corporations, like directors, owe fiduciary duties of care and loyalty, and that the fiduciary duties of officers are the same as those of directors. We now explicitly so hold.”) (internal citations omitted). 140 In re Rural Metro Corp., 88 A.3d 54, 86–87 (Del. Ch. 2014) (“[T]he Delaware Supreme Court has noted that Section 102(b)(7) does not protect officers.”) (internal citations omitted); see also 27 also a director, and even if he is indemnified to the full extent of Section 102(b)(7),
personal liability cannot be eliminated for “intentional misconduct or a knowing
violation of law.” 141 The Plaintiff here alleges that, with knowledge that
Levandowski had retained Google IP, Kalanick plotted to steal that IP through the
acquisition of Otto. Therefore, it is reasonable to infer from the allegations that
Kalanick breached his fiduciary duty of loyalty as a director, as well. As a result,
at least one member on the Demand Board, Kalanick, faces a substantial likelihood
of liability and cannot consider demand impartially.142
b. The Plaintiff Has Failed to Plead Bad Faith by the Other Directors
The Plaintiff’s argument, as I understand it, 143 is that the directors (other than
Kalanick) at the time the Otto acquisition was approved 144 acted in bad faith because
they had a “duty to act” to inform themselves of Stroz’ preliminary findings.145 A
Gantler, 965 A.2d at 709 n.37 (“Although legislatively possible, there currently is no statutory provision authorizing comparable exculpation of corporate officers.”). 141 8 Del. C. § 102(b)(7)(ii). 142 This determination is based upon allegations pled in the Amended Complaint. Of course, these remain allegations and I hold no opinion, at this point, about any actual breaches of duty by Kalanick. 143 The Plaintiff implies that the directors took an action (approving the merger with Otto), the consequence of which was a violation of law (stealing Google’s IP). Pl.’s Omnibus Answering Br., at 34–36, 55. However, the Plaintiff does not explicitly base his argument for director bad faith on a knowing violation of law by the Defendant Directors (save Kalanick); to the extent such an argument is implied, I find that it is only supported by conclusory allegations in the Plaintiff’s Amended Complaint. I note that in the Merger Agreement, Otto made representations that it owned its IP. 144 The directors at the time were Kalanick, Camp, Graves, Gurley, and Bonderman. 145 Pl.’s Omnibus Answering Br., at 34–50. 28 director’s failure to inform herself, where the failure is sufficient to implicate gross
negligence—that is, reckless indifference to duty—is a breach of her fiduciary duty
of care. Absent bad faith, however, a director’s failure to inform herself is only a
breach of duty of care, which can be, and here was, exculpated.146 Bad faith would
implicate a non-exculpated breach of the duty of loyalty. A sufficient allegation of
bad faith, however, requires pleading “either [1] an extreme set of facts to establish
that disinterested directors were intentionally disregarding their duties or [2] that the
decision under attack is so far beyond the bounds of reasonable judgment that it
seems essentially inexplicable on any ground other than bad faith.” 147 Bad faith
requires an intentional dereliction; “there is a vast difference between an inadequate
or flawed effort to carry out fiduciary duties and a conscious disregard for those
duties.”148
According to the Plaintiff, the directors had a duty to inform themselves of
Stroz’ preliminary findings, breach of which amounts to bad faith. This is because
the directors were aware of several key facts: that Uber with Kalanick as a CEO had
a history of violating the law and engaging in unethical conduct, that the terms of
the Merger Agreement indemnified Otto for disclosed bad acts including IP
146 Breaches of the duty of care can be exculpated under Section 102(b)(7). In re Cornerstone Therapeutics Inc, S’holder Litig., 115 A.3d 1173, 1180 n.27 (Del. 2015) (explaining prior Supreme Court precedent). The purpose of allowing exculpation is to “free[ ] . . . directors to take business risks without worrying about negligence lawsuits.” Id. at 1185. 147 In re MeadWestvaco S’holders Litig., 168 A.3d 675, 684 (Del. Ch. 2017) (citations omitted). 148 Lyondell Chem. Co. v. Ryan, 970 A.2d 235, 243 (Del. 2009). 29 misappropriation, and that a third-party investigator had been hired to conduct due
diligence on Otto. In other words, according to the Plaintiff, the directors knew that
they had a duty to act to inform themselves of the investigator’s preliminary findings,
independent of management’s representations, which they consciously
disregarded149 when they approved the acquisition.150 According to the Plaintiff, the
directors’ failure to investigate primary sources, in light of these facts, goes beyond
gross negligence to bad faith. A director’s failure to inform herself, sufficient to
amount to gross negligence, still states only an exculpated claim for breach of duty
of care;151 again, to demonstrate a substantial likelihood of liability here requires a
sufficient pleading of breach of the duty of loyalty (in this instance, the Plaintiff
pleads bad faith or waste).
