Friedman v. Maffei

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
JULIE FRIEDMAN, derivatively on behalf of )
TRIPADVISOR, INC., )
)
Plaintiff, )
)
v. )
)
GREGORY B. MAFFEI, STEPHEN )
KAUFER, SUKHINDER SINGH CASSIDY, )
JONATHAN F. MILLER, DIPCHAND V. )
NISHAR, JEREMY PHILIPS, SPENCER M. ) C.A. No. 11105-VCMR
RASCOFF, CHRISTOPHER W. SHEAN, )
ROBERT S. WISENTHAL, SETH )
KALVERT and DARA KHOSROWSHAHI, )
)
Defendants, )
)
-and- )
)
TRIPADVISOR, INC., a Delaware )
Corporation, )
)
Nominal Defendant. )
MEMORANDUM OPINION
Date Submitted: January 13, 2016
Date Decided: April 13, 2016
David A. Jenkins and Neal C. Belgam of SMITH, KATZENSTEIN & JENKINS
LLP, Wilmington, Delaware; Steven J. Purcell of LEVI & KORSINSKY LLP,
New York, New York; Attorneys for Plaintiff.
Kenneth J. Nachbar, Susan W. Waesco, and Thomas P. Will of MORRIS,
NICHOLS, ARSHT & TUNNELL LLP, Wilmington, Delaware; Attorneys for
Defendants and Nominal Defendant.
MONTGOMERY-REEVES, Vice Chancellor.
The plaintiff’s Verified Stockholder Derivative Complaint, brought on
behalf of TripAdvisor, Inc., alleges that certain current and former TripAdvisor
directors and executives improperly allowed another former TripAdvisor director
to retain, and receive immediate vesting of, restricted stock units upon his
departure from the board.
Before initiating this lawsuit, the plaintiff demanded that the board
investigate the circumstances surrounding the retention and vesting of those
restricted stock units and take appropriate action. The board formed a special
committee that investigated the allegations and drafted a detailed report that
recommended that the board take no action. The board adopted those
recommendations and refused the demand. The plaintiff then filed her complaint
asserting her original allegations and adding a claim that the board wrongfully
refused her demand. In response, the defendants moved to dismiss the complaint
under Court of Chancery Rule 23.1, contending that the plaintiff fails to plead
particularized facts that raise a reasonable doubt as to whether the board validly
exercised its business judgment in refusing the demand. For the reasons stated in
this Memorandum Opinion, I grant the motion to dismiss under Rule 23.1.
1
I. BACKGROUND1
A. Parties
Plaintiff Julie Friedman has been a stockholder of TripAdvisor, Inc.
(“TripAdvisor” or the “Company”) since December 2011.
Nominal Defendant TripAdvisor is a Delaware corporation with its principal
place of business in Newton, Massachusetts. TripAdvisor is a travel advisory firm
that offers travel advice and a variety of online travel booking tools. TripAdvisor’s
websites operate in forty-five countries worldwide.
Defendant Stephen Kaufer co-founded TripAdvisor in 2000 and is the
Company’s current President and CEO. Kaufer also serves on the Company’s
board of directors. Defendant Dara Khosrowshahi was a director of TripAdvisor
from December 2011 until February 7, 2013. Khosrowshahi has been the CEO of
Expedia, Inc. (“Expedia”) since August 2005. Defendant Seth Kalvert is
TripAdvisor’s Senior Vice President and General Counsel. Defendant Gregory B.
Maffei has been the Chairman of TripAdvisor’s board of directors since February
1
The facts are drawn from the particularized allegations of the plaintiff’s Verified
Stockholder Derivative Complaint (the “Complaint”) and the attachments thereto.
“When considering a motion to dismiss under Rule 23.1, this Court affords
plaintiffs all reasonable inferences that logically flow from the particularized facts
alleged in the complaint.” Postorivo v. AG Paintball Hldgs., Inc., 2008 WL
552305, at *4 (Del. Ch. Feb. 29, 2008). Those allegations and inferences, as well
as the facts drawn from the documents attached to the Complaint, are assumed true
for purposes of this motion to dismiss.
2
2013 and the President and CEO of Liberty Interactive Corporation (“Liberty”)
since February 2006.2
Defendants Sukhinder Singh Cassidy, Jonathan F. Miller, Jeremy Philips,
and Robert S. Wiesenthal have been TripAdvisor directors since December 2011.
Defendant Christopher W. Shean has been a TripAdvisor director since February
2013. Defendants Dipchand V. Nishar and Spencer M. Rascoff have been
TripAdvisor directors since September 2013.
Kaufer, Maffei, Cassidy, Miller, Philips, Wiesenthal, Shean, Nishar, and
Rascoff, collectively, are referred to as the “Board.” The Board, Khosrowshahi,
and Kalvert, collectively, are referred to as “Defendants.”
Non-party Expedia is another company that provides travel-related services
and is one of TripAdvisor’s “primary competitor[s].”3 TripAdvisor was a wholly-
owned business segment of Expedia’s until December 2011.
2
Liberty held a substantial equity stake in Expedia, but had granted an irrevocable
proxy to Barry Diller to vote its shares of Expedia common stock. As a result of
Liberty’s irrevocable proxy, Diller was Expedia’s controlling stockholder. The
Complaint does not describe the circumstances surrounding that irrevocable proxy.
3
Compl. ¶ 74-75.
3
B. Facts
1. Expedia grants Khosrowshahi restricted stock units and
spins off TripAdvisor into a separate company.
On March 7, 2006, the compensation committee of Expedia’s board of
directors granted its CEO, Khosrowshahi, restricted stock units (“RSUs”)
representing 800,000 shares of Expedia common stock. Five years later, in
December 2011, Expedia spun off its wholly-owned business segment,
TripAdvisor, into a separate company. To effectuate that spin-off, Expedia
commenced a one-for-two reverse stock split. When the spin-off was completed
on December 20, 2011, Expedia stockholders received one share of Expedia
common stock and one share of TripAdvisor common stock for every two shares
of Expedia common stock that they previously had owned. As a result, Diller,
Expedia’s controlling stockholder by virtue of an irrevocable proxy granted to him
by Liberty, became TripAdvisor’s controlling stockholder as well.
2. TripAdvisor and Khosrowshahi enter into an agreement
governing the vesting of the RSUs.
Upon the consummation of the spin-off, Khosrowshahi joined TripAdvisor’s
board of directors. Further, Khosrowshahi’s original award of 800,000 RSUs
representing Expedia common stock was bifurcated into 400,000 RSUs
4
representing Expedia common stock4 and 400,000 RSUs representing TripAdvisor
common stock. TripAdvisor and Khosrowshahi then entered into an agreement,
dated December 20, 2011, covering the vesting of those 400,000 RSUs (the “RSU
Agreement”).5
The RSU Agreement conditioned the vesting of the RSUs on the
achievement of certain performance goals, one of which related to Expedia’s stock
price and earnings and the other of which related to a target operating income for
TripAdvisor (the “Combined Goals”).6 Upon satisfaction of the Combined Goals,
75% of the RSUs would vest immediately. The remaining 25% would vest one
year later if Khosrowshahi had not either (1) voluntarily resigned from
TripAdvisor’s board or (2) been terminated for “Cause.”7
4
In 2013, Friedman filed a derivative complaint on Expedia’s behalf against
Khosrowshahi and Expedia’s board regarding the vesting of these 400,000 RSUs
of Expedia common stock. This Court dismissed that action under Rule 23.1 for
failure to plead demand futility. The Delaware Supreme Court affirmed that
dismissal. See Friedman v. Khosrowshahi, 2014 WL 3519188 (Del. Ch. July 16,
2014), aff’d, 2015 WL 1001009 (Del. Mar. 6, 2015) (TABLE).
