In re GoPro, Inc. Stockholder Derivative Litigation, C.A. No. 2018-0784-JRS (Del. Ch. Apr. 28, 2020) (Slights, V.C.)
In this memorandum opinion, the Delaware Court of Chancery granted a motion to dismiss derivative claims asserted against the board of directors of GoPro, Inc. because the plaintiffs failed to adequately plead demand futility under Court of Chancery Rule 23.1. In so holding, the Court found that the plaintiffs failed to plead with particularity that a majority of the board was unfit to consider a demand.
In early 2016, GoPro, Inc. (“GoPro” or the “Company”) planned to roll out two new products to the market. GoPro provided favorable revenue guidance for 2016 based on projected sales of both products. While the Company faced production difficulties in getting the products to market, its revenue guidance remained unchanged. Once the products were released in the fall of 2016, GoPro faced production ramp-up issues, inventory shortages, higher than expected product returns and ultimately a product recall of one of the products. GoPro’s board of directors eventually caused GoPro’s revenue guidance to be adjusted to account for these problems. The year-end results revealed that GoPro generated $1.185 billion in revenue during 2016, below its updated revenue guidance of $1.25 to $1.3 billion. GoPro’s stock suffered a 12% decline in response to the revenue miss.
Amid GoPro’s 2016 difficulties, stockholders filed suit in federal court alleging that certain GoPro fiduciaries violated federal securities laws because, as of October 2015, they knew the Company would fall short of its annual revenue guidance, which they failed to timely disclose to stockholders. Based on similar allegations, stockholders filed complaints in the Court of Chancery alleging certain GoPro officers and directors breached their fiduciary duties and seeking to hold certain fiduciaries liable under Brophy for trading in GoPro stock in a manner that exploited their knowledge of non-public information.
In granting the defendants’ motion to dismiss, the Court concluded that the plaintiffs failed to plead with particularity that a majority of the GoPro board in place when the complaint was filed was unfit to consider a demand. The Court observed that the plaintiffs’ theory of demand futility hinged on conclusory allegations that a majority of the board faced a substantial likelihood of liability for breach of fiduciary duty because they knew GoPro could not meet its revenue guidance. Finding the complaint lacked sufficient factual particularity to support this assertion, either as an affirmative choice to mislead stockholders or as a matter of poor oversight, the Court emphasized that GoPro management was regularly advising the board that GoPro was on track to hit its revenue guidance notwithstanding production difficulties. In light of the presumption of directorial good faith, as well as the board’s statutory right to rely on management reports, the Court found that nothing in the complaint supported a reasonable inference that the board knew that the Company would miss its guidance or consciously disregarded the risk.
The Court likewise rejected the plaintiffs’ argument that the board could not competently consider a demand due to the federal securities litigation or the Brophy claim. The Court reasoned that only one director (the controlling stockholder and CEO) was named as a defendant in the federal securities litigation or with respect to the Brophy claim and that the ability of a controller to remove board members at will says nothing of their independence for purposes of demand futility.
Having concluded that a majority of the board could exercise independent and disinterested business judgment in responding to a demand, the Court dismissed the complaint.