The Plaintiff also argues that the directors at the time of closing152 acted in
bad faith—again, given their knowledge of Uber’s corporate culture of lawbreaking,
149 I note that “[c]onscious disregard for fiduciary duties is not the only form bad faith can take; a lack of good faith may also be shown where a director intentionally pursues goals other than the best interests of the stockholders.” In re Oracle Corp. Deriv. Litig., 2018 WL 1381331, at *11 (Del. Ch. Mar. 19, 2018) (citing In re Walt Disney Co. Deriv. Litig., 906 A.2d 27, 67 (Del. 2006)). However, the Plaintiff does not plead that directors pursued such goals in approving the Otto acquisition. 150 Pleading bad faith via a showing of conscious disregard of duties does not require a pleading of motive, such as personal interest. See, e.g., Guttman v. Huang, 823 A.2d 492, 506 n.34 (Del. Ch. 2003). 151 McMullin v. Beran, 765 A.2d 910, 921 (Del. 2000) (“Director liability for breaching the duty of care ‘is predicated upon concepts of gross negligence.’”) (internal citations and quotations omitted). 152 The directors at the time of closing were Kalanick, Camp, Graves, Gurley, Bonderman, Huffington, and Al-Rumayyan. 30 the merger’s indemnification terms, and the presence of an independent
investigator—by allowing the transaction to close without reviewing Stroz’ final
report. I consider the Plaintiff’s arguments on approval of the merger before turning
to closing.
i. Approving the Transaction
At the time the transaction was approved, only three members of the Demand
Board were serving as directors; they are Kalanick, Camp, and Graves. The Plaintiff
does not allege that any director other than Kalanick saw or otherwise had
knowledge of Stroz’ preliminary findings. The Plaintiff’s Amended Complaint
acknowledges that Kalanick, who was CEO at the time, made a presentation to the
Board regarding the Otto transaction. The Plaintiff alleges that the Board was not
shown, and did not specifically request, Stroz’ preliminary findings before
approving the transaction. From the few other allegations made about the
management presentation and the Board’s decision-making process, it appears that
the Board discussed the indemnification terms of the Merger Agreement and the
potential for litigation with Google.
The Plaintiff does not allege that Kalanick’s presentation or the Board’s
decision-making process were lacking in any way except in terms of knowledge of
Stroz’ preliminary findings. The Plaintiff did not bring a Section 220 action to
explore the details of the Board’s deliberation on the Otto acquisition. At Oral
31 Argument and in subsequent supplemental letters, the parties contested the extent to
which other documents that illuminate the presentation and the Board’s decision are
incorporated into the Amended Complaint.153 The Plaintiff’s Amended Complaint,
even with the incorporated documents, alleges very little about these topics except
that diligence was, at least minimally, discussed and represented to be “okay.” I
draw no further inferences. To the extent that the parties now argue about the
sufficiency of management’s presentation and the Board’s decision-making process,
for example in the context of 8 Del. C. § 141(e),154 such arguments are misplaced.
The Plaintiff has only challenged the Defendant Directors’ failure to personally
review Stroz’ findings (both preliminary and final), and the failure of Officer
Defendants to specifically share Stroz’ findings (or similar knowledge of IP
misappropriation) with the Board.
The Plaintiff argues that the directors could not rely on Kalanick because of
his and Uber’s past history of unlawful conduct. Instead, per the Plaintiff, the
directors had a duty to personally review Stroz’ preliminary findings, no matter what
153 For example, in the Amended Complaint, the Plaintiff cites to sections of Gurley’s testimony in another litigation. The Defendants seek to introduce more testimony from the same litigation, which would illuminate the Board’s discussions during their meeting and the Board’s reliance on management’s presentation. The Plaintiff contests that this additional testimony was incorporated in the Amended Complaint, and I have not considered it beyond Gurley’s full answer, which is only partially referenced in the Amended Complaint, as discussed supra. 154 Opening Br. of Defs. Camp, Graves, Huffington, Al-Rumayyan, Gurley and Bonderman in Support of Mot. to Dismiss, at 20; Reply Br. of Defs. Camp, Graves, Huffington, Al-Rumayyan, Gurley and Bonderman in Support of Mot. to Dismiss, at 13; Oral Argument Tr. 14:24–15:5, 65:14–16, 76:13–17; D.I. 96. 32 management told them. Additionally, the Plaintiff argues that the indemnification
provisions of the Merger Agreement and accompanying side agreements should
have triggered the same directorial duty to act to inform themselves of Stroz’
preliminary findings. However, the Plaintiff ultimately fails to plead that the
directors did more than violate a duty of care, which here is an exculpated claim. 155
The Plaintiff suggests that his allegations are sufficient to plead bad faith in
line with this Court’s ruling in In re Massey Energy Company.156 In Massey, this
Court, on a motion for a preliminary injunction to enjoin a merger, sought to review
whether a company’s derivative claims had value, in particular a Caremark claim.157
The underpinning of a Caremark claim, as our Supreme Court in Stone v. Ritter
explained, is where directors “fail to act in the face of a known duty to act, thereby
demonstrating a conscious disregard for their responsibilities.”158 In a Caremark
claim, the “imposition of liability [therefore] requires a showing that the directors
knew that they were not discharging their fiduciary obligations.”159
155 See, e.g., City of Birmingham Ret. & Relief Sys. v. Good, 177 A.3d 47, 55 (Del. 2017) (“When, like here, the directors are protected from liability for due care violations under § 102(b)(7) of the Delaware General Corporation Law, the plaintiff must allege with particularity that the directors acted with scienter . . . .”). 156 2011 WL 2176479 (Del. Ch. May 31, 2011). 157 Id. at *17–18. A Caremark claim is so named for the Court of Chancery case In re Caremark International Inc. Derivative Litigation. 698 A.2d 959 (Del. Ch. 1996); see also Stone v. Ritter, 911 A.2d 362, 364 (Del. 2006) (“[C]haracterized . . . as a ‘classic Caremark claim,’ a claim that derives its name from In re Caremark International Inc. Derivative Litigation.”) (internal quotations and citations omitted). 158 911 A.2d at 370 (citing In re Walt Disney Co. Deriv. Litig., 906 A.2d 27, 67 (Del. 2006)). 159 Id. (citing Guttman v. Huang, 823 A.2d 492, 506 n.34 (Del. Ch. 2003). 33 The Plaintiff argues that Camp and Graves (and the other Board members at