5
See Compl., Ex. 1 [RSU Agreement].
6
RSU Agreement § 1(b).
7
Id. The RSU Agreement defines “Cause” as follows:
(i) The plea of guilty or nolo contedere to, conviction for, or
the commission of, a felony offense by [Khosrowshahi]; (ii) a
material breach by [Khosrowshahi] of a fiduciary duty owed
to the Corporation; (iii) a material breach by [Khosrowshahi]
of any of the covenants made by [Khosrowshahi] in
5
Alternatively, if a “Change in Control” occurred, as defined in the RSU
Agreement, then 50% of the RSUs would vest immediately, irrespective of the
Combined Goals.8 The vesting of the remaining 50% of the RSUs, however,
depended on whether Khosrowshahi remained with or departed from
TripAdvisor’s board during the one year following a Change in Control, as well as
the circumstances surrounding any such departure. If Khosrowshahi remained
employed by TripAdvisor one year after a Change in Control, then the Combined
Paragraph 18 of this Agreement; (iv) the willful or gross
neglect by [Khosrowshahi] of the material duties as a director
of the Corporation or the Material duties relating to such
other Service provided by [Khosrowshahi]; or (v) a knowing
and material violation by [Khosrowshahi] of any policy of the
Corporation pertaining to ethics, legal compliance, wrong-
doing or conflicts of interest that, in the case of the conduct
described in clauses (iv) or (v) above, if curable, is not cured
by [Khosrowshahi] within 30 days after [Khosrowshahi] is
provided with written notice thereof.
Id. at 1.
8
Id. § 5(b). The RSU Agreement defines “Change in Control” as including the
following:
[T]he termination of the irrevocable proxy held by Barry
Diller to vote shares of the Corporation held by Liberty
Media Corporation or its affiliates, and the acquisition by
Liberty Media Corporation and their respective affiliates of
Beneficial Ownership of equity securities of the Corporation
whereby Liberty Media Corporation acquires or assumes
more than 35% of the voting power of the then outstanding
equity securities of the Corporation entitled to vote generally
in the election of directors . . . .
Id.
6
Goals would have to be satisfied for the remaining RSUs to vest.9 If
Khosrowshahi was terminated without Cause within one year following the
Change in Control, then the other 50% would vest irrespective of the Combined
Goals.10 And, if Khosrowshahi voluntarily resigned or was terminated for Cause
within one year of a Change in Control, then he would forfeit the remaining 50%
of the RSUs.11
Finally, the RSU Agreement contained a non-compete provision (the “Non-
Compete”) that restricted Khosrowshahi as follows:
In consideration of the Corporation’s award of Restricted
Stock Units, [Khosrowshahi] hereby agrees and
covenants that during his Service with the Corporation
and its Subsidiaries and Affiliates and for a period of 24
months beyond [Khosrowshahi’s] date of termination of
Service for any reason (the “Non-Compete Period”),
[Khosrowshahi] shall not, directly or indirectly, engage
in, assist or become associated with a Competitive
Activity. For purposes of this Agreement, (i) a
“Competitive Activity” means, at the time of
[Khosrowshahi’s] termination of Service, any business or
other endeavor, in any jurisdiction, of a kind being
conducted by the Corporation or any of its subsidiaries
or, if engaged in the provision of any travel related
services, any of its subsidiaries or, if engaged in the
provision of any travel related services, any of its
Affiliates in any jurisdiction (or demonstrably anticipated
9
Id. § 1(b).
10
Id. § 5(b).
11
Id. § 1(e).
7
by the Corporation or its Subsidiaries or Affiliates) as of
the date hereof or at any time thereafter; and (ii)
[Khosrowshahi] shall be considered to have become
“associated with a Competitive Activity” if [he] becomes
directly or indirectly involved . . . with any individual,
partnership, corporation or other organization that is
engaged in a Competitive Activity.12
The Non-Compete contained a carve-out that specifically exempted
Khosrowshahi’s service at Expedia from the definition of “Competitive
Activity.”13
3. Liberty purchases control of TripAdvisor from Diller.
On December 11, 2012, TripAdvisor and Liberty announced that Liberty
and Diller had entered into a transaction whereby Liberty purchased over 4.7
million shares of TripAdvisor common stock from Diller (the “Liberty/Diller
Transaction”). Further, under the Liberty/Diller Transaction, Liberty terminated
Diller’s right to control the vote of the shares of TripAdvisor common stock that
Liberty beneficially owned. As a result, the Liberty/Diller Transaction constituted
a Change in Control under the RSU Agreement, and 50% of Khosrowshahi’s RSUs
immediately vested. Thus began the one year period during which the remaining
RSUs either would (1) vest if Khosrowshahi was terminated without Cause or (2)
be forfeited if Khosrowshahi was terminated for Cause or voluntarily resigned.
12
Id. § 18.
13
Id.
8
4. Expedia purchases a majority equity stake in Trivago.
On December 21, 2012, Expedia announced that it had entered into an
agreement to acquire a 61.6% equity position in trivago GmbH (the
“Expedia/Trivago Transaction”). trivago GmbH (“Trivago”) is a “hotel
metasearch functionality” company headquartered in Düsseldorf, Germany. 14 In
its Form 8-K announcing the transaction, Expedia stated that “[t]he deal is
anticipated to close during the first half of 2013 pending approval from relevant
competition authorities. Post close, the trivago co-founders and management team
will continue to operate independently out of trivago’s headquarters in Dusseldorf,
Germany.”15 Trivago’s co-founder, Rolf Schrömgens, also stated that “[Trivago’s]
passion and focus will remain on independently evolving our comprehensive and
individualized hotel search.”16
According to Friedman, Trivago’s independence from Expedia is evidenced
by the fact that Expedia plays no role in Trivago’s management. 17 In the
Shareholders Agreement annexed to Expedia’s December 21, 2012 Form 8-K,
Malte Siewert, Trivago’s co-founder and managing director, and two other Trivago
14
Compl. ¶ 49.
15
Id. ¶ 76.
16
Id.
17
Id.
9
stockholders are identified as Trivago’s “Managing Shareholders.”18 Expedia, on
the other hand, is identified as the “Parent Guarantor” and restricted from
accessing certain of Trivago’s information relating to its customers and business
partners.19 Further, a year after Expedia acquired its stake in Trivago, Siewert
issued public statements emphasizing Trivago’s operational independence from
Expedia.20
5. Khosrowshahi tenders his resignation from TripAdvisor’s
board.
On December 21, 2012, the same day that the Expedia/Trivago Transaction
was announced, Khosrowshahi emailed Kaufer regarding that transaction.
