Court Opinion

ID: 4471915
Source: CourtListenerOpinion
Date Created: 2020-01-13 20:02:42.048529+00
Date Added: 2024-06-11T13:07:29.356499
License: Public Domain

IN THE SUPREME COURT OF THE STATE OF DELAWARE

LENZA H. MCELRATH, III,      §
derivatively on behalf of UBER
                             §
TECHNOLOGIES, INC.,          §
                             §            No. 181, 2019
    Plaintiff Below,         §
    Appellant,               §            Court Below: Court of Chancery
                             §
    v.                       §            C.A. No. 2017-0888
                             §
TRAVIS KALANICK, GARRETT §
CAMP, RYAN GRAVES,           §
ARIANNA HUFFINGTON, YASIR §
AL-RUMAYYAN, WILLIAM         §
GURLEY, DAVID BONDERMAN, §
                             §
    Defendants Below,        §
    Appellees.               §
                             §
    and                      §
                             §
UBER TECHNOLOGIES, INC.,     §
                             §
    Nominal Defendant Below, §
    Appellee.                §

                        Submitted: October 30, 2019
                        Decided:   January 13, 2020

Before SEITZ, Chief Justice; VALIHURA, and TRAYNOR, Justices.

Upon appeal from the Court of Chancery. AFFIRMED.

Michael J. Barry, Esq. (argued), John C. Kairis, Esq., Kimberly A. Evans, Esq.,
GRANT & EISENHOFER P.A., Wilmington, Delaware; Jeffrey Reeves, Esq.,
Atlanta, Georgia; Attorneys for Plaintiff-Appellant Lenza H. McElrath, III,
derivatively on behalf of Uber Technologies, Inc.
R. Judson Scaggs, Jr., Esq., Susan W. Waesco, Esq., Sabrina M. Hendershot, Esq.,
MORRIS, NICHOLS, ARSHT & TUNNELL LLP, Wilmington, Delaware; Susan
S. Muck, Esq., Kevin P. Muck, Esq., Marie C. Bafus, Esq., FENWICK & WEST
LLP, San Francisco, California; Attorneys for Defendants-Appellees Garrett Camp,
Ryan Graves, Arianna Huffington, Yasir Al-Rumayyan, William Gurley and David
Bonderman.

Donald J. Wolfe, Jr., Esq., T. Brad Davey, Esq., J. Matthew Belger, Esq., Jacob R.
Kirkham, Esq., POTTER ANDERSON & CORROON LLP, Wilmington,
Delaware; Joseph G. Petrosinelli, Esq., Kenneth J. Brown, Esq., WILLIAMS &
CONNOLLY LLP, Washington, D.C.; Attorneys for Defendant-Appellee Travis
Kalanick.

A. Thompson Bayliss, Esq., Michael A. Barlow, Esq., ABRAMS & BAYLISS LLP,
Wilmington, Delaware; Mark Gimbel, Esq. (argued), C. William Phillips, Esq.,
COVINGTON & BURLING, LLP, New York, New York; Bryant Pulsipher, Esq.,
COVINGTON & BURLING, LLP, San Francisco, California; Attorneys for
Nominal Defendant-Appellee Uber Technologies, Inc.

SEITZ, Chief Justice:

                                        2
      In 2016, Uber Technologies, Inc. acquired Ottomotto LLC to gain more

traction in the autonomous vehicle space. The acquisition was high risk from the

start. Although Uber ostensibly bought a company, and paid only $100,000 up front,

it hired key employees from Google’s more mature autonomous vehicle program.

Uber took some steps to ensure the former Google employees did not misuse

Google’s confidential information, but the transaction ended in embarrassment.

Uber fired its key hire from Google after it came to light Google’s proprietary

information had been misused. It also ended up settling Google’s misappropriation

claims by issuing additional Uber stock to Google valued at $245 million.

      The plaintiff, an Uber stockholder and former Uber employee, filed suit in the

Court of Chancery against the directors who approved the Otto acquisition. The

plaintiff claimed that the directors ignored the alleged theft of Google’s intellectual

property and failed to investigate pre-closing diligence that would have revealed

problems with the transaction. According to the plaintiff, the board should not have

relied on the CEO’s representations that the transaction had the necessary

protections because he and Uber had a history of misusing the intellectual property

of others.

      The defendants responded by moving to dismiss the complaint under Court of

Chancery Rule 23.1. As they asserted, the plaintiff first had to make a demand on

the board of directors before pursuing litigation on the corporation’s behalf. The

                                          3
Court of Chancery found that a majority of the Uber board of directors could have

fairly considered the demand, and dismissed the complaint. The plaintiff has

appealed the Court of Chancery’s decision.