the time) knew that Kalanick’s decisions and representations could not be relied
upon, given Uber’s history of violating local regulations governing car-for-hire
services and given Kalanick’s previous failed venture, Scour. The Plaintiff
compares his allegations to those in Massey, where this Court found the plaintiff’s
pleadings were likely160 sufficient to meet the Caremark standard on a Rule 23.1
motion to dismiss.161 The plaintiffs in Massey pled that Massey Energy Company,
a mining company, “had pled guilty to criminal charges [for violating mine safety
laws], had suffered other serious judgments and settlements as a result of violations
of law, had been caught trying to hide violations of law and suppress material
evidence, and had miners suffer death and serious injuries at its facilities,” leading
up to a serious mining disaster. 162 Those pleadings were sufficient to “create a
pleading-stage inference that the top management of Massey” had breached its duty
of loyalty “by knowingly causing [Massey] to seek profit by violating the law.” 163
The Massey board was aware of the issues and purported to be “involved in
160 This Court said “likely” because Massey was not before the Court on a Rule 23.1 motion to dismiss, rather it was before the Court on a preliminary injunction motion to enjoin a merger on the basis that the directors had failed “to secure the purported value of the Derivative Claims for [the company’s] stockholders[;]” this Court then examined whether such claims were frivolous. Massey, 2011 WL 2176479 at *17–18. 161 Id. at *21. 162 Id. at *20. 163 Id. 34 considering safety issues in the period leading up to [the serious mining disaster] and
had taken steps to improve the company’s safety record.” 164 The Court wrote that:
[Massey’s] directors and officers cannot take comfort in the appearance of compliance motion at the pleading stage, when the plaintiffs are able to plead particularized facts creating an inference that the Board and management were aware of a troubling continuing pattern of non- compliance in fact and of a managerial attitude suggestive of a desire to fight with and hide evidence from the company’s regulators.165
Massey and similar progeny of Caremark are distinguishable here. Unlike in
Massey, where the inaction under consideration and the manifest and pervasive
lawbreaking involved a single topic (mine safety), here the challenged decision of
Uber’s directors is not related to Uber’s purported scofflaw history.166
The Plaintiff alleges, and at the pleading stage I accept as true, that Uber had
a history of flouting local regulations and laws governing car-for-hire services. As
an initial matter, the Plaintiffs have not sufficiently pled that specific Uber directors
(outside Kalanick, who was also CEO) were aware or should have been aware of
any lawbreaking regarding car-for-hire regulations.167 I assume for purposes of
164 Id. at *20. 165 Id. at *21. 166 See, e.g., Melbourne Mun. Firefighters’ Pension Trust Fund v. Jacobs, 2016 WL 4076369, at *8 (Del. Ch. Aug. 1, 2016) (“The subsequent complained-of ‘corporate trauma,’ however, must be sufficiently similar to the misconduct implied by the ‘red flags’ such that the board’s bad faith, ‘conscious inaction’ proximately caused that trauma.”) (internal citations and quotations omitted), aff’d, 158 A.3d 449 (Del. 2017) (TABLE). 167 See South v. Baker, 62 A.3d 1, 17–18 (Del. Ch. 2012) (“Although the complaint asserts that the directors knew of and ignored the 2011 safety incidents, the complaint nowhere alleges anything that the directors were told about the incidents, what the Board’s response was, or even that the incidents were connected in any way. . . . Plaintiffs’ counsel could not cite a single decision in which a court had inferred knowledge of wrong-doing or conscious indifference to alleged red 35 analysis that they were so aware. Regardless, the Plaintiff’s claim against the
directors is not that the directors did not stop Uber from breaking taxicab laws, but
that they did not stop Uber from incurring liability for IP purloined by Levandowski
in the Otto transaction. Assuming the directors were aware of the culture of taxicab
violations, I cannot infer from that knowledge that the directors were also aware or
should have been aware of Kalanick’s alleged participation in Levandowski’s IP
theft.168 The Plaintiff points to no previous acts—known or unknown to the
directors—committed by Uber to misappropriate IP or other property. The Plaintiff
attempts to rely on a pre-Uber failed venture, Scour, which, per the Plaintiff,
implicated Kalanick in copyright infringement. The Plaintiff does not plead that the
Board had knowledge of this, nor would that be a reasonable inference. Instead, the
Plaintiff argues that the Board was well aware of what he characterizes as Kalanick’s
essential “bad character.” This is not a sufficient red flag, in my mind, to convert a
flags under circumstances paralleling the plaintiffs’ complaint, where the complaint’s allegations did not attempt to set forth facts suggesting conscious indifference.”) (internal citations omitted). Here, the Plaintiff, in support of his allegation that the Board “specifically approved” of “illicit culture” at Uber, cites only the allegation in the Amended Complaint that whistleblowers revealed that Kalanick and the Board did not scrutinize certain executives who were close to Kalanick. Pl.’s Omnibus Answering Br., at 37; Am. Compl. ¶ 30. 168 For example, in In re Dow Chemical Co. Derivative Litigation, the plaintiffs “argue[d] because bribery may have occurred in the past ([the defendant] paid a fine to the SEC in January 2007), by different members of management, in a different country (India), and for a different transact ion (pesticide registrations), the board should have suspected similar conduct by different members of management, in a different country, in an unrelated transaction.” 2010 WL 66769, at *13 (Del. Ch. Jan. 11, 2010). This Court found the plaintiffs’ argument in In re Dow Chemical Co. “simply too attenuated to support a Caremark claim.” Id. 36 plain vanilla duty of care allegation into a persuasive pleading of bad faith on the
part of the directors.