Khosrowshahi’s email stated, “[l]et me know if you want me off the [TripAdvisor
board]. I’ll completely understand . . . I’m figuring out my travel schedule for next
year so [sic] figuring out if I have to be in Boston on Feb[ruary] 12 [for a
scheduled board meeting] . . . .”21 On December 24, 2012, Kaufer sent Maffei an
email expressing his view that Trivago is “serious competition to the core
TripAdvisor value proposition, which may now get even more competitive should
18
Id. ¶ 77.
19
Id. ¶ 77-78.
20
Id. ¶ 79.
21
Compl., Ex. 2 at TA0002.
10
Expedia put their reviews on Trivago, and otherwise help them with marketing and
distribution.”22 Kaufer’s email reiterated that the Expedia/Trivago Transaction,
while “a reasonable move for Expedia, . . . is certainly competitive to TripAdvisor”
and stated that “it doesn’t feel appropriate for anyone to sit on both the Expedia
board, as well as the TripAdvisor board.”23
Although Kaufer’s email acknowledged that he previously had wanted
Khosrowshahi to remain on TripAdvisor’s board, the Expedia/Trivago Transaction
changed his outlook. As such, Kaufer suggested that both Khosrowshahi and
Diller be replaced as TripAdvisor directors. Kaufer also stated, however, that he
was “a little sensitive to having lots of different announcements of people coming
on and off” the board and that he was not in a hurry to make those changes.24
Maffei replied to Kaufer on December 27, 2012, agreeing that “[i]f Expedia is
competitive in your view, we should definitely not have [Khosrowshahi] on the
board.”25
22
Id. at TA0001.
23
Id.
24
Id.
25
Id.
11
After not receiving a reply to his first email, Khosrowshahi emailed Kaufer
again on January 7, 2013 to solicit a response.26 Kaufer returned Khosrowshahi’s
email the next day, apologizing for the delay and indicating that it would be “best
if [Khosrowshahi] drop[ped] off the Trip[Advisor] board . . . .”27 Kaufer explained
that although he would “miss [Khosrowshahi’s] wisdom and support on the
board,” he “want[ed] to be really open with the board” and did not feel he could be
given the competition between Trivago and TripAdvisor.28
Nearly one month later, on February 7, 2013, Kalvert sent Khosrowshahi the
following email:
As discussed, we understand that today you will be
tendering at our request your resignation as a member of
the TripAdvisor, Inc. Board of Directors, effective
immediately. Such termination would constitute a
“termination of Service” pursuant to Section 5(b)(i) of
the RSU Agreement, dated as of December 20, 2011,
between you and the Company, and, as such, the
remaining Restricted Stock Units (as defined in the RSU
Agreement) shall vest immediately.29
26
Id. at TA0002 (“Just pinging you on this – let me know . . . Thanks and happy new
year.”).
27
Id.
28
Id.
29
Id. at TA0003.
12
Two hours later, Khosrowshahi sent an email to Kalvert and Kaufer—who was
copied on Kalvert’s original email—tendering his resignation from the board.30
6. Friedman inspects TripAdvisor’s books and records and
makes a demand on the Board.
On February 12, 2013, TripAdvisor filed a Form 8-K announcing that
Khosrowshahi had resigned from the board. The Company’s Schedule 14A Proxy
statement filed with the SEC on May 13, 2013 reiterated that announcement and
further stated that Khosrowshahi’s “remaining RSUs . . . were accelerated and
became fully vested.”31
Because she disagreed with Kaufer and Kalvert’s decision to accelerate the
vesting of Khosrowshahi’s remaining 200,000 RSUs (the “Challenged RSUs”)
upon Khosrowshahi’s resignation, Friedman served TripAdvisor with a demand for
inspection of books and records pursuant to 8 Del. C. § 220 on December 10, 2013.
In response, the Company produced the above-referenced emails between
Khosrowshahi, Kaufer, Maffei, and Kalvert related to Khosrowshahi’s departure
from the board (the “Section 220 Documents”).
30
Id. (“I hereby tender my resignation as a board member of TripAdvisor. It has
been a pleasure working with you and the TripAdvisor team. You’ve built an
amazing company and I look forward to working with you to build our
partnership. You can also count on my being a shareholder for many years to
come!”).
31
Compl. ¶ 53.
13
On March 10, 2014, Friedman sent a seven-page letter to the Board
demanding that it investigate claims, initiate legal action, and take necessary and
appropriate remedial measures regarding the accelerated vesting of the Challenged
RSUs (the “Demand Letter”). In the Demand Letter, Friedman asserted that “[t]he
accelerated vesting was in violation of the terms of the RSU agreement between
Khosrowshahi and the Company.”32 According to the Demand Letter,
Khosrowshahi voluntarily resigned from the board; he was not terminated without
Cause. As such, pursuant to the RSU Agreement, Khosrowshahi forfeited the
Challenged RSUs, and Kaufer and Kalvert should not have accelerated the vesting
of those RSUs.
The Demand Letter, therefore, stated that the “RSUs (or the value thereof)
should be returned to the Company.”33 Specifically, Friedman demanded, on
TripAdvisor’s behalf, that the Board take the following actions:
1. Rescind or recall the 200,000 shares of TripAdvisor
common stock granted to Khosrowshahi upon his
resignation, or seek damages against Kaufer and Kalvert
in the amount of the value of the 200,000 shares; and
32
Id., Ex. 3 [Demand Letter], at 1.
33
Demand Letter at 1.
14
2. Adopt and implement adequate internal controls and
systems at the Company designed to prohibit and prevent
a recurrence of the wrongdoing described herein.34
7. The Board investigates and refuses Friedman’s demand.
On March 16, 2015, one year after Friedman sent the Demand Letter, the
Board refused her demand. In its letter to Friedman (the “Demand Refusal
Letter”), the Board explained that it had established a special committee (the
“Special Committee”) “to investigate the Demand and report its findings and
recommendations to the full Board.”35 The Special Committee employed legal
advisors to assist with its investigation. Together, the Special Committee and its
legal advisors (1) investigated the factual and legal issues raised in the Demand
Letter; (2) reviewed the RSU Agreement, TripAdvisor’s governance documents,
the Section 220 Documents, both TripAdvisor’s and Expedia’s public filings, and
applicable Delaware law, among other items; and (3) interviewed Khosrowshahi,
Maffei, and other TripAdvisor officers, directors, and advisors.36
As a result of their investigation, the Special Committee concluded that there
was no basis on which to rescind the Challenged RSUs or to seek damages against
Kaufer or Kalvert. The Special Committee presented its conclusions to the Board
34
Id. at 6.
35
Compl., Ex.4 [Demand Refusal Letter], at 1.
36
Demand Refusal Letter at 2.
15
on February 5, 2014, and “the Board accepted the Special Committee’s
recommendation and . . . determined that no action should be taken in response to”
Friedman’s demand.37
In so concluding, the Special Committee and the Board found that
Khosrowshahi had not voluntarily resigned. Rather, they found that Khosrowshahi
was terminated without Cause due to the Expedia/Trivago Transaction. And, “[i]n
addition to considering the merits of the potential legal claims, the Special
Committee (in its recommendation) and the Board (in its decision) considered
other factors in determining whether pursuing claims would be in the best interests
of the Company.”38 The Special Committee and the Board, therefore, “determined
that the possibility the Company would prevail on any claims was remote, while
37
Id. at 1.
