Delaware Business Litigation Report

Chancery Ends Trip for Uber Derivative Lawsuit

McElrath v. Kalanick, C.A. No. 2017-0888-SG (Del. Ch. Apr. 1, 2019).

This derivative action arose out of Uber’s acquisition of a self-driving vehicle firm named Otto, which involved former Google employees.  Google sued Otto and Uber for alleged intellectual property infringement, resulting in Uber settling the dispute for $245 million.  The plaintiff sued Uber’s directors for the acquisition, claiming they should have known better than to rely on their CEO’s promotions of the deal and his representations regarding the company’s due diligence findings under the circumstances.

This decision grants the defendants’ motion to dismiss under Court of Chancery Rule 23.1 pre-suit demand-on-the-board grounds.  Applying recognized legal principles for that analysis, the Court held that the complaint lacked the necessary particularized allegations showing that pre-suit demand on the board would have been futile.  In this regard, the plaintiffs’ allegations and argument had focused on the directors’ failure to inform themselves of specific due diligence findings rather than relying on management’s discussions of those issues, citing management’s alleged history of causing the company to engage in other misconduct as a supposed “red flag.”  According to the Court, however, plaintiff alleged at most an exculpated duty of care claim, not a breach of the duty of loyalty.  Central to the Court’s reasoning was the absence of other known misconduct involving the type of misconduct at-issue in the acquisition—the misappropriation of intellectual property.  According to the Court, a board’s alleged awareness of an executive’s supposed bad character “is not a sufficient red flag … to convert a plain vanilla duty of care allegation into a persuasive pleading of bad faith on the part of the directors.”  Under Delaware law, “there is a vast difference between an inadequate or flawed effort to carry out fiduciary duties and a conscious disregard for those duties.”

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