Neither is this situation akin to In re The Walt Disney Company Derivative
Litigation, where this Court found “the facts alleged . . . suggest that the defendant
directors consciously and intentionally disregarded their responsibilities . . .” and
met the pleading-stage requirements for bad faith in a Rule 23.1 motion to dismiss. 169
The facts pled in Disney, which this Court found showed bad faith, are both more
specific—the amended complaint in Disney followed a Section 220 request—and
more egregious than those here. In Disney, the board approved a substantial hiring
decision before the details, including compensation and termination, were even
negotiated. The board then tasked the CEO with negotiating a contract—including
those material terms—with the new hire, his friend of many years. This Court wrote
in Disney:
Less than one and one-half pages of the fifteen pages of Old Board minutes were devoted to discussions of Ovitz’s hiring as Disney’s new president. . . . No presentations were made to the Old Board regarding the terms of the draft agreement. No questions were raised, at least so far as the minutes reflect. At the end of the meeting, the Old Board authorized Ovitz’s hiring as Disney’s president. No further review or approval of the employment agreement occurred. Throughout both meetings, no expert consultant was present to advise the compensation committee or the Old Board. Notably, the Old Board approved Ovitz’s hiring even though the employment agreement was still a “work in
169 825 A.2d 275, 289 (Del. Ch. 2003). 37 progress.” The Old Board simply passed off the details to Ovitz and his good friend, Eisner. 170
Again, in Disney, board approval occurred without any review of material terms
because those terms had not yet been proposed; the board simply gave the CEO carte
blanche. Nothing similar is alleged here.
Here, the Plaintiff acknowledges that the directors held a meeting to approve
the Otto acquisition, where Kalanick gave a presentation, and at which the Board
discussed the indemnification terms of the Merger Agreement and the potential for
litigation with Google. All that is pled with respect to the Uber Board is that it
accepted management’s representations without examining directly the diligence
report produced by Stroz. In the interstices between what the Plaintiff here pled and
what was pled in Disney resides, to my mind, the line between a lack of care and a
lack of good faith. Similarly, Amalgamated Bank v. Yahoo! Inc. involves issues not
present here;171 issues of executive compensation necessarily alert a board to the
dangers of deference solely to the judgment of those same executives. 172 Here, such
a conflict was absent, and the Plaintiff does not contend that Uber’s management
170 Id. at 287. 171 Amalgamated Bank v. Yahoo! Inc., 132 A.3d 752, 783 (Del. Ch. 2016); see also Pl.’s Omnibus Answering Br., at 43 (first citing Disney, 825 A.2d 289; and then citing Yahoo!, 132 A.3d at 783). 172 Yahoo!, 132 A.3d at 783 (“A board cannot mindlessly swallow information, particularly in the area of executive compensation: ‘While there may be instances in which a board may act with deference to corporate officers’ judgments, executive compensation is not one of those instances. The board must exercise its own business judgment in approving an executive compensation transaction.’”) (quoting Haywood v. Ambase Corp., 2005 WL 2130614, at *6 (Del. Ch. Aug. 22, 2005)). 38 was otherwise improperly interested or conflicted in the Otto transaction.
Furthermore, the Plaintiff does not allege that Uber’s directors did nothing; rather,
the Plaintiff acknowledges that Uber’s directors met, received a presentation, asked
certain questions, and made a decision. The Plaintiff chose not to bring a Section
220 demand in connection with his allegations that the directors did not review
Stroz’ preliminary findings or ask about them. I do not find that the directors’ failure
to ask for those findings is akin to the conscious abdication of responsibility in
Disney or Yahoo!. To the extent the Plaintiff makes a broader “rubberstamping”
argument about the Board’s decision, the Plaintiff has not pled facts from which such
an inference can be drawn.
The Plaintiff also contends that it was an act of bad faith for the directors to
rely on representations by Kalanick, and by extension by management. I have
already explained above why Uber’s purported taxicab law violations (under
Kalanick’s guidance) did not give rise to a non-exculpated duty to further question
the acquisition here. The Plaintiff’s allegation that Kalanick, in particular, could not
be relied upon (per the Plaintiff, necessitating personal directorial review of Stroz’
preliminary findings) focuses largely on the same purported lawbreaking activity. 173
173 Not only is such lawbreaking activity, again, unrelated to the acquisition of Otto, but it also speaks only to the manner in which Uber and Kalanick dealt with third parties. The Plaintiff, however, does not allege that Kalanick had a history of deception when it came to Uber’s own Board. The Plaintiff’s pleadings do not raise a reasonable inference that Kalanick had lied previously to his own Board, much less that the Board knew or consciously disregarded the fact that he would. 39 I find that the Plaintiff has not sufficiently pled that the directors consciously
disregarded their known responsibilities in the Otto acquisition, and thereby
breached their duty of loyalty.