38
Id. at 3 (“For example, if the Company were to seek rescission of the 200,000
shares that vested in connection with Mr. Khosrowshahi’s termination, he would
have viable claims against the Company for breach of his RSU Agreement, which
would impose additional costs on the Company to defend. Likewise, any claims
against Messrs. Kaufer and Kalvert would result in the Company incurring not
only its own legal fees, but those of Messrs. Kaufer and Kalvert, as both have
indemnification and advancement rights under the Company’s bylaws and
applicable Delaware law. Furthermore, litigation against the Company’s
executives would likely serve as a distraction from the Company’s ongoing, day-
to-day operations for an extended period of time.”).
16
the likelihood the Company would incur substantial costs with no tangible benefits
was high.”39 Thus, the Board refused Friedman’s demand.
C. Procedural History
Friedman filed the Complaint on June 5, 2015. On August 12, 2015,
Defendants responded to the Complaint by moving to dismiss under Court of
Chancery Rule 23.1 (the “Motion”). The parties submitted briefs supporting and
opposing the Motion, and, on January 13, 2016, I held oral argument on the
Motion. This Memorandum Opinion contains my rulings on Defendants’ Motion.
D. Parties’ Contentions
The Complaint asserts three derivative counts on TripAdvisor’s behalf
against Defendants. Count I is a claim for breach of fiduciary duty against all
Defendants except Khosrowshahi. Count II is a claim for waste of corporate assets
against all Defendants except Khosrowshahi. Count III is a claim for unjust
enrichment against Khosrowshahi. The Complaint seeks the following relief: (1) a
declaration that the accelerated vesting of the Challenged RSUs violated the RSU
Agreement; (2) an order directing Khosrowshahi to return the 200,000 Challenged
RSUs; (3) damages sustained by the Company as a result of Defendants’
wrongdoing, plus pre-judgment and post-judgment interest; (4) equitable and
injunctive relief as necessary to restrict the disposition or exercise of the
39
Id.
17
Challenged RSUs; (5) an award of the fees, costs, and expenses Friedman incurred
in this action; and (6) such other relief as the Court may deem just and proper.
In addition to its substantive derivative claims, the Complaint asserts that the
Board wrongfully refused Friedman’s demand.40 Friedman expands upon this in
her brief and argues that the Section 220 Documents unambiguously demonstrate
that Khosrowshahi voluntarily resigned from the board. Consequently,
Khosrowshahi forfeited the Challenged RSUs under the RSU Agreement, and
Kaufer and Kalvert’s underlying decision to grant Khosrowshahi the Challenged
RSUs despite his voluntary resignation constituted waste. In addition, Friedman
dismisses the “other factors” the Board considered regarding the Company’s best
interests as “vague and unsubstantiated.”41 The Board, therefore, purportedly acted
in bad faith by refusing to take the actions requested in Friedman’s Demand Letter.
As such, Friedman contends that her Complaint should survive Defendants’
Motion under Rule 23.1 because she has raised a reasonable doubt that the Board’s
refusal was a valid exercise of business judgment.
According to Defendants, the Complaint should be dismissed because it fails
to plead particularized facts that raise a reasonable doubt that the Board validly
exercised its business judgment in refusing Friedman’s demand. Defendants argue
40
Id. ¶ 91.
41
Pl.’s Answering Br. 43.
18
that by making demand on the Board, Friedman implicitly conceded the Board’s
independence and disinterestedness with respect to its ability to consider the
demand. Friedman, therefore, only can challenge the Board’s decision to refuse
her demand on the grounds that the investigation of the underlying claims was
unreasonable or that the refusal was made in bad faith. Defendants point out that
Friedman’s Complaint does not challenge the reasonableness of the Board’s
investigation. And, as to Friedman’s argument that the Board acted in bad faith by
refusing her demand, Defendants maintain that the Complaint’s allegations do not
support such a finding. Thus, Defendants contend that Friedman’s Complaint
should be dismissed under Rule 23.1 because it fails to satisfy that Rule’s
particularized pleading requirements.
Finally, Friedman’s answering brief contains an alternative, cursory request
for “leave to amend the Complaint to clarify and supplement the relevant
allegations therein.”42 Defendants respond that Friedman’s request for leave to
amend is procedurally improper and untimely. Defendants contend, therefore, that
Friedman’s request should be denied under Rule 15(aaa) because she failed to
demonstrate that good cause exists on which the Court could find that dismissal of
the Complaint with prejudice would be unjust.
42
Pl.’s Answering Br. 46.
19
II. ANALYSIS
A. Standard of Review
1. The demand requirement
A stockholder seeking to pursue a derivative claim in this Court must satisfy
the demand requirement embodied in Rule 23.1. Rule 23.1 provides that “[i]n a
derivative action . . . the complaint shall . . . allege with particularity the efforts, if
any, made by the plaintiff to obtain the action the plaintiff desires from the
directors . . . and the reasons for the plaintiff’s failure to obtain the action or for not
making the effort.”43
The demand requirement flows from a fundamental premise of Delaware
corporate law: “The business and affairs of every corporation organized under this
chapter shall be managed by or under the direction of a board of directors . . . .”44
The phrase “[t]he business and affairs of every corporation” necessarily includes
the decision whether to bring litigation on behalf of a corporation. As this Court
has recognized, that decision “is a quintessential exercise of business judgment,
involving as it does a complex array of costs (both monetary and otherwise),
43
Ct. Ch. R. 23.1(a).
44
8 Del. C. § 141(a).
20
potential benefits, and the risk of uncertain outcomes.”45 Hence, a corporation’s
board of directors should have the initial opportunity to decide whether it must, in
the exercise of its fiduciary duties, seek rectification of alleged wrongs.46
A plaintiff may satisfy the demand requirement by either (1) making a
demand on the board to undertake a corrective action or (2) demonstrating that any
such demand would have been futile and, therefore, that the demand is excused.47
“[A] motion to dismiss under Rule 23.1 is not intended to test the legal sufficiency
of the plaintiff’s substantive claim. Rather, its purpose is to determine who is
entitled, as between the corporation and its shareholders, to assert the plaintiff’s
underlying substantive claim on the corporation’s behalf.”48
45
Ironworkers Dist. Council of Phila. & Vicinity Ret. & Pension Plan v. Andreotti,
2015 WL 2270673, at *25 (Del. Ch. May 8, 2015), aff’d, 2016 WL 341201 (Del.
Jan. 28, 2016) (TABLE).
46
Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984) (“[B]y promoting this form of
alternate dispute resolution, rather than immediate recourse to litigation, the
demand requirement is a recognition of the fundamental precept that directors
manage the business and affairs of corporations.”), overruled on other grounds by
Brehm v. Eisner, 746 A.2d 244 (Del. 2000).
47
See, e.g., Beam v. Stewart, 845 A.2d 1040, 1044 (Del. 2004).