      By any reasonable measure, the Uber board of directors approved a flawed

transaction. But we, like the Court of Chancery, do not decide the merits of the

claims at this stage of the proceedings. Instead, we consider the gating issue of the

demand requirement in a derivative action. Under Delaware law, the board of

directors manage the business and affairs of the corporation. That responsibility

normally includes deciding whether to bring litigation on the corporation’s behalf.

When the board is disabled from making the decision, however—whether because

of interestedness or lacking independence from those who are interested—a

stockholder can control the litigation decision.

      We find, as did the Court of Chancery, that a majority of the 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 also independent of

the one interested director. Thus, the board, and not the plaintiff, controlled the

decision whether to bring litigation on Uber’s behalf, which meant the plaintiff had

to make a demand on the board that Uber bring the litigation. He did not. The Court

of Chancery’s judgment dismissing the complaint with prejudice is affirmed.

                                          4
                                                I.

       According to the allegations of the complaint, Uber operates a leading “ride

share” mobile application.1 In 2015, Travis Kalanick, Uber’s founder, feared Uber

was falling behind in the race to develop an autonomous vehicle—an “existential”

threat to the company.2 To regain lost ground, in June 2015 Uber recruited Anthony

Levandowski, then the Engineering Manager of Google’s autonomous vehicle

project, to leave Google and join Uber.3 Kalanick communicated extensively with

Levandowski. They developed an “extremely close” relationship.4

       On January 15, 2016, Levandowski founded Otto while still employed by

Google.5 At the end of January, Levandowski left Google and hired over a dozen

former Google employees at Otto. Weeks later, Uber and Otto signed a term sheet

for Uber to acquire Otto.6 According to the plaintiff, Otto had no real operations and

1
  At this stage of the proceedings, we accept as true the complaint’s well-pleaded allegations and
also rely on documents referred to or incorporated by reference. See Marchand v. Barnhill, 212
A.3d 805, 809 n.13 (Del. 2019). The complaint incorporated Uber’s charter, the Stroz Friedberg
final report, a redacted version of the Merger Agreement between Uber and Otto, a redacted
version of the indemnification agreement between Uber and Otto that accompanied the Merger
Agreement, a redacted version of a slide deck used in Uber management’s presentation to the board
on the Otto acquisition, and part of Uber director William Gurley’s testimony in another litigation
that the plaintiff quoted in the complaint. McElrath on behalf of Uber Techs., Inc. v. Kalanick,
2019 WL 1430210, at *2 n.2 (Del. Ch. Apr. 1, 2019).
2
  App. to Opening Br. at A172-73 (Verified Amended Stockholder Derivative Complaint 12-13
¶ 37 (hereinafter “Am. Compl.”)).
3
  Id. at A172–73 (Am. Compl. 12-13 ¶¶ 35, 39).
4
  Id. at A174 (Am. Compl. 14 ¶ 40).
5
  Id. at A175 (Am. Compl. 15 ¶ 44).
6
  Id. at A176 (Am. Compl. 16 ¶ 46).

                                                5
was run from Levandowski’s house.7 Kalanick testified in another proceeding that

the acquisition was “basically [] hiring [Levandowski] and his team.”8

       After signing the term sheet, Uber and its outside counsel hired Stroz

Friedberg, LLC, a computer forensic investigation firm, to conduct an independent

investigation into whether Otto employees took with them Google’s proprietary

information or might breach non-solicitation, non-compete, or fiduciary obligations

if they moved from Google to Otto.9 The board was aware that Stroz had been hired

to conduct an investigation.10

       In early April, Stroz delivered its preliminary report to Uber’s outside counsel,

Uber’s general counsel, and Otto’s counsel. The complaint contained little detail

about the contents of the report, except a finding that some Otto employees

“possessed substantial files containing confidential and proprietary Google

information, and surreptitiously tried to delete more on the eve of the Stroz

interviews.”11 Uber’s general counsel knew of the preliminary findings by April 10,

2016, and, as alleged, expressed “serious reservations” to Kalanick about the Otto

acquisition, but did not otherwise inform the board.12

7
  Id. at A176 (Am. Compl. 16 ¶ 47).
8
  Id.
9
  Id. at A177 (Am. Compl. 17 ¶ 49), A163 (Am. Compl. 3 ¶ 5).
10
   Id. at A177 (Am. Compl. 17 ¶ 50).
11
   Id. at A179 (Am. Compl. 19 ¶ 55).
12
   Id. at A178–79 (Am. Compl. 18-19 ¶ 53).

