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Delaware Court Of Chancery Dismisses Derivative Suit For Failure To Plead Sufficient Facts Showing Demand Futility
10/13/2020On September 30, 2020, Chancellor Andre G. Bouchard dismissed a derivative suit brought by stockholders of TrueCar, Inc. (the “Company”) against certain of its officers and directors (along with allegedly related entities) asserting breaches of fiduciary duty, insider trading, unjust enrichment, contribution and indemnification, as well as aiding and abetting. In Re TrueCar, Inc. Stockholder Derivative Litigation, C.A. No. 2019-0672-AGB (Del. Ch. Sept. 30, 2020). According to the complaint, the Company operated an internet platform designed to facilitate purchases of cars that allegedly depended on consumer traffic directed to TrueCar by its “affinity partners.” The gravamen of the claims was that defendants did not disclose in the Company’s SEC filings that an impending redesign of the website of its most significant affinity partner would negatively impact the Company’s business and that certain defendants and their alleged affiliates engaged in stock sales before the public disclosure of this allegedly adverse development. Dismissing the suit in its entirety, the Court found that plaintiffs failed to plead “particularized facts sufficient to impugn the ability” of any of the directors to consider a pre-suit demand because the allegations did not demonstrate that the directors learned of the development or ignored any red flags before the challenged disclosures and stock sales.
Significantly, the Court distinguished between what Company management may have been aware of and what the board knew and understood about the development in the partnership. In particular, the Court noted that “vague references” in board materials to underperformance or a need to “re-energize” the Company’s relationship with the partner at issue were not sufficient to infer that the board had knowledge about the website redesign and its implications. Accordingly, the directors were not subject to a substantial likelihood of liability for any of the claims.
More specifically, as to the disclosure claim, the Court found that the complaint did not adequately allege that the directors “deliberately misinform[ed]” the shareholders. As to the Caremark claim for alleged lack of oversight, the Court also noted that the complaint itself “acknowledge[d] that [the Company] had systems in place to review and approve its public filings, including an Audit Committee and a Disclosure Committee charged with handling” the company’s public filings. Therefore, the claim could not be maintained on a theory that the directors “utterly failed” to implement reporting and information systems and controls.
The Court also explained that to state a so-called Brophy claim for insider trading, a plaintiff must allege that the corporate fiduciary possessed material, nonpublic information and “used that information improperly by making trades because she was motivated, in whole or in part, by the substance of that information.” As above, the complaint failed to allege this adequately on the basis of supposed knowledge of the website redesign.
Additionally, regarding direct sales by certain directors, the Court found that the timing and amounts (e.g., 7% of one director’s holdings and 3% of another’s) did not give rise to an inference of scienter. Moreover, as to certain directors, the complaint alleged Brophy claims merely on the basis of stock sales by other entities with which they were allegedly affiliated. The Court found that these claims were deficient for the additional reason that the complaint did not sufficiently allege facts demonstrating that the directors had any control over the relevant entities’ investment decisions (though the Court noted that allegations that one director was on a relevant entity’s investment committee were sufficient in this regard).
As to sales by the affinity partner itself (as it was also a defendant), the Court highlighted that it held only 14% of the Company’s stock and the complaint did not otherwise allege facts sufficient to demonstrate that it exercised control over the Company. The Court thus determined that the entity did not owe any fiduciary duties and, therefore, a Brophy claim could not be maintained.
The Court also found that the existence of a parallel securities class action that named several of the directors as defendants based on similar allegations of misleading disclosures—and for which the derivative plaintiffs sought “indemnification and contribution”—did not expose the directors to a substantial likelihood of liability for a nonexculpated claim in light of the Company’s exculpatory charter provision. The Court noted that, as against the demand board members, the securities class action only asserted “strict liability and negligence” (not scienter-based) claims under the Securities Act of 1933. The Court also determined that the settlement of the securities action—with the settlement payment covered by insurance—“eliminated as a practical matter” any exposure to personal liability.