48
Levine v. Smith, 1989 WL 150784, at *5 (Del. Ch. May 21, 1990), aff’d, 591 A.2d
194 (Del. 1991).
21
If a plaintiff, as here, makes a demand on the corporation’s board and the
board refuses that demand, then the plaintiff must demonstrate that the board
wrongfully refused the demand.49
2. Wrongful demand refusal
The Delaware Supreme Court has held that a plaintiff who makes demand
on the board concedes that the board had the requisite independence and disinterest
to evaluate the demand objectively.50 Thus, a board’s decision to refuse a
plaintiff’s demand is afforded the protection of the business judgment rule unless
the plaintiff alleges particularized facts that raise a reasonable doubt as to whether
the board’s decision to refuse the demand was the product of valid business
judgment.51
49
Spiegel v. Buntrock, 571 A.2d 767, 775-76 (Del. 1990).
50
Levine, 591 A.2d at 212 (“A shareholder plaintiff, by making demand upon a
board before filing suit, tacitly concedes the independence of a majority of the
board to respond.” (internal quotation marks omitted)), overruled on other
grounds by Brehm, 746 A.2d 244.
51
Grimes v. Donald, 673 A.2d 1207, 1217 (Del. 1996) , overruled on other grounds
by Brehm, 746 A.2d 244. “Reasonable doubt can be said to mean that there is a
reason to doubt.” Id. “Stated obversely, the concept of reasonable doubt is akin to
the concept that the stockholder has a ‘reasonable belief’ that the board lacks
independence or that the transaction was not protected by the business judgment
rule.” Id. n.17. In Ironworkers, Vice Chancellor Glasscock uses the term
“reasonable inference” rather than “reasonable belief” when referring to the
obverse of “reasonable doubt.” See, e.g., 2015 WL 2270673, at *26 n.255
(“[F]ailure to conduct a thorough investigation could, if sufficiently egregious,
support a reasonable inference of gross negligence.”).
22
In assessing whether the board’s decision to refuse demand was the product
of valid business judgment, “the only issues to be examined [by the Court] are the
good faith and reasonableness of [the board’s] investigation.”52 This Court
recently restated the standard a plaintiff claiming wrongful refusal faces:
[T]o survive a motion to dismiss under Rule 23.1 where
demand has been made and refused, a plaintiff must
allege particularized facts that raise a reasonable doubt
that (1) the board’s decision to deny the demand was
consistent with its duty of care to act on an informed
basis, that is, was not grossly negligent; or (2) the board
acted in good faith, consistent with its duty of loyalty.
Otherwise, the decision of the board is entitled to
deference as a valid exercise of its business judgment.53
Further, because Rule 23.1 requires that a derivative complaint’s allegations be
pled with particularity, “‘[v]ague or conclusory allegations do not suffice,’ and this
Court ‘need not blindly accept as true all allegations, nor must it draw all
inferences from them in plaintiffs’ favor unless they are reasonable inferences.’”54
B. The Board Did Not Wrongfully Refuse Friedman’s Demand.
Friedman’s opposition to the Motion largely focuses on arguing that, under
the Section 220 Documents and the RSU Agreement, the Board incorrectly
52
Id.
53
Ironworkers, 2015 WL 2270673, at *24.
54
Id. at *25 (quoting Postorivo, 2008 WL 553205, at *4; Higher Educ. Mgmt. Gp.,
Inc. v. Mathews, 2014 WL 5573325, at *5 (Del. Ch. Nov. 3, 2014)).
23
determined that Khosrowshahi was entitled to the Challenged RSUs. In her
answering brief, for instance, Friedman states that “Defendants’ attempt to dismiss
the Complaint hinges on their claim that Khosrowshahi’s resignation from
TripAdvisor’s board was involuntary.”55 That argument, however, is flawed. As
Vice Chancellor Glasscock pointed out in Ironworkers District Council of
Philadelphia & Vicinity Retirement & Pension Plan v. Andreotti, “[i]t is clear that
mere disagreement with the Committee’s ultimate conclusion, as well as its
subsidiary conclusions leading thereto, will be insufficient to raise a reasonable
doubt that the Board acted in good faith and on an informed basis.”56
The Special Committee’s finding that there was “no evidence demonstrating
that Mr. Khosrowshahi voluntarily resigned from the Company”—as well as the
other factors the Board considered, including the projected costs and benefits from
pursuing Friedman’s claims—served as the basis on which the Board refused
Friedman’s demand.57 Defendants’ Motion, on the other hand, hinges on whether
the Board’s decision to refuse Friedman’s demand was a valid exercise of business
judgment. That latter determination—i.e., whether the Board validly exercised its
business judgment in refusing Friedman’s demand—depends on the underlying
55
Pl.’s Answering Br. 24.
56
2015 WL 2270673, at *27.
57
Demand Refusal Letter at 2.
24
merits of the Board’s decision only for purposes of ascertaining whether the
Board’s decision was “so inexplicable that a court may reasonably infer that the
directors must have been acting for a purpose unaligned with the best interest of
the corporation; that is, in bad faith.”58 It was not. As such, Friedman has failed to
raise a reasonable doubt as to whether the Board refused her demand in good faith.
In addition, Friedman failed to make particularized allegations that would raise a
doubt about the reasonableness of the Board’s investigation.
1. Friedman has not raised a reasonable doubt as to whether
the Board complied with its duty of care.
Friedman’s brief in opposition to the Motion contains few, if any, arguments
regarding the reasonableness of the Board’s investigation into her Demand Letter’s
claims.59 That alone may suffice for the Court to conclude that Friedman has not
raised a reasonable doubt as to whether the Board complied with its duty of care in
refusing her demand.60 Nevertheless, a more searching review of the Complaint
reveals that Friedman has not carried her burden of demonstrating that the
Complaint’s particularized allegations raise a reasonable doubt that the Board was
not grossly negligent in refusing her demand.
58
Ironworkers, 2015 WL 2270673, at *26.
59
See Pl.’s Answering Br.
60
Emerald P’rs v. Berlin, 726 A.2d 1215, 1224 (Del. 1999) (“Issues not briefed are
deemed waived.”).
25
a. Legal standard for finding gross negligence
A board’s compliance with its duty of care is measured by the standard of
gross negligence.61 The “gross negligence” inquiry focuses on whether the
directors considered “all material information reasonably available to them.” 62 As
the Delaware Supreme Court recently stated, “[t]he burden to plead gross
negligence is a difficult one, particularly when . . . the committee did a time-
consuming investigation with the advice of its own advisors, and prepared a
detailed written report of its investigation.”63
b. Friedman has failed to raise a reasonable doubt that
the Board was not grossly negligent in refusing her
demand.
This Court examines the reasonableness of a board’s investigation to
determine whether that board was grossly negligent in refusing a stockholder’s
demand. Here, the Demand Refusal Letter describes the Board’s investigation.
Although the Special Committee generated a more thorough report to present the
findings of its investigation to the Board, Friedman’s counsel explained at oral
61
Espinoza v. Dimon, 124 A.3d 33, 37 (Del. 2015).
62
Aronson, 473 A.2d at 812; Mount Moriah Cemetery v. Moritz, 1991 WL 50149, at
*4 (Del. Ch. Apr. 4, 1991).