                                             6
       On April 11, 2016, the board—then composed of Kalanick, Garrett Camp,

Ryan Graves, William Gurley, and David Bonderman—met to approve the

acquisition. When Kalanick presented the transaction to the board, according to the

plaintiff, Kalanick “failed to present the preliminary findings of the Stroz

investigators.”13 Also, as alleged, none of the other directors asked to see the

report.14 Otherwise, the record reflects that diligence was discussed and represented

to be “okay.”15

       The board also discussed what the plaintiff characterizes as atypical

indemnification provisions of the merger agreement that “were clearly explained in

the presentations to the [b]oard regarding the transaction.”16               Otto would not

indemnify Uber post-closing for Otto’s breaches of representations and warranties.17

Also, certain Otto employees, including Levandowski, would have limited

indemnification rights for pre-signing misconduct disclosed during the Stroz

13
   Id. at A179 (Am. Compl. 19 ¶ 54).
14
   Id.
15
    McElrath, 2019 WL 1430210, at *11. The Court of Chancery found that the complaint
incorporated Gurley’s testimony in another suit where Gurley testified that there was “discussion
about the due diligence that had been done. And we as a group made a decision that we’re going
to move forward because the due diligence was okay.” Id. at *4; App. to Opening Br. at A159.
While the plaintiff argues this was not expressly alleged in his complaint, he does not challenge
the incorporation of the relevant Gurley testimony.
16
   App. to Opening Br. at A187 (Am. Compl. 27 ¶ 78).
17
    Id. at A182 (Am. Compl. 22 ¶ 62) (“[T]he Merger Agreement contains customary
representations regarding Otto’s ownership of IP, but it omits any post-closing indemnification
remedy for Uber. Contrary to what is customary, Uber is not indemnified for breaches of
representations and warranties nor is it indemnified for any species of third party claims.”).

                                               7
investigation, but not for undisclosed pre-signing or any post-signing misconduct.18

After discussion, the board approved the transaction.

       On August 5, 2016, Stroz delivered its final report, which described how some

Otto employees had retained, accessed, or deleted confidential Google information

on their personal devices after their departure from Google. The plaintiff did not,

however, allege that the report found any Google confidential information

transferred to Otto or Uber.19 And while the plaintiff relied on a list of findings in

the final Stroz report, it is unclear whether they differ from the preliminary report.20

Also, the plaintiff does not allege that the directors knew that the final report differed

from the preliminary report.

       The board—having added Arianna Huffington and Yasir Al-Rumayyan—met

before closing the transaction. The directors discussed the risk of Google suing, the

critical nature of the diligence, and the details of the indemnification provision.21

18
   Id. at A183-84 (Am. Compl. 23–24 ¶ 65).
19
    Id. at A130 (According to the report, “[w]hile Levandowski retained, and in some cases,
accessed Google confidential information after his departure from Google, Stroz Friedberg
discovered no evidence indicating that he transferred any of that data to Ottomotto or other third
parties.”).
20
    Compare id. at A179 (Am. Compl. 19 ¶ 55) (describing the preliminary findings that
“Levandowski and others at Otto possessed substantial files containing confidential and
proprietary Google information, and surreptitiously tried to delete more on the eve of the . . .
interview”), with id. at A185–86 (Am. Compl. 25–26 ¶¶ 70–73) (describing the final report’s
findings that Otto employees possessed confidential files and Levandowski attempted to delete
files before and during his interview).
21
   Id. at A186–87 (Am. Compl. 26–27 ¶¶ 75, 78).

                                                8
The plaintiff alleges they did not, however, specifically read or inquire about the

Stroz report.22

       After the transaction closed, in December 2016, Google mistakenly received

an email intended for Uber from one of its vendors. The email contained drawings

of a circuit board for autonomous vehicle technology that allegedly resembled

Google’s internal engineering drawings. Google sued Uber and Otto in February

2017 for misappropriation of proprietary information. Uber eventually settled the

lawsuit by issuing additional Uber stock to Google valued at $245 million.23 Uber

also terminated Levandowski’s employment.24

       After Uber announced the settlement, the plaintiff filed this derivative suit

against the directors who decided to proceed with the Otto transaction, the directors

who decided to close the transaction, and two Uber officers.25 According to the

plaintiff, making a demand on the Uber board before filing suit was futile because a

majority of the Uber directors at the time he filed his complaint—Kalanick, Graves,

Camp, Huffington, Al-Rumayyan, Matt Cohler, David Trujillo, Ursula Burns, and

John Thain—were interested or not independent of those who were interested.26

22
   Id. at A179–80 (Am. Compl. 19–20 ¶ 56); Opening Br. at 37.
23
   According to Uber, Google “already owned Uber shares.” Uber’s Answering Br. at 14.
24
   App. to Opening Br. at A192 (Am. Compl. 32 ¶ 94).
25
   Id. at A161.
26
   Wan Ling Martello and Dara Khosrowshahi were also on the Uber board at the time the plaintiff
filed his complaint, but he does not contest their disinterestedness or independence. Id. at A194
(Am. Compl. 34 ¶ 104).

