Delaware Court Of Chancery Grants Motion To Dismiss Finding Demand Was Not Excused In Connection With Alleged Failure To Update Revenue Guidance
On April 28, 2020, Vice Chancellor Joseph R. Slights III granted a motion to dismiss a derivative action alleging claims of breach of fiduciary duty and improper trading brought by stockholders of GoPro, Inc. against certain of the company’s current and former directors and officers. In re GoPro, Inc. Stockholder Derivative Litigation, C.A. No. 018-0784-JRS (Del. Ch. April 28, 2020). Plaintiffs alleged that defendants failed to disclose that the company’s revenue guidance was unachievable in light of emerging problems with a product launch. Dismissing the claims, the Court held that the complaint did not plead with particularity that a majority of the board faced a substantial risk of liability, and therefore, rejected plaintiffs’ contention that pre-suit demand on the board to sue was excused as futile. Specifically, the Court found that the board presentations incorporated by reference into the complaint revealed that management regularly advised the board that the company was still on track to meet the revenue guidance. As the Court explained, the board was “under no obligation to disclose what it did not know or did not believe to be true.”
Likewise, the Court found that a majority of the current board did not face a substantial likelihood of liability with respect to additional claims by plaintiffs that certain defendants exploited their knowledge of nonpublic company information to sell shares. Indeed, the Court noted that these claims were asserted against only one current board member.
The Court also dismissed plaintiffs’ argument that demand was excused because the board was allegedly “beholden” to the company’s CEO and controlling shareholder. As the Court highlighted, “[a]lleging only that the controller/CEO could remove Board members ‘at will’ says nothing of their independence for purposes of demand futility.”
Finally, the Court found that the existence of a parallel securities fraud case based on similar allegations did not render demand futile. Plaintiffs argued that the board could not fairly evaluate the claims of improper insider trading because asserting such claims would be “tantamount to admitting liability.” The Court explained that plaintiff failed to plead that a majority of the board faced a substantial likelihood of liability because only one member was even named as a defendant in that action.