63
Espinoza, 124 A.2d at *36.
26
argument that Friedman did not request that report because the Demand Refusal
Letter sufficiently described the Board’s investigation process.64
The Demand Refusal Letter details a reasonable process: (1) the Board
formed the Special Committee to investigate the claims in Friedman’s Demand
Letter; (2) the Special Committee engaged a competent and reputable legal advisor
to assist with its investigation; (3) the Special Committee and its legal advisor
investigated the factual and legal issues raised in the Demand Letter; (4) the
Special Committee and its legal advisor reviewed the RSU Agreement,
TripAdvisor’s governance documents, the Section 220 Documents, both
TripAdvisor’s and Expedia’s public filings, and applicable Delaware law, among
other items; (5) the Special Committee and its legal advisor interviewed
Khosrowshahi, Maffei, and other TripAdvisor officers, directors, and advisors; (6)
the Special Committee reported its findings to the Board and recommended that
the Board refuse Friedman’s demand; and (7) the Board gave “careful
64
Oral Arg. Tr. 29-30 (“The reason we did not ask for the report or anything -- or
make a second [Section] 220 demand after we got the refusal is very simple. It is
because we were told exactly what the board did, exactly what the board
concluded, and exactly why they reached those conclusions [in the Demand
Refusal Letter]. . . . So it was entirely unnecessary based on the record that we had
at that time to ask for anything further.”).
27
consideration” to the results of the Special Committee’s investigation and agreed
with the Special Committee’s recommendation as to Friedman’s demand. 65
Because these facts indicate that the Board, through the Special Committee,
informed itself of material information reasonably available to it, and because the
Complaint is devoid of any particularized allegations to the contrary, Friedman has
failed to raise a reasonable doubt that the Board was not grossly negligent in
refusing her demand.
2. Friedman has not raised a reasonable doubt as to whether
the Board complied with its duty of loyalty.
Friedman devotes much of her Complaint and brief to convincing the Court
that, under the RSU Agreement and applicable case law, the Company should not
have accelerated the vesting of the Challenged RSUs upon Khosrowshahi’s
departure from the Company. On a motion to dismiss for wrongful demand refusal
under Rule 23.1, the Court’s analysis centers on a board’s decision to refuse a
stockholder’s demand. The Court only considers a complaint’s underlying claims
for a narrow purpose—to determine whether the merits of those claims are so
overwhelmingly obvious that the board’s decision not to pursue them must have
been made in bad faith.66
65
Demand Refusal Letter at 1-2.
66
See In re infoUSA, Inc. S’holders Litig., 953 A.2d 963, 986 (Del. Ch. 2007) (“It is
not enough for a shareholder merely to plead facts sufficient to raise an inference
28
Under that standard, Friedman has not carried her burden of demonstrating
that the Complaint’s particularized allegations raise a reasonable doubt as to the
Board’s good faith in refusing her demand.
a. Legal standard for finding bad faith
Because a plaintiff concedes a board’s independence and disinterest by
making a demand, the board can only breach its duty of loyalty by acting in bad
faith.67 In In re Walt Disney Co. Derivative Litigation, the Delaware Supreme
Court described the standard for bad faith as follows:
A failure to act in good faith may be shown, for instance,
where the fiduciary intentionally acts with a purpose
other than that of advancing the best interests of the
corporation, where the fiduciary acts with the intent to
violate applicable positive law, or where the fiduciary
intentionally fails to act in the face of a known duty to
act, demonstrating a conscious disregard for his duties.68
Even if “the majority of the directors were disinterested and independent, the
presumptive validity of the business judgment rule can be rebutted ‘where the
decision under attack is so far beyond the bounds of reasonable judgment that it
that the board of directors would refuse a demand. A court should not intervene
unless that shareholder raises the more troubling inference that the refusal itself
would not be a good faith exercise of business judgment.”).
67
Levine, 591 A.2d at 205-06.
68
906 A.2d 27, 67 (Del. 2006) (quoting In re Walt Disney Co. Deriv. Litig., 907
A.2d 693, 755 (Del. Ch. 2005)).
29
seems essentially inexplicable on any ground other than bad faith.’” 69 Yet, “[f]or
the actions of directors to have been in bad faith, the directors must have acted
with scienter, i.e., with a motive to harm, or with indifference to harm that will
necessarily result from the challenged decision—here, that decision being rejection
of the Plaintiff’s demand.”70
“Demonstrating that directors have breached their duty of loyalty by acting
in bad faith goes far beyond showing a questionable or debatable decision on their
part.”71 In the demand refusal context, a board acts in bad faith if it “intentionally
act[s] in disregard of the Company’s best interests in deciding not to pursue the
litigation the Plaintiff demanded.”72 Finally, the Court takes into account not only
the defendants’ countervailing legal arguments, but also the other relevant factors
considered by the board—e.g., whether the costs of pursuing the claims outweigh
the expected recovery.73 “A board may in good faith refuse a shareholder demand
69
Crescent/Mach I P’rs, L.P. v. Turner, 846 A.2d 963, 981 (Del. Ch. 2000) (internal
quotation marks omitted) (quoting Parnes v. Bally Entm’t Corp., 722 A.2d 1243,
1247 (Del. 1999)); see also Levine, 591 A.2d at 207 (“If a board’s decision can be
‘attributed to any rational business purpose,’ a court will not substitute its
judgment for that of a board.” (citation omitted) (quoting Sinclair Oil Corp. v.
Levien, 280 A.2d 717, 720 (Del. 1971)); Ironworkers, 2015 WL 2270673, at *26.
70
Ironworkers, 2015 WL 2270673, at *27.
71
Id.
72
Id. at *32.
73
infoUSA, Inc., 953 A.2d at 986.
30
to begin litigation even if there is substantial basis to conclude that the lawsuit
would eventually be successful on the merits” because the board may consider, in
the exercise of its business judgment, whether it “would be excessively costly to
the corporation or harm its long-term strategic interests.”74
b. Friedman has not raised a reasonable doubt as to
whether the Board refused her demand in good faith.
The Complaint asserts three separate Counts against Defendants,75 each of
which is contingent on a finding that Khosrowshahi was not entitled to the
Challenged RSUs upon his departure from the Company. As such, Friedman’s
brief does not argue that the Board acted in bad faith as to each of the individual
claims. Rather, Friedman’s position is that Khosrowshahi was not entitled to the
Challenged RSUs under the RSU Agreement and, therefore, “[t]he Board’s refusal
of the Demand was wrongful because the transaction that gave rise to the Demand
was a waste of corporate assets . . . .”76
Specifically, Friedman argues that Khosrowshahi voluntarily resigned from
TripAdvisor’s board. Alternatively, Friedman argues that if Khosrowshahi did not
74
Id.
75
As described above, the Complaint asserts claims for, (1) breach of fiduciary duty
against all Defendants except Khosrowshahi, (2) waste of corporate assets against
all Defendants except Khosrowshahi, and (3) unjust enrichment against
Khosrowshahi. See supra Section I.D.
76
Pl.’s Answering Br. 38.