                                               9
Uber and the individual defendants moved to dismiss for failure to make a demand

under Court of Chancery Rule 23.1. They argued that the Uber board could have

fairly considered whether to pursue the litigation brought by the plaintiff. The Court

of Chancery found that Kalanick was the only interested director, and a majority of

the board was independent from him at the time of the complaint. Thus, Rule 23.1

required the plaintiff to demand the board pursue litigation on Uber’s behalf.

Because the plaintiff did not, the Court of Chancery dismissed the complaint.

                                                 II.

       We review de novo the Court of Chancery’s decision to dismiss the

complaint.27 At this stage, we must accept as true any “particularized allegations of

fact.”28 And while we must draw all reasonable inferences in the plaintiff’s favor,

we do not draw unreasonable inferences.29 Under Rule 23.1, the plaintiff has “a

heightened burden to plead particularized facts establishing a ‘reasonable doubt that

. . . the board of directors could have properly exercised its independent and

disinterested business judgment in responding to a demand.’”30

27
   Brehm v. Eisner, 746 A.2d 244, 254 (Del. 2000) (“We . . . decide de novo whether the Complaint
was properly dismissed for failure to set forth particularized facts to support the plaintiffs’ claim
that demand is excused.”).
28
   City of Birmingham Ret. and Relief Sys. v. Good, 177 A.3d 47, 55–56 (Del. 2017).
29
   Id. at 56.
30
   Id. (quoting Rales v. Blasband, 634 A.2d 927, 934 (Del. 1993)).

                                                10
                                                A.

       Under Delaware law, the board of directors manages the business and affairs

of the corporation, which includes deciding whether the corporation should pursue

litigation against others.31        To protect the directors’ managerial authority, a

stockholder must comply with Court of Chancery Rule 23.1 before pursuing

derivative litigation.32 A stockholder must first make a demand on the board to

pursue the claim, and, if the board declines, “attempt to demonstrate that the

directors wrongfully refused the demand.”33 The demand requirement affords “the

corporation the opportunity to address an alleged wrong without litigation and to

control any litigation which does occur.”34              Further, it “insure[s] [sic] that a

stockholder exhausts his intracorporate remedies” and “safeguard[s] against strike

suits.”35

       A stockholder can bypass the demand requirement if he “can allege with

sufficient particularity that demand is futile and should be excused due to a disabling

31
   Id. at 54; Aronson v. Lewis, 473 A.2d 805, 811 (Del. 1984) (citing 8 Del. C. § 141(a)) overruled
on other grounds by Brehm, 746 A.2d at 253.
32
   Ct. Ch. R. 23.1(a).
33
   City of Birmingham Ret. and Relief Sys., 177 A.3d at 55; see Ct. Ch. R. 23.1(a).
34
   Kaplan v. Peat, Marwick, Mitchell & Co., 540 A.2d 726, 730 (Del. 1988).
35
   Aronson, 473 A.2d at 811–12; see Beam ex rel. Martha Stewart Living Omnimedia, Inc. v.
Stewart, 845 A.2d 1040, 1050 (Del. 2004) (finding that a purpose of the demand requirement is to
deter suits “where there is only a suspicion expressed solely in conclusory terms”) (quoting Grimes
v. Donald, 673 A.2d 1207, 1217 (Del. 1996)).

