McElrath v. Kalanick, No. 181, 2019 (Del. Jan. 13, 2020) (Seitz, C.J.)

In this decision, the Delaware Supreme Court affirmed the Delaware Court of Chancery’s dismissal of a derivative lawsuit arising out of Uber Technologies, Inc.’s (“Uber”) acquisition of Ottomotto LLC (“Otto”) for failure to make a demand on the Uber board of directors, holding that a majority of the Uber board was disinterested because it had no real threat of personal liability due to Uber’s exculpatory charter provision and a majority of the board was independent of the only interested director.

The plaintiff brought a derivative lawsuit against Uber directors for approving the Otto acquisition claiming that the directors ignored certain thefts of intellectual property and failed to investigate pre-closing diligence that would have revealed problems with the transaction.  The plaintiff did not make a pre-suit demand on the Uber board of directors.  The defendants moved to dismiss the complaint under Delaware Court of Chancery Rule 23.1.  The Delaware Court of Chancery held that a majority of the Uber board of directors could have fairly considered the demand and dismissed the complaint.  The plaintiff appealed.

The plaintiff alleged that of the eleven directors on the Uber board when the plaintiff filed the complaint there were five who were interested because they faced a substantial likelihood of liability.  There was no serious dispute by defendants regarding the interestedness of one of those directors as determined by the trial court, and the plaintiff alleged that five of the directors were not independent of that interested director.

The Delaware Supreme Court held that the plaintiff failed to meet his burden of alleging that the directors at-issue acted in bad faith.  Instead, the only potentially well-plead allegations revolved around claims that the directors should have been better informed.  Due care violations by the Uber directors, however, were exculpated by Uber’s charter, and therefore the directors-at-issue could not have faced a substantial likelihood of liability sufficient to support demand futility.

Moreover, the Delaware Supreme Court held that at least one of the challenged directors was independent of the interested director and therefore a majority of the Uber board was disinterested and independent to consider a demand.  The Court determined that the plaintiff’s allegations that the director was not independent because the interested director appointed him during a power struggle and he may be loyal to the interested director were insufficient without more to allow a reasonable inference that he and the interested director had a relationship of a “bias-producing nature.”

Accordingly, the Court affirmed the Delaware Court of Chancery decision to dismiss the complaint, holding that the plaintiff was required to demand that the Uber board pursue the claim.

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