31
voluntarily resign, then he was terminated for Cause.77 Conversely, the Board and
the Special Committee concluded that Khosrowshahi was terminated without
Cause. Both parties agree that, under the RSU Agreement, Khosrowshahi would
forfeit the Challenged RSUs if he either voluntarily resigned or was terminated for
Cause. In order to find that the Board wrongfully refused Friedman’s demand,
Friedman must sufficiently allege that the Board’s decision not to pursue her
claims was “so inexplicable that a court may reasonably infer that the directors
must have been acting for a purpose unaligned with the best interest of the
corporation; that is, in bad faith.”78 Friedman has not raised a reasonable doubt as
to whether the Board refused her demand in good faith. To the contrary, the
Section 220 Documents and the other factors that the Board considered support its
decision to refuse Friedman’s demand.
i. Voluntary resignation
Friedman first asserts that the Section 220 Documents reveal that
Khosrowshahi voluntarily resigned from TripAdvisor. According to Friedman,
Khosrowshahi saw the consummation of the Liberty/Diller Transaction—which
77
Oral Arg. Tr. 33 (“[Friedman’s] position is very simple. The essential point is that
. . . based on the particularized allegations of this complaint, [Khosrowshahi’s]
departure from the TripAdvisor board was either voluntary or it was a termination
of service for cause . . . .”).
78
Ironworkers, 2015 WL 2270673, at *26.
32
constituted a Change in Control under the RSU Agreement—as an opportunity to
vest his remaining RSUs immediately and without reference to the Combined
Goals. In order to capitalize on that opportunity, Khosrowshahi reached out to
Kaufer, with whom he allegedly had a friendly relationship, and initiated his
resignation “[a] mere ten days after the Liberty/Diller Transaction.”79 When
Kaufer did not respond, Khosrowshahi “ping[ed]” him again a few weeks later.80
Friedman asserts that “this is not the behavior of someone who would prefer not to
leave or is even indifferent about staying put.”81 Friedman maintains that
Khosrowshahi’s behavior demonstrates that he “had a ‘conscious intention’ to
leave,” his resignation was “a result of [his] own personal choice,” and he resigned
on “‘[his] own motion,’ as opposed to being discharged.”82 As such, Friedman
claims Khosrowshahi’s resignation was voluntary.
Although Khosrowshahi ultimately resigned, the Section 220 Documents
imply that he did not do so voluntarily. The Section 220 Documents indicate that
79
Pl.’s Answering Br. 25 & n.4 (“Insofar as the email exchanges between
Khosrowshahi and Kaufer suggest a friendly relationship, it appears that
Khosrowshahi had tactical reasons for choosing Kaufer as the person he would
reach out to in order to make his way off the Board.”).
80
Compl., Ex. 2 at TA0002.
81
Pl.’s Answering Br. 25 (internal quotation marks omitted).
82
Id. at 26 (quoting Woodall v. Bayhealth Med. Ctr., 2000 WL 973082, at *3 (Del.
Super. Apr. 28, 2000); Andress v. F. Schumacher & Co., 1993 WL 542062, at *3
(Del. Super. Nov. 3, 1993)).
33
the decision of whether Khosrowshahi should be removed from the board was
always in the hands of the Company and Liberty—TripAdvisor’s controlling
stockholder—and that shortly after the Expedia/Trivago Transaction,
Khosrowshahi recognized the potential conflict and reached out to Kaufer to
inquire whether he wanted Khosrowshahi off the board. Kaufer—TripAdvisor’s
co-founder, president, and CEO—and Maffei—the Board’s Chairman and
Liberty’s President and CEO—then conferred and decided that Khosrowshahi
should be removed from the board.83 Kaufer and Kalvert’s emails to
Khosrowshahi provide further evidence that the Company made the decision to
remove Khosrowshahi from the board. In his email, Kaufer states, “I think it is
best if you drop off the Trip[Advisor] board.”84 Similarly, Kalvert notes “that
today you will be tendering at our request your resignation.”85
Friedman rejects the “assertion that Khosrowshahi was ‘forced’ off the
Board.”86 According to Friedman, Delaware law requires “either ‘an ultimatum
83
Compl., Ex. 2 at TA0001.
84
Id. at TA0002.
85
Id. at TA0003.
86
Pl.’s Answering Br. 27-29. Separately, Friedman points out that because the Non-
Compete in the RSU Agreement explicitly exempts Khosrowshahi’s employment
with Expedia from being considered a conflict, he could not have been forced to
resign on that basis. Id. at 29-31. Friedman, therefore, describes the
Expedia/Trivago Transaction as a pretextual basis on which Khosrowshahi
34
with regard to the employment’ or ‘poor working conditions’ as a predicate to a
finding of a non-voluntary [resignation],”87 neither of which were present here.
Further, even if Khosrowshahi had been given an ultimatum, Friedman contends
that Khosrowshahi’s actions do not indicate that he resigned involuntarily because
he “did not ‘stand pat and fight’” that resignation.88
Despite the absence of an explicit ultimatum to resign, however, Liberty had
the power to remove Khosrowshahi from the board at any time and for any reason
under TripAdvisor’s bylaws.89 Other Delaware cases have “held that when an
individual is presented with an option to resign or face imminent termination and
resigned and states that the Board was not, and should not have been, concerned
about Khosrowshahi’s conflict. Id. The conversation between Kaufer and Maffei
in the Section 220 Documents, however, directly contradicts Friedman’s
contention that they were not concerned about the Expedia/Trivago Transaction.
Compl., Ex. 2 at TA0001. Further, I address the Non-Compete in more detail in
the context of whether Khosrowshahi was terminated for Cause. See infra Section
II.B.2.b.ii.
87
Id. at 27-28 (quoting Ingleside Homes, Inc. v. Gladden, 2003 WL 22048205, at *8
(Del. Super. Aug. 27, 2003)) (citing Anchor Motor Freight, Inc. v. Unemployment
Ins. Appeal Bd., 325 A.2d 374 (Del. Super. 1974)).
88
Id. at 33 (quoting Hargray v. City of Hallandale, 57 F.3d 1560, 1568 (11th Cir.
1995)) (citing Christie v. United States, 518 F.2d 584, 587 (Ct. Cl. 1975)).
89
Defs.’ Opening Br., Ex. A, Art. III § 2 (“Any director or the entire Board of
Directors may at any time be removed effective immediately, with or without
cause, by the vote, either in person or represented by proxy, of a majority of the
voting power of shares of stock issued and outstanding . . . .”).
35
chooses to resign, the forced resignation is a non-voluntary termination.”90 And,
the cases that Friedman cites for the proposition that Khosrowshahi must have
resisted termination in order for his resignation to be involuntary arguably are
inapposite. In each of those cases, the court found that the employee had resigned
voluntarily after choosing resignation over fighting the employer’s purported “for
cause” termination.91 In this case, however, Khosrowshahi never was threatened
with termination for Cause and, therefore, never faced a similar choice.
Even if I were to credit Friedman’s interpretation of the Section 220
Documents as the most reasonable interpretation, that would not suffice to find the
Board had wrongfully refused her demand. “[T]he pertinent ‘reason to doubt’
is not doubt about the propriety of the underlying conduct, nor is it doubt about
90
See Thompkins v. Franciscan Elder Care, 2008 WL 2602171, at *2 (Del. Super.