                                                11
conflict by a majority of the directors to consider the demand.”36 The demand futility

test is highly dependent on the particularity of the facts alleged in the complaint.37

When a majority of directors at the time of the challenged conduct have been

replaced, the demand futility test articulated in Rales v. Blasband applies.38 The

Rales test considers “whether the board that would be addressing the demand can

impartially     consider     its   merits    without     being     influenced      by    improper

considerations.”39 The plaintiff satisfies the demand futility pleading requirements

under Rales if his allegations “create a reasonable doubt that . . . the board of

directors could have properly exercised its independent and disinterested business

judgment in responding to a demand.”40

       First, the court must consider whether any directors were interested. A

director is interested if, in this instance, she would face a substantial likelihood of

personal liability for the conduct alleged in the complaint.41 Second, if any directors

were interested, the court considers whether any other directors were not

36
   City of Birmingham Ret. and Relief Sys., 177 A.3d at 55.
37
   See Rales, 634 A.2d at 933-34.
38
   Id. The Court of Chancery applied the Rales test. McElrath, 2019 WL 1430210, at *8. The
parties do not dispute its application.
39
   Rales, 634 A.2d at 934.
40
   Id.
41
   City of Birmingham Ret. and Relief Sys., 177 A.3d at 55; Wood v. Baum, 953 A.2d 136, 140–41
(Del. 2008). A director can be interested for other reasons, which are not alleged here. See Rales,
634 A.2d at 936 (Director interest can be shown when “he or she will receive a personal financial
benefit from a transaction that is not equally shared by the stockholders” or “where a corporate
decision will have a materially detrimental impact on a director, but not on the corporation and the
stockholders.”).

                                                12
independent of an interested director. Independence turns on whether “the director’s

ability to act impartially on a matter important to the interested party can be doubted

because that director may feel either subject to the interested party’s dominion or

beholden to that interested party.”42 After tallying the results, if a majority of the

board in place when the complaint was filed was disinterested and independent, the

stockholder must first make a demand on the board before pursuing litigation on the

corporation’s behalf.

                                                B.

       Examining first the Uber directors the plaintiff alleges were interested because

of the substantial likelihood of personal liability for wrongdoing, Uber’s Certificate

of Incorporation exculpates its directors from monetary liability for fiduciary duty

breaches to the fullest extent permitted by the Delaware General Corporation Law.43

Given this protection from due care violations, the plaintiff must plead with

particularity that the directors “acted with scienter, meaning ‘they had actual or

constructive knowledge that their conduct was legally improper.’”44 In other words,

directors are liable for “subjective bad faith” when their conduct is motivated “by an

actual intent to do harm,” or when there is an “intentional dereliction of duty, a

42
   Marchand, 212 A.3d at 818 (citing Sandys v. Pincus, 152 A.2d 124, 128 (Del. 2016) (quoting
Del. Cty. Emps. Ret. Fund v. Sanchez, 124 A.3d 1017, 1024 n.25 (Del. 2015))).
43
   McElrath, 2019 WL 1430210, at *9.
44
   City of Birmingham Ret. and Relief Sys., 177 A.3d at 55 (quoting Wood, 953 A.2d at 141 (internal
quotations omitted)).

                                                13
conscious disregard for one’s responsibilities.”45 Pleading bad faith is a difficult

task and requires “that a director acted inconsistent with his fiduciary duties and,

most importantly, that the director knew he was so acting.”46 Gross negligence,

without more, is insufficient to get out from under an exculpated breach of the duty

of care.47

       Of the eleven directors on the board when the plaintiff filed his complaint, the

plaintiff alleges that five were interested because they faced a substantial likelihood

of liability for approving and closing the deal—Kalanick, Camp, Graves,

Huffington, and Al-Rumayyan.48 While the defendants claim they dispute the Court

of Chancery’s finding that Kalanick was interested,49 they make no serious argument

45
   In re Walt Disney Co. Derivative Litig., 906 A.2d 27, 64, 66 (Del. 2006); see Lyondell Chem.
Co. v. Ryan, 970 A.2d 235, 243 (Del. 2009) (“[T]here is a vast difference between an inadequate
or flawed effort to carry out fiduciary duties and a conscious disregard for those duties.”).
46
   City of Birmingham Ret. and Relief Sys., 177 A.3d at 55 (quoting In re Massey Energy Co., 2011
WL 2176479, at *22 (Del. Ch. May 31, 2011) (emphasis in original)); see id. (“Because of the
difficulties in proving bad faith director action, a Caremark claim is ‘possibly the most difficult
theory in corporation law upon which a plaintiff might hope to win a judgment.’”) (citing In re
Caremark Int’l Inc. Derivative Litig., 698 A.2d 959, 967 (Del. Ch. 1996)).
47
   In re Walt Disney Co. Derivative Litig., 906 A.2d at 65.
48
   App. to Opening Br. at A199 (Am. Compl. 39 ¶ 113). Kalanick, Camp, Graves, Gurley, and
Bonderman were the entire board that approved the Otto transaction. Id. at A167-68 (Am. Compl.
7–8 ¶¶ 18–24). Huffington and Al-Rumayyan joined the board after the transaction’s approval,
but before closing. Id. While Gurley and Bonderman were not directors at the time the plaintiff
filed his complaint, his allegation that Trujillo and Cohler were conflicted relies, in part, on finding
that Gurley and Bonderman faced a substantial likelihood of liability for approving and closing
the deal.
49
   Uber’s Answering Br. at 19 n.3; Kalanick’s Joinder in Answering Br. at 2.

