By Mark S. Nelson, J.D.
The Delaware Supreme Court affirmed a finding by the Chancery Court that demand was not excused where a majority of Uber Technologies, Inc’s board of directors was independent of CEO/director Travis Kalanick at the time the plaintiff shareholder filed a lawsuit challenging a troubled acquisition undertaken by Uber. That meant the plaintiff was obliged to make a demand on the board, something the plaintiff failed to do. The Chancery Court had dismissed the case with prejudice (McElrath v. Kalanick, January 13, 2020, Seitz, C.).
Troubled deal. The case arose from Uber’s "flawed" acquisition of Ottomotto LLC. Uber, worried that it was trailing Google in autonomous vehicle technologies, sought to acquire Ottomotto primarily to gain the expertise of Ottomotto’s founder, Anthony Levandowski, a former Google employee who created Ottomotto while still working for Google. The transaction was fraught with risks about misappropriation of Google technology and the deal terms reflected this concern: there were "atypical" indemnity provisions and Uber paid only $100,000 for what consisted of the combined human capital of Levandowski and his team rather than a full-fledged company. Further evidence of the deal’s troubled character includes Uber’s eventual payment of Uber stock worth $245 million to Google to resolve claims regarding misuse of Google’s intellectual property. Uber also would go on to fire Levandowski for misuse of proprietary Google data.
The plaintiff, a former Uber employee and shareholder, alleged that Uber’s board breached its fiduciary duties by blindly approving the Uber-Ottomotto acquisition. Specifically, the plaintiff said the unusual indemnity provisions built into the deal, coupled with Kalanick’s "law breaker" reputation regarding his handling of competitors’ intellectual property, required the board to more closely scrutinize the Ottomotto acquisition.
The "usual way" to become a director. In a recitation suitable for a corporate law treatise, the court explained that it reviews demand excusal cases on a de novo basis and that the inquiry consists of determining whether there were any interested directors (substantial likelihood of personal liability) and, then, whether any other directors were beholden to any of the interested directors (inability to be impartial). If a majority of the board members are disinterested and independent, the plaintiff shareholder must ask the board to pursue the proposed litigation. Still, as in the Uber case, where the company has an exculpatory charter provision regarding allegations of due care violations, the plaintiff may invoke an escape valve by alleging the board’s bad faith. But the court further explained that bad faith is a "high hurdle" and requires allegations that the board knew of wrongdoing (gross negligence, for example, would be insufficient).
The court first noted that the Uber-Ottomotto indemnity provisions were odd but also explained that the provisions would offer some benefit to Uber. With respect to the hiring of Levandowski, the court rejected the plaintiff’s analogy to the Disney case where a board ignored the on boarding of a significant hire, an old friend of the company executive to whom the board had delegated the hiring process. In the Uber case, the company had hired an outside firm to review the use of Google proprietary information and the board did consider the Ottomotto acquisition. The court observed that even if the Uber board could have done more to scrutinize the Ottomotto acquisition, its actions did not rise to bad faith.
Next, the court addressed the question of director independence. The Chancery Court had found that Kalanick was an interested director and the Delaware Supreme Court agreed. In its analysis, the justices asked if a majority (six members) of the then-11-member Uber board were independent of Kalanick. The plaintiff did not challenge the independence of five of the needed six independent directors.
The plaintiff and the court, however, did focus on director John Thain, whom Kalanick had appointed at the height of a power struggle that would result in Kalanick’s ouster as CEO and Kalanick’s being subjected to an investor’s fraud suit. But even being appointed director in this manner might not run afoul of directors’ duties. Said the court: "Importantly, being nominated or elected by a director who controls the outcome is insufficient by itself to reasonably doubt a director’s independence because ‘[t]hat is the usual way a person becomes a corporate director’" (citation omitted). The court concluded that while Thain might have felt a need to be loyal to Kalanick under the circumstances of his appointment, there were no additional allegations that the Kalanick-Thain relationship resulted in Thain being biased.
The case is No. 181, 2019.