Additionally, the Plaintiff argues that, despite Kalanick’s representations, the
specifics of the Otto transaction should have caused the Board to investigate further
before approving the deal, and are in fact so unusual as to imply scienter. The
Plaintiff specifically points to the indemnification terms of the Merger Agreement.174
Those fail, in my mind, to give rise to a reasonable inference that the “decision under
attack is so far beyond the bounds of reasonable judgment that it seems essentially
inexplicable on any ground other than bad faith.” 175 It was no secret that Uber was
buying Otto not for its operations, but for its personnel. Uber was highly interested
174 To the extent that the Plaintiff argues that the Board must have known of a plan to illegally appropriate Google technology via the Otto merger, given the sales price, I find that argument unpersuasive. The Plaintiff suggests that Uber would not have paid $680 million for a legitimate start-up in Otto’s condition; therefore, it must have been apparent to the directors at the time that Otto was a vehicle for theft. The Defendants aver (and the Plaintiff acknowledges), however, that the up-front cash payment by Uber to acquire Otto was a modest $100,000. The additional value was conditional on milestones being met by 2030. See Pl.’s Omnibus Answering Br., at 21–22. The Plaintiff argues vehemently that the earn-outs are scams, presumably meant to make it appear that the terms of the Otto acquisition are reasonable. Per the Plaintiff, the earn-outs are structured such that they are “virtually asur[ed to] vest,” thus ultimately compensating Levandowski and his cohorts for the stolen Google technology. Id. The Plaintiff also points out, correctly, that the true nature of the earn-outs in any event is not in the record, and must not be considered on a motion to dismiss. I agree that, to the extent the Defendants argue that the transaction should be valued at under $680 million, such argument is unavailing on this record. But assuming it is true that, as the Plaintiff argues, the conditional nature of the payments above $100,000 is illusory, that fact is irrelevant unless the Defendant Directors knew such to be the case, which is neither pled in, nor a reasonable inference to be drawn from, the complaint. In other words, it is not reasonable to infer that the purchase price and structure of the transaction alone are sufficient to imply the Defendant Directors’ scienter. 175 In re MeadWestvaco S’holders Litig., 168 A.3d 675, 684 (Del. Ch. 2017) (citations omitted). 40 in developing a self-driving car, Google was a leader in that emerging field, Uber
wanted to attract Google’s engineering talent to design its self-driving auto, and the
Board entered a transaction to accomplish that goal. Indemnification of those
engineers was a part of this transaction; the Plaintiff himself alleges that the Board
specifically discussed the indemnification. The Plaintiff points to a number of
unusual features and risks in the transaction, known to, and approved, by the Board.
I consider those in examining the Director Defendants’ good faith. However, I
cannot infer from those features of the merger that the Director Defendants must
have known the transaction was illicit. Absent knowledge of an intent to steal IP, the
fact that the directors agree to indemnification terms that create corporate risk does
not imply a breach of a duty of loyalty.
If the Plaintiff’s allegations are true, the directors who approved the Otto
acquisition approved a questionable transaction without fully informing themselves.
Their decision ultimately damaged Uber. Nonetheless, a failure to follow best
practices is not necessarily a breach of fiduciary duty. Negligent oversight by
directors, although certainly not commendable, is not a breach of fiduciary duty.
Even grossly negligent board action does not imply a non-exculpated breach. A
breach of the duty of loyalty via bad faith, as alleged here, requires disregard so
profound that it raises an inference of scienter. I do not find that the directors’ failure
41 to inform themselves about the specifics of Stroz’ preliminary findings is so
profound as to raise that inference.
ii. Allowing the transaction to close
The Plaintiff also alleges that the Uber Board “breached its duties” by
allowing the Otto transaction to close.176 According to the Plaintiff, Stroz’ final
report, which was available prior to closing, contained information that, if read in
conjunction with the Merger Agreement, showed that Otto had breached its
representations in the Merger Agreement regarding IP ownership. 177 Uber, per the
Plaintiffs, was therefore entitled to walk away from the deal. The directors, which
by closing included Huffington and Al-Rumayyan, did not read the final Stroz report
and did not attempt to stop closing. After closing, Google sued Uber for IP
infringement, and Uber paid a settlement to Google. The Plaintiff contends that the
Uber directors, in not reviewing the final report, breached non-exculpated fiduciary
duties. The Plaintiff’s argument is that the Uber directors acted in bad faith because
they had a duty to inform themselves of the final Stroz report prior to the closing of
the transaction, but did not do so.178
176 Id. at 50 177 The Plaintiffs do not allege that Stroz’ final report made any explicit determinations regarding representations in the Merger Agreement. Instead, the Plaintiff’s argument, as I understand it, is that Stroz’ final report found that Otto employees had retained IP from Google, which could have been used by Uber as a basis to argue that Otto had breached representations in the Merger Agreement, and thus avoid the Agreement. 178 The Defendants argue that the directors could have reviewed Stroz’ final report, and, with knowledge of its contents, nonetheless made a business decision to close the transaction. See, e.g., 42 The Plaintiff’s argument for a non-exculpated breach of duty related to the
directors’ actions at closing is that the directors were aware (or should have been
aware) of the possibility that Otto had misappropriated IP, and that Uber had taken
on the risk of that misappropriation. The directors, per the Plaintiff, could have
further informed themselves via Stroz’ final report, but consciously disregarded the
risk to Uber by not personally reviewing that report. For the same reasons addressed
above, I do not find failure to review the report to be a conscious breach of duty
amounting to bad faith.
