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Supreme Court Affirms Dismissal of Uber Derivative Action for Failure to Plead Demand Futility

Mcelrath v. Kalanick, No. 181-2019 (Del. Jan. 13, 2020). 

This case exemplifies the Delaware courts’ approach to examining demand futility. In 2016, Uber Technologies, Inc. (“Uber”) acquired Ottomotto LLC (“Otto”), a company started by a contingent of employees from Google’s autonomous vehicles group, in order for Uber to gain expertise in developing autonomous vehicles. The shareholder-plaintiff brought a claim, on behalf of Uber, against some of Uber’s directors. The plaintiff alleged that Uber’s directors ignored the risks presented by Otto’s alleged theft of Google’s intellectual property, which eventually led to Uber paying a settlement of $245 million to Google and terminating its employment agreement with Otto’s founder.

The plaintiff argued that the directors should have informed themselves of the results of a report prepared by a forensic investigative firm hired by Uber to conduct due diligence on Otto. The report uncovered that Otto employees had misappropriated Google’s intellectual property. More specifically, the plaintiff contended that the directors were on notice to review the report. The directors should not have relied on the representations of then-CEO Travis Kalanick to acquire Otto because Mr. Kalanick had repeatedly flaunted laws applicable to Uber. Plaintiff also alleged that the directors were on notice because of unusual indemnification provisions in the merger agreement between Uber and Otto that protected Otto from liability for some of its disclosed bad acts and misstatements. Finally, the plaintiff claimed that the directors had notice to inquire about the results of the report because they were aware that Uber had requested the forensic investigative firm to prepare the report. 

The Delaware Supreme Court affirmed the Court of Chancery’s dismissal of the plaintiff’s complaint because the plaintiff had failed to allege that a majority of Uber’s directors was not disinterested or independent. The Supreme Court held that the mere fact that Kalanick had appointed a director in a control dispute to the Uber board did not lead, without more, to the inference that that director was interested or not independent of Kalanick. In addition, Uber has an exculpatory charter provision, which shields its directors from liability for breaches of the duty of care, meaning that the otherwise disinterested and independent directors could be liable only for intentional misconduct. The plaintiff’s complaint and documents incorporated by reference reflected that the directors discussed the diligence prepared by the forensic accounting firm, were told that the diligence was “OK,” and noted the possibility of litigation with Google. The Supreme Court also found that the directors could have reasonably relied on Mr. Kalanick’s representations because Uber’s alleged past violations of laws under his leadership did not involve intellectual property, and Mr. Kalanick did not have a history of lying to the board. The Supreme Court therefore held that “[a]though there might have been reason to dig deeper into Kalanick’s representations about the transaction, the board’s failure to investigate further cannot be characterized fairly as an ‘intentional dereliction’ of its responsibilities.”



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