Chancery Dismisses GoPro Derivative Action for Failure to Allege Directors Intentionally Made Inflated Revenue Forecasts or Failed to Exercise Appropriate Caremark Oversight
In re GoPro, Inc. S’holder Deriv. Litig., C.A. No. 2018-0784-JRS (Del. Ch. Apr. 28, 2020)
This opinion serves as a reminder that particularized allegations of non-exculpated wrongdoing are necessary to support the contention that a demand would be futile. Vice Chancellor Joseph R. Slights, III dismissed a breach of fiduciary duty derivative action for failure to allege demand futility with the detail prescribed by Chancery Court Rule 23.1. The plaintiffs, GoPro, Inc. stockholders, filed suit against officers and directors after complications with the launch of a new drone caused the company to miss its revenue forecast. The complaint alleged that pre-suit demand was futile because a majority of the board faced liability for its knowledge of, but failure to disclose, the company’s revenue shortfall and were beholden to the CEO/controlling stockholder such that they could not exercise independence. The missed revenue projections also spurred a federal securities class action suit, naming three of the same defendants, where a ruling denying a dismissal motion found that the class plaintiffs well pled that the named overlapping defendants made false or misleading statements regarding the drone.
First, the Court found the complaint’s allegations insufficient to demonstrate that the board knowingly authorized the dissemination of false financial information (i.e. acted affirmatively and with scienter to make misleading disclosures). Pressed for specific information that the Board approved publication of revenue forecasts that the directors knew were invalid, the plaintiffs pointed only to a single power-point slide from a board presentation, which the Court viewed as showing backwards looking data, rather than suggesting that future guidance was inaccurate. According to the Vice Chancellor, “Board acquiescence cannot support an inference of affirmative Board-level misconduct.” The Court also noted the lack of any allegations of a credible motive to disseminate false information. While the Company’s controlling stockholder was named in the companion securities class action, that did not suffice to undermine the others’ independence, because settled Delaware law provides that a controlling stockholder’s ability to remove and replace directors does not in itself make a director beholden.
Despite the plaintiffs disclaiming any attempt to bring a claim under In re Caremark Intern. Inc. Deriv. Litig., 698 A.2d 959 (Del. Ch. 1996), where a director faces liability for a bad faith failure to oversee company operations, the Court still evaluated the “Caremark-like allegations” for completeness. Viewed from this perspective, the directors’ alleged failures to: (i) access company data to monitor inventory levels for the drone, a product that comprised only 10% of the company’s revenue, to ensure it could meet the production quantity necessary to hit the revenue guidelines (ii) learn of the drone’s battery defects through testing or viewing online videos documenting those defects, or (iii) react more promptly to board presentation slides explaining the risk associated with the drone, did not rise to the level of bad faith necessary for a valid Caremark claim. According to the Court, none of these facts demonstrate that the board knew GoPro would miss its revenue forecasts and knowingly failed to correct public false statements.
The Court also rejected the plaintiffs’ “last ditch demand futility arguments” related to the class action federal lawsuit and allegations of insider trading lodged against one of the directors. The Vice Chancellor rejected the plaintiffs’ reliance upon In re Fitbit, 2018 WL 6587159 (Del. Ch. Dec. 14, 2018), and Pfeifer v. Toll, 989 A.2d 683 (Del. Ch. 2010), as misplaced. Both cases found demand futile because related federal securities class actions named a majority of the board as defendants, such that considering a demand for the corporation to sue may be viewed as tantamount to an admission of their liability. In the current case, only one director defendant was named in the corresponding federal action and was allegedly involved in insider trading. Accordingly, the plaintiffs’ complaint was dismissed pursuant to Chancery Rule 23.1 for failure to plead demand futility.