To the extent the Plaintiff bases his argument on Uber’s past bad acts under
Kalanick’s leadership, I have already rejected the notion that such violations—
regarding taxicab regulations—raised red flags and created a duty to act when it
came to an acquisition that might involve IP infringement. In considering entry of
the Merger Agreement, I similarly found that the indemnification terms of that
Agreement did not reflect director knowledge of or conscious disregard that Otto
had misappropriated IP. The same logic follows for allowing the transaction to
close. The Plaintiffs have not sufficiently pled that the directors knew IP
misappropriation was not a simply a risk, but was actually Kalanick’s goal, and that,
Opening Br. in Support of Nom. Def. Uber’s Mot. to Dismiss, at 33–34. At Oral Argument, the Plaintiff argued that this is irrelevant to whether the Defendant Directors acted in bad faith; I need not resolve this issue here. See Oral Argument Tr. 82:13–17. It is also unnecessary to resolve the parties’ related dispute concerning whether Otto breached certain representations and whether, therefore, Uber had the ability to terminate the Merger Agreement prior to closing. 43 in light of that knowledge, the directors closed their eyes to evidence of IP
misappropriation by refusing to look at Stroz’ final report. The Amended Complaint
does not allege that the Board knew that the report was available, nor that
management made the Board aware of the existence of any new information learned
after approval of the Merger Agreement regarding IP theft by Otto. Therefore, any
breach by the directors sounds in care, not loyalty. As in Stone v. Ritter, “[t]he
lacuna in the plaintiff[’s] argument is a failure to recognize that the directors’ good
faith exercise of oversight responsibility may not invariably prevent employees from
violating . . . laws, or from causing the corporation to incur significant financial
liability, or both.”179
c. Corporate Waste
The Plaintiff also brings a claim for waste against the Director Defendants,
five of whom are members of the Demand Board. “To state a claim for waste, a
stockholder must allege, with particularity, that the board authorized action that no
reasonable person would consider fair.”180 The Plaintiff argues that the Director
Defendants consciously made a choice to avoid learning that the Otto transaction
was an illegal attempt to steal Google’s IP.181 Therefore, per the Plaintiff, the
179 Stone v. Ritter, 911 A.2d 362, 373 (Del. 2006). 180 Freedman v. Adams, 58 A.3d 414, 417 (Del. 2013). 181 Pl.’s Omnibus Answering Br., at 65. 44 transaction lacked a legitimate and legal purpose.182 But this is simply the bad faith
claim I have rejected above. Stripped of bad faith, all the Plaintiff alleges is that the
Defendants caused Uber to enter a risky transaction without adequately informing
themselves. This is not waste.
3. A Majority of the Uber Board Is Independent
The Plaintiff claims that five members of the Demand Board have a
substantial likelihood of liability. I have found that only one, Kalanick, faces a
substantial likelihood of liability. As a result, the Plaintiff must demonstrate that at
least five additional members of the Demand Board lack independence in order to
demonstrate demand futility. In “the demand-excusal context, . . . the board is
presumed to be independent.”183 “Independence is a fact-specific determination
made in the context of a particular case. The court must make that determination by
answering the inquiries: independent from whom and independent for what
purpose?”184 Under this framework, the Plaintiff here must plead that the directors
of the Demand Board lacked independence from Kalanick, who faces a substantial
likelihood of liability, or that they lacked independence from another individual or
entity that was interested in the transaction.
182 Id. at 66; see also Am. Compl. ¶ 133. 183 See Beam v. Stewart, 845 A.2d 1040, 1055 (Del. 2004). 184 Id. at 1050. 45 In order to demonstrate lack of independence, a plaintiff must demonstrate
“ties [that] are material, in the sense that the alleged ties could have affected the
impartiality of the director.”185 The materiality inquiry must focus on the financial
circumstances or personal affinities of the particular director in question. 186
The Plaintiff does not contend that Al-Rumayyan lacks independence. 187 The
Plaintiff does submit that Camp, Graves, Thain, Burns, and Huffington are not
independent of Kalanick. The Plaintiff also argues that Cohler is not independent of
Gurley, and that Trujillo is not independent of Bonderman. 188 I address each
allegation below and find that the Plaintiff has, at most, pled that three directors on
the Demand Board, together with Kalanick, lack independence. Upon review, based
on the allegations here, I find that there is no reasonable doubt that at least seven out
of the eleven members of the Demand Board are disinterested and independent.
Accordingly, the Plaintiff has failed to plead demand futility consistent with Rales.
a. Cohler and Trujillo Are Independent
i. Matt Cohler
185 In re MFW S’holders Litig., 67 A.3d 496, 509–510 (Del. Ch. May 29, 2013) (citing Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 363 (Del. 1993)). 186 See, e.g., id. at 510 (“[I]t is necessary to look to the financial circumstances of the director in question to determine materiality.”). 187 See Am. Compl. ¶ 112; see also, generally, Am. Compl.; Pl.’s Omnibus Answering Br., at 59– 64. 188 I note that the Plaintiff brings a claim against Yoo, an officer of Uber; however, the Plaintiff makes no argument that any of the members of the Demand Board lack independence from Yoo. See generally Am. Compl. I do not consider the claim against her at this juncture. 46 Gurley, who served on Uber’s Board at the time the merger with Otto was
approved and closed, left the Board in 2017. Gurley and Cohler are both partners at
Benchmark, and Cohler replaced Gurley on Uber’s Board. The Plaintiff alleges that
Cohler is not independent from Gurley because they are both partners at the same
investment fund, and because Gurley was Cohler’s mentor at that fund. 189 However,
independence is only relevant here if Gurley stands a substantial likelihood of
liability. The Plaintiff alleges that Gurley faces a substantial likelihood of liability
because he was on Uber’s board when it approved the Otto merger. But, I found
above that the directors who approved the merger with Otto (and then allowed the
merger to close) do not face a substantial likelihood of liability. As a result, I need
not reach the question of independence between Cohler and Gurley, because their
relationship is unlikely to be implicated. Therefore, the Plaintiff has not shown a
reasonable doubt that Cohler cannot be impartial when considering demand.