                                                  14
on appeal to challenge the finding. Thus, we start from the Court of Chancery’s

finding that Kalanick was interested and unable to fairly consider a demand.50

       The plaintiff challenges the Court of Chancery’s finding that the directors did

not act in bad faith when approving the Otto transaction.51 First, the plaintiff argues

that, because Kalanick as CEO was the one who brought the transaction to the board

and was involved with diligence, the directors should have been wise enough not to

rely on someone with a reputation as a law breaker. In support, the plaintiff points

to one of Kalanick’s prior businesses, Scour, which offered music and film releases.

Scour was eventually shut down for copyright violations and sued for $250 billion.

Further, the plaintiff alleges that Uber had a practice of hiring employees from

competitors to steal trade secrets and a general practice of ignoring and violating

regulations.52 When these allegations are combined, the plaintiff argues that the

board was on notice that Kalanick might be ignoring intellectual property laws in

the Otto acquisition.

50
   McElrath, 2019 WL 1430210, at *10; Sullivan v. Mayor of Town of Elsmere, 23 A.3d 128, 134
(Del. 2011) (finding that a trial court’s determination became the “law of this case” when the party
did not challenge that determination in a cross-appeal); see also Greenlaw v. United States, 554
U.S. 237, 244 (2008) (“Under [the cross-appeal rule,] an appellate court may not alter a judgment
to benefit a nonappealing party.”).
51
   Because Kalanick was interested, we will refer to the directors as those directors other than
Kalanick.
52
   The plaintiff also alleges other reasons to doubt Kalanick’s reliability, including Uber’s “internal
espionage market analytics team,” Kalanick’s public disdain for the law, Uber’s “Greyball”
operation, and the lawsuits and criminal probes against Uber. Opening Br. at 24–25.

                                                 15
          Second, the plaintiff argues that the allegedly unusual indemnification clauses

in the merger agreement put the board on notice that Kalanick wanted to steal

Google’s proprietary information.          The agreement indemnified certain Otto

employees for pre-signing misconduct disclosed during the Stroz investigation, but

prevented Uber from seeking indemnification from Levandowski for violating non-

compete and infringement claims. And, as the plaintiff alleged, Uber hired Stroz to

investigate whether Otto employees stole Google’s intellectual property, but the

board approved the transaction without personally reviewing the preliminary or final

Stroz reports. The plaintiff argues that, viewed holistically, these facts entitle him

“to a reasonable inference that the [b]oard’s failure to inquire or inform themselves

about the scope of potential legal and financial risk faced by Uber in connection with

the [Otto] [t]ransaction amounts to bad faith.”53

          We agree, however, with the Court of Chancery that the plaintiff did not meet

his particularized burden of alleging that the board in place when the plaintiff filed

his complaint, besides Kalanick, acted in bad faith. As noted before, a showing of

bad faith in the context of demand excusal is a high hurdle, and essentially requires

the plaintiff to demonstrate intentional wrongdoing by the board. The complaint

alleges, however, that Uber’s directors heard a presentation that summarized the

53
     Id. at 28.

                                            16
transaction, reviewed the risk of litigation with Google, generally discussed due

diligence, asked questions, and participated in a discussion.54 The inference from

these allegations shows a functioning board that did more than rubberstamp the

transaction presented by Uber’s CEO.

       Further, Kalanick might have a background that would lead a reasonable

board member to dig deeper into representations he made about the transaction. But,

as the Court of Chancery found, there were no allegations that Kalanick had a history

of lying to the board.55 And the record supports the conclusion that the diligence

presented to the board was, in fact, “okay.”56 The complaint’s allegations do not

lead to a reasonable inference that the board intentionally ignored the risks of the

transaction.57 On the contrary, it appears that the directors considered the risks and

nonetheless proceeded with the transaction. As we have noted before, “there is a

vast difference between an inadequate or flawed effort to carry out fiduciary duties

and a conscious disregard for those duties.”58 It is not enough to allege that the

54
   App. to Opening Br. at A183 (Am. Compl. 23 ¶ 63), A186 (Am. Compl. 26 ¶ 75), A187 (Am.
Compl. 27 ¶ 78); Opening Br. at 28 (“The [b]oard knew about these unusual provisions . . . and
specifically discussed the possibility of being sued by Google, yet it still approved the [Otto]
[t]ransaction . . . .”).
55
   McElrath, 2019 WL 1430210, at *15 n.173.
56
   App. to Opening Br. at A159; see McElrath, 2019 WL 1430210, at *4, *11.
57
   8 Del. C. § 141(e) (The board “shall . . . be fully protected in relying in good faith upon the . . .
information, opinions, reports or statements presented” by the corporation’s officers.).
58
   Lyondell Chem. Co., 970 A.2d at 243.

