Delaware Court Of Chancery Dismisses Derivative Suit Alleging Tech Company Exposed Itself To Unnecessary Litigation Risk With Acquisition
04/09/2019On April 1, 2019, Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery dismissed for lack of demand a stockholder derivative suit against directors of Uber Technologies, Inc. (“Uber”) that asserted breach of fiduciary duty claims in connection with Uber’s acquisition of self-driving car startup Ottomotto, LLC (“Otto”). McElrath v. Kalanick, et al., C.A. No. 2017-0888-SG (Del. Ch. April 1, 2019). After Uber acquired Otto, which was founded by a former Google employee, Google sued for infringement and Uber paid $245 million to resolve the claims. Plaintiff in McElrath claimed that the Uber board violated its duties by failing to adequately investigate the Otto transaction.
The Court considered the following factual allegations in the complaint, which the Court accepted as true solely for the purpose of considering the motion to dismiss for failure to make a demand on the board: Otto, which Uber acquired in 2016, was founded by a former employee of Waymo, Google’s subsidiary engaged in development of self-driving vehicles, who allegedly retained voluminous Google files. Otto also employed other former Google employees. As part of Uber’s diligence on the acquisition, Uber hired an outside forensic firm to investigate the possible retention by Otto personnel of Google files. The preliminary findings of the firm were available at the time the Uber board approved the Otto acquisition in April 2016 but were not presented to the board, and although the board was aware of the review, the directors did not request to review the findings. The board did, however, engage in some discussion concerning the diligence and Uber’s agreement to indemnify Otto and its CEO for certain intellectual property liabilities before approving the transaction. According to the complaint, the final diligence report revealed that Otto’s CEO and employees had hundreds of thousands of Google’s proprietary files and that the CEO had attempted to obscure and destroy evidence of the files in his possession.
After the deal closed, Google sued, and Uber settled. Plaintiff then sued the Uber board, alleging that they breached their duty to inform themselves about the preliminary investigation findings in light of the alleged reputation of Uber’s then-CEO for disregarding the law. The Court concluded these allegations did not amount to bad faith such that a failure to act could constitute a breach of the duty of loyalty. In so holding, the Court observed that the alleged lawbreaking was unrelated to the issues presented by the Otto acquisition and, accordingly, no knowledge of prior bad acts could be imputed to the directors under Caremark. Finding that any breach of the duty of care would be exculpated, the Court found that none of the directors (other than the CEO) faced a substantial likelihood of liability such that demand would be excused. The Court also rejected plaintiff’s argument that demand was futile because those directors who joined Uber’s board after approval of the merger lacked independence from Uber’s CEO. The Court held that plaintiff failed to raise a reasonable doubt as to the independence of a majority of these directors.