ii. David Trujillo
The allegations against Trujillo mirror those against Cohler. Bonderman
served on Uber’s Board at the time the merger with Otto was approved and closed;
he left the Board in 2017. Bonderman and Trujillo are both partners at TPG. When
Bonderman left the Board, Trujillo replaced him. The Plaintiff alleges that Trujillo
is not independent from Bonderman because they are both partners at TPG. As with
189 Pl.’s Omnibus Answering Br., at 60–62; Am. Compl. ¶¶ 114–115. 47 Gurley and Cohler, however, Trujillo’s independence from Bonderman is only
implicated if Bonderman has a substantial likelihood of liability. Again, I found
above that the directors of Uber who served when the Board approved the Otto
merger do not face a substantial likelihood of liability. I need not inquire into the
relationship between Bonderman and Trujillo. As the Plaintiff does not allege that
Trujillo would otherwise be conflicted, the Plaintiff has not shown that Trujillo
cannot impartially consider demand here.
b. Graves and Thain Are Independent from Kalanick
i. Ryan Graves
Kalanick hired Graves as Uber’s first employee. 190 Graves served as Uber’s
CEO in 2010, before amicably stepping down to become general manager. 191 The
Plaintiff argues that, as Kalanick’s friend, Graves lacks independence. As our
Supreme Court has made clear, directors, like all human actors, can have personal
loyalties that cloud their ability to comply with fiduciary duties. Thus, long and
close personal friendships may, in specific circumstances, raise a reasonable doubt
of a director’s ability to exercise business judgment. 192 However, such relationships
must be pled with particularity to overcome the presumption of independence. The
190 Am. Compl. ¶ 107. 191 Id. 192 In Delaware County Employees Retirement Fund v. Sanchez, our Supreme Court found that a “half century” close friendship was likely considered “precious” and when “a close relationship endures for that long, a pleading stage inference arises that it is important to the parties.” 124 A.3d 1017, 1022 (Del. 2015). 48 only allegation here, in addition to a long-term employee relationship, is the
conclusory assertion that Kalanick and Graves are “close,” and that Graves is
described—by parties unknown—as Kalanick’s “confidant” and “ally.” 193 Such
allegations are of insufficient specificity to support a claim that the two have such a
close personal relationship that Graves lacks independence.
The Plaintiff also implies that Graves is not independent of Kalanick because
Graves has derived substantial wealth from Uber. 194 I note that Kalanick, while still
a director, is no longer CEO of Uber, nor does he hold another management position;
likewise, it seems that Graves, while still a director, no longer holds a management
position at Uber.195 The Plaintiff has not pled any facts to suggest—nor has he even
made conclusory allegations—that Kalanick has any means to deprive Graves of the
wealth Graves has accumulated, or that Kalanick has the ability to deprive Graves
of wealth—let alone wealth that is material to Graves196—going forward. The fact
193 Am. Compl. ¶ 108. 194 Id. ¶ 107. The Plaintiff alleges that Graves, as a result of being hired by Kalanick, has “reaped millions of dollars in compensation over the years at Uber.” Id. 195 Graves resigned from his position as head of global operations on August 10, 2017. Id. ¶ 20. 196 As then-Chancellor Chandler deftly explained in Orman v. Cullman: A director may be considered beholden to (and thus controlled by) another when the allegedly controlling entity has the unilateral power (whether direct or indirect through control over other decision makers), to decide whether the challenged director continues to receive a benefit, financial or otherwise, upon which the challenged director is so dependent or is of such subjective material importance to him that the threatened loss of that benefit might create a reason to question whether the controlled director is able to consider the corporate merits of the challenged transaction objectively. 794 A.2d 5, 25 n.50 (Del. Ch. 2002). 49 that Kalanick hired Graves as an employee, standing alone, is insufficient to raise a
reasonable likelihood that Graves lacks independence.
ii. John Thain
The Plaintiff alleges that Thain is not independent from Kalanick because
Kalanick unilaterally appointed Thain to the Board “during a power struggle within
Uber.”197 The Amended Complaint does not explain how Kalanick appointed Thain
or whether Kalanick has the power to remove Thain; 198 however, the Plaintiff
contended for the first time at Oral Argument that Kalanick has the power to remove
Thain.199 The Plaintiff does not allege that Thain has a personal or financial
connection to Kalanick, nor does the Plaintiff allege that the directorship—including
its monetary compensation—is of substantial material importance to Thain (that is,
even assuming that Kalanick has the power to unilaterally remove Thain from the
Board). Thus, I must decide whether Thain is independent based solely on the fact
that Kalanick appointed him during a power struggle. This allegation alone is not
sufficient to undermine Thain’s independence; once appointed to the Board, a
director is entitled to a presumption of independence.
As a result, I have no reasonable doubt that at least a seven-member majority
of the Demand Board—Al-Rumayyan, Martello, Khosrowshahi, Cohler, Trujillo,
197 Am. Compl. ¶ 117. 198 See generally Am. Compl. 199 See Oral Argument Tr. 85:18–87:13. 50 Graves, and Thain—are independent under Rales. I note that the Board, for all the
Plaintiff’s claims of dominance by Kalanick, was able to oust Kalanick from
management in 2017.