                                                  17
directors should have been better informed—a due care violation exculpated by the

corporation’s charter provision.59

       Turning to the indemnification provisions, while unusual, those provisions

were “clearly explained to the board” and did provide some protection for Uber—

Uber would not have to indemnify Levandowski and others for conduct that was not

disclosed to Uber before closing.60 The Court of Chancery concluded correctly that

the allegations as pleaded did not support a reasonable inference that the directors

knew the transaction was nothing more than a vehicle to steal Google’s proprietary

information.61 Instead, the reasonable inference is the board should have done more,

not that it acted in bad faith. Thus, we agree with the Court of Chancery that the

unusual indemnification provisions approved by the board do not lead to any

inference other than the board approved a flawed transaction.

       The plaintiff attempts to analogize the allegations here to In re Walt Disney

Co. Derivative Litigation, where the Court of Chancery found that “the facts alleged

. . . suggest that the defendant directors consciously and intentionally disregarded

their responsibilities . . .” and the plaintiff sufficiently pleaded bad faith.62 In Disney,

59
   Id. at 243–44 (“[I]f the directors failed to do all that they should have under the circumstances,
they breached their duty of care. Only if they knowingly and completely failed to undertake their
responsibilities would they breach their duty of loyalty.”).
60
   App. to Opening Br. at A183-84 (Am. Compl. 23–24 ¶ 65), A187 (Am. Compl. 27 ¶ 78).
61
   McElrath, 2019 WL 1430210, at *15.
62
   825 A.2d 275, 289 (Del. Ch. 2003) (emphasis omitted).

                                                18
the board approved a high profile hiring decision before the details were negotiated

and assigned the responsibility to the CEO to negotiate the employment contract

with the new hire who was his friend of many years.63 The court explained:

          Less than one and one-half pages of the fifteen pages of Old Board
          minutes were devoted to discussions of Ovitz’s hiring as Disney’s new
          president. . . . No presentations were made to the Old Board regarding
          the terms of the draft agreement. No questions were raised, at least so
          far as the minutes reflect. At the end of the meeting, the Old Board
          authorized Ovitz’s hiring as Disney’s president. No further review or
          approval of the employment agreement occurred. Throughout both
          meetings, no expert consultant was present to advise the compensation
          committee or the Old Board. Notably, the Old Board approved Ovitz’s
          hiring even though the employment agreement was still a “work in
          progress.” The Old Board simply passed off the details to Ovitz and
          his good friend, Eisner.64

          Here, like the Court of Chancery, we find the Disney allegations different.

Unlike Disney, where the directors devoted very little time, had no presentations,

and asked no questions, the Uber board met to consider the Otto acquisition. Outside

counsel and an investigative firm assisted with due diligence. Kalanick made a

presentation, and the board discussed the terms of the deal and its risks. Although

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.

63
     Id. at 279–81.
64
     Id. at 287.

                                            19
       The plaintiff also argues that the directors who decided to close the deal acted

in bad faith because they should have reviewed the final Stroz report before allowing

the transaction to close. Besides relying on the same argument that approving the

transaction was done in bad faith, the plaintiff argues only that the final Stroz report

showed that Uber could have terminated the deal because Otto breached a

representation.65 But the plaintiff did not allege that the directors were informed of

any change or had any additional reasons to doubt the diligence process since the

approval decision. Like the approval decision, Uber’s directors heard a presentation

that summarized the transaction, reviewed the risk of litigation with Google,

generally discussed due diligence, asked questions, and participated in a

discussion.66 We agree with the Court of Chancery that the plaintiff has “not

sufficiently    [pleaded]      that    the    directors    knew      [intellectual     property]

misappropriation was not [] simply a risk, but was actually Kalanick’s goal, and that,

in light of that knowledge, the directors closed their eyes to evidence of IP

misappropriation by refusing to look at Stroz’ final report.” 67

65
   Opening Br. at 36. The defendants dispute whether there was a breach. Answering Br. at 33–
34.
66
   App. to Opening Br. at A186-87 (Am. Compl. 26–27 ¶¶ 75, 78).
67
   McElrath, 2019 WL 1430210, at *16. The plaintiff also briefly raises his waste claim. Opening
Br. at 31. But because this claim requires finding waste on the same facts that we do not find bad
faith, we also find it to be without merit.

                                               20
                                               C.

       Having found only one interested director, Kalanick, we turn to the allegations

that a majority of directors were not independent of Kalanick. Because Uber’s board

consisted of eleven directors when the plaintiff filed his complaint, dismissal

depends on whether we find that at least six directors were independent of Kalanick.

The plaintiff does not challenge the independence of three directors—Martello,

Khosrowshahi, and Al-Rumayyan. And he does not challenge Cohler’s or Trujillo’s

independence from Kalanick.68 Thus, if one additional director was independent of

Kalanick, the plaintiff failed to plead demand futility.

       A director’s independence turns on “whether the plaintiffs have [pleaded]

facts from which the director’s ability to act impartially on a matter important to the

interested party can be doubted because that director may feel either subject to the

interested party’s dominion or beholden to that interested party.”69                 We must

consider the full context of “all the [pleaded] facts regarding a director’s relationship

to the interested party,”70 and decide whether the relationship is “of a bias-producing

nature.”71 Importantly, being nominated or elected by a director who controls the

68
   The plaintiff challenged Cohler’s and Trujillo’s independence from their predecessor directors
who were also partners of their respective investment firms. But, like the Court of Chancery, we
need not decide whether Cohler and Trujillo were independent from their predecessors because
we find that their predecessors were not interested.
69
   Sandys, 152 A.3d at 128 (quoting Sanchez, 124 A.3d at 1024 n.25).
70
   Sanchez, 124 A.3d at 1022.
71
   Beam, 845 A.2d at 1050.

                                               21
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.”72

       The plaintiff challenged Thain’s independence because Kalanick appointed

Thain “during a power struggle within Uber” after the board ousted Kalanick as CEO

and an investor had sued Kalanick for fraud.73 The Court of Chancery found that

Thain was independent because the plaintiff does not allege that Thain had a personal

or financial connection to Kalanick or that the directorship was of substantial

material importance to him.74

       We agree with those determinations.               The plaintiff challenged Thain’s

independence, in part, because Kalanick had the ability to appoint and remove him.

Otherwise, the plaintiff relied only on the circumstances surrounding Thain’s

appointment and the allegation that Kalanick sought to use Thain as a means of

retaining control.      But appointment to the board is an insufficient basis for

challenging Thain’s independence.75 And the context of Thain’s appointment—that

72
   Aronson, 473 A.2d at 816; see Beam, 845 A.2d at 1052 (“To create a reasonable doubt about an
outside director’s independence, a plaintiff must plead facts that would support the inference that
because of the nature of a relationship or additional circumstances other than the interested
director’s stock ownership or voting power, the non-interested director would be more willing to
risk his or her reputation than risk the relationship with the interested director.”).
73
   App. to Opening Br. at A202 (Am. Compl. 42 ¶ 117).
74
   McElrath, 2019 WL 1430210, at *19.
75
   See also Blaustein v. Lord Baltimore Capital Corp., 84 A.3d 954, 958–59 (Del. 2014) (finding
that allegations that a director was appointed by a party and voted with the party in the past were
insufficient, without more, to demonstrate a lack of independence).

                                                22
Kalanick appointed him in a power struggle and that Thain might be loyal to him—

without more does not allow a reasonable inference that Thain and Kalanick’s

relationship was of a “bias-producing nature.”76 Otherwise, a director would be

automatically disqualified if appointed during a board conflict. We agree with the

Court of Chancery that Thain was independent of Kalanick.77

                                               III.

       We stop here because we find that six directors—a majority of the board at

the time the plaintiff filed the complaint—were disinterested and independent. Thus,

the plaintiff was required to demand that the board pursue the claim. Because the

plaintiff did not make a demand before filing suit, we affirm the Court of Chancery’s

decision to dismiss the complaint.

76
  See Beam, 845 A.2d at 1050.
77
   The plaintiff also alleged comments by the successor CEO that characterized Kalanick’s
appointments as “disappointing news” and “highly unusual,” and that a “corporate governance
expert said that [Thain] ‘seem[s] to be walking in the door with a button that says Team Travis,
instead of Team Shareholder.’” App. to Opening Br. at A203 (Am. Compl. 43 ¶ 118). Hearsay
and hyperbole, however, are no substitute for pleading particularized facts to meet the plaintiff’s
heightened pleading burden.

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