For the sake of completeness, I address the allegations regarding the
remaining directors below.
iii. Ursula Burns
The Plaintiff alleges that Burns is not independent from Kalanick for two
reasons: first, that Kalanick appointed Burns under the same circumstances as Thain,
discussed above, and second, that Kalanick is a client of Burns’s employer. 200 As
an initial matter, the first contention fails for the same reasons discussed with respect
to Thain. Regarding the second contention, the Plaintiff alleges that Burns works
for the same public relations firm that Kalanick has retained to manage his image,
and that because of this, Burns is not independent of Kalanick. Having already found
that a majority of the Board is independent of Kalanick, I need not determine whether
the Plaintiff has met its burden to raise reasonable doubt that Burns could consider
a demand while her firm represents Kalanick. I do note, however, that the Plaintiff’s
pleading is conclusory or silent as to the materiality of the relationship between
Kalanick and Burns’s PR Firm, and with Burns herself.
200 Am. Compl. ¶ 117. 51 iv. Garrett Camp
The Plaintiff claims that Camp also lacks independence from Kalanick. In
support of this allegation, the Plaintiff notes that Camp co-founded Uber with
Kalanick, and that Kalanick is a “close personal friend” of Camp. 201 Again, this
allegation would be troubling, if it were not merely conclusory. This is particularly
the case in light of the fact that Camp and Kalanick are co-founders of Uber. While
that fact alone does not by itself raise a reasonable doubt of Camp’s independence, 202
a more robust pleading of Camp and Kalanick’s relationship is easily conceivable.
Again, I need not find Camp independent in order to find a majority of the Demand
Board is composed of independent directors.
v. Arianna Huffington
The Plaintiff alleges that Huffington was unilaterally appointed to the Board
by Kalanick.203 Purportedly, the two have a close personal relationship that preceded
her appointment as director, as evidenced by their collaboration “on projects to
promote Huffington’s book.” 204 Once appointed, Huffington defended Kalanick,
both publicly and at Board meetings, at times when his leadership of Uber was
201 Id. ¶ 109. 202 See, e.g., Apple Computer, Inc. v. Exponential Tech., Inc., 1999 WL 39547, at *12 (Del. Ch. Jan. 21, 1999) (“The factual predicate, that [the defendant and a director] are cofounders, falls far short of raising a reasonable doubt as to [the director’s] disinterestedness.”). 203 Am. Compl. ¶ 110. 204 Id. 52 embroiled in controversy. 205 That Huffington, as a director of Uber, defended
Kalanick is not noteworthy unless the Plaintiff can raise a reasonable doubt via a
showing that she did so because of their close personal relationship.
The Plaintiff alleges that the relationship between Kalanick and Huffington is
“so close that Huffington visited Kalanick’s family members in the hospital and
made him omelettes.”206 Such personal interaction is “suggestive of the type of very
close personal relationship that, like family ties, one would expect to heavily
influence a human’s ability to exercise impartial judgment.” 207 While one instance
is not indicative of Kalanick’s and Huffington’s entire relationship, the “standard
does not require a plaintiff to plead a detailed calendar of social interaction to prove
that directors have a very substantial personal relationship rendering them unable to
act independently of each other.”208 Because, notwithstanding Huffington, I find
that the majority of the Board is independent, I need not determine whether
allegations of hospital visits and omelet-making evince such a close personal
relationship as to question Huffington’s independence. I note, however, that the
pleadings here approach, if not cross, a line of director independence.
205 Id. 206 Id. 207 Sandys v. Pincus, 152 A.3d 124, 130 (Del. 2016). 208 Id. at 130. 53 4. Rule 23.1 Determination
The Plaintiff has failed to raise a reasonable doubt as to the independence of
at least seven of the eleven members of the Demand Board. Those directors are
capable of considering demand here. If it had been made, demand would not have
been futile.
III. CONCLUSION
The Plaintiff did not make a demand on Uber’s Board. Such demand is
necessary unless futile; here the Plaintiff has not sufficiently pled that at least seven
of the eleven members of the Demand Board are either interested or lack
independence. Therefore, there is no reasonable doubt that a majority of the Demand
Board can be impartial, and the Plaintiff has fallen short of pleading demand futility.
The action is dismissed under Rule 23.1.209 An appropriate order is attached.
209 Therefore, I need not reach the Defendants’ Motions to Dismiss under Rule 12(b)(6). 54 IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
LENZA H. MCELRATH, III, ) derivatively on behalf of UBER ) TECHNOLOGIES, INC., ) ) Plaintiff, ) ) v. ) C.A. No. 2017-0888-SG ) TRAVIS KALANICK, GARRETT ) CAMP, RYAN GRAVES, ARIANNA ) HUFFINGTON, YASIR AL- ) RUMAYYAN, WILLIAM GURLEY, ) DAVID BONDERMAN, and SALLE ) YOO, ) ) Defendants, ) -and- ) ) UBER TECHNOLOGIES, INC., ) ) Nominal Defendant. )
ORDER
AND NOW, this 1st day of April, 2019,
The Court having considered the Defendants’ Motions to Dismiss, and for the
reasons set forth in the Memorandum Opinion dated April 1, 2019. IT IS HEREBY
ORDERED that the Motion to Dismiss is GRANTED.
SO ORDERED.
/s/ Sam Glasscock III
Vice Chancellor
Related
Cite This Page — Counsel Stack
Lenza H. McElrath, III v. Travis Kalanick, Counsel Stack Legal Research, https://law.counselstack.com/opinion/lenza-h-mcelrath-iii-v-travis-kalanick-delch-2019.