June 27, 2008) (finding that an employee was “constructively discharged” where
he “was given the choice of resigning as opposed to being terminated” and chose
to resign); Kaminski v. Ann Taylor Loft, 2000 WL 33114360, at *3 (Del. Super.
Oct. 27, 2000) (noting that “a constructive discharge by the employer” occurs if an
employee is “given only the option of resigning or facing imminent termination”).
91
See Hargray, 57 F.3d at 1568 (“[R]esignations can be voluntary even where the
only alternative to resignation is facing possible termination for cause or criminal
charges. Resignations obtained in cases where an employee is faced with such
unpleasant alternatives are nevertheless voluntary because the fact remains that
plaintiff had a choice. [Plaintiff] could stand pat and fight.” (citations omitted)
(internal quotation marks omitted)); Christie, 518 F.2d at 587 (“While it is
possible plaintiff, herself, perceived no viable alternative but to tender her
resignation . . . plaintiff chose to resign and accept discontinued service retirement
rather than challenge the validity of her proposed discharge for cause.”).
36
whether the Board, in rejecting the demand, made a wise decision; it is doubt
whether the Board’s action, wise or foolish, was taken in good faith . . . .”92
Friedman has failed to raise a reasonable doubt as to whether the Board refused her
demand in good faith.
ii. Termination for Cause
Friedman’s alternative argument is that if Khosrowshahi did not resign
voluntarily and if the Expedia/Trivago Transaction was the true impetus for
Khosrowshahi’s departure from the board, then he must have been terminated for
Cause.93 According to Friedman, the Expedia/Trivago Transaction “fundamentally
changed the nature of the relationship between TripAdvisor and Expedia” such that
(1) the Board thought it prudent for Khosrowshahi to resign and (2)
Khosrowshahi’s service as Expedia’s CEO no longer was exempted from
constituting Competitive Activity under the Non-Compete.94 As Expedia’s CEO, it
is reasonable to infer that Khosrowshahi played a significant role in that
transaction.95 As a result, Friedman argues that Khosrowshahi engaged in a
92
Ironworkers, 2015 WL 2270673, at *26.
93
Compl. ¶ 90; Oral Arg. Tr. 44 (“Assuming this conflict of interest was the reason
that not only [Khosrowshahi] left but that he had to leave, that is a for-cause
termination of service under the plain terms of the [RSU Agreement].”).
94
Oral Arg. Tr. 46.
95
Id. at 46-47.
37
Competitive Activity by facilitating the Expedia/Trivago Transaction in violation
of the Non-Compete, and, thus, he was terminated for Cause.96
It is important to note, however, that the Non-Compete only exempts
Khosrowshahi’s employment with Expedia from being considered a Competitive
Activity under the RSU Agreement.97 The Non-Compete does not appear to
inhibit Liberty’s ability to remove Khosrowshahi from the board.98 It was
reasonable, therefore, for the Board to have concluded that although the
Expedia/Trivago Transaction created a conflict between Expedia and TripAdvisor
such that it was prudent to remove Khosrowshahi as a director, that transaction
could not have constituted Competitive Activity under the Non-Compete because it
explicitly was exempted by the carve-out. In other words, the Company and
Liberty may have had good “cause,” from a competitive standpoint, to remove
Khosrowshahi from the board, but the carve-out for Khosrowshahi’s employment
96
At oral argument, Friedman’s counsel also implied that Khosrowshahi may have
been terminated for Cause for violating one of the Company’s policies regarding
ethics or conflicts of interest. See Oral Arg. Tr. 45. The Complaint’s allegations,
however, are limited to assertions that Khosrowshahi was terminated for Cause for
violating the Non-Compete. Compl. ¶¶ 87-90. The Complaint is devoid of any
allegations that Khosrowshahi violated one of TripAdvisor’s policies regarding
ethics or conflicts of interest. Because of the absence of any such particularized
allegations, therefore, I will not consider this portion of Friedman’s counsel’s
argument. Ironworkers, 2015 WL 2270673, at *25.
97
RSU Agreement § 18; Defs.’ Opening Br. 27.
98
See supra note 89 and accompanying text.
38
with Expedia in the Non-Compete may have prevented them from terminating him
for Cause, as defined in the RSU Agreement.
Friedman has failed to raise a reasonable doubt as to whether the Board
refused her demand in good faith by concluding that Khosrowshahi was not
terminated for Cause. “The question is not whether the [Board’s] conclusion was
wrong; the question is whether the Board . . . intentionally acted in disregard of the
Company’s best interests in deciding not to pursue the litigation the Plaintiff
demanded.”99 Thus, the fact that the Board’s justifications for refusing Friedman’s
demand fall within “the bounds of reasonable judgment” is fatal to Friedman’s
claim that the refusal was made in bad faith.100
iii. Other factors
In addition to its disagreement with the Demand Letter’s substantive claims,
the Board based its refusal of Friedman’s demand on other factors that bear on
TripAdvisor’s best interests. Those factors include the costs that TripAdvisor
would incur (1) defending a potential claim brought by Khosrowshahi for breach
of the RSU Agreement in response to the Company seeking rescission of the
99
Ironworkers, 2015 WL 2770673, at *32.
100
Crescent/Mach I P’rs, L.P., 846 A.2d at 981; see also Ironworkers, 2015 WL
2270673, at *32 (“[A] disagreement, however vehement, with the conclusion of an
independent and adequately represented committee is not the same as pleading
particularized facts that create a reasonable doubt that the Board acted in what it
perceived as the best interests of the corporation.”).
39
Challenged RSUs, (2) prosecuting claims against Kaufer and Kalvert and
satisfying their “indemnification and advancement rights under the Company’s
bylaws and applicable Delaware law,” and (3) dealing with the “distraction from
the Company’s ongoing, day-to-day operations for an extended period time” that
would result from “litigation against the Company’s executives.”101
Friedman counters that the Court should ignore those factors in evaluating
the Motion because they allegedly “are contradicted by common sense or
otherwise vague and entirely unsubstantiated.”102 In so arguing, Friedman cites to
City of Orlando Police Pension Fund v. Page for the proposition that “[a] demand
refusal is not insulated from judicial scrutiny merely because the board said it acted
appropriately and made a decision in the company’s best interests.”103 Rather, as
the court in Page recognized, the Board must identify and substantiate the factors
that align its demand refusal with the Company’s best interests.104
101
Demand Refusal Letter at 3.
102
Pl.’s Answering Br. 44.
103
Id. at 43 (citing 970 F. Supp. 2d 1022 (N.D. Cal. 2013)).
104
970 F. Supp. 2d at 1031 (“It may be true that pursuing litigation was not in [the
company’s] best interests, and that demand was properly refused. However, the
[demand refusal letter] merely recites the conclusion that refusal was proper
without explaining how the committee reached that conclusion.”).
40
Friedman’s argument, however, is belied by the plain language of the
Demand Refusal Letter. Far from vague, the Demand Refusal Letter explicitly
describes the additional costs that the Board weighed against the potential benefits
of pursuing Friedman’s claims. And, although Friedman speculates “that certain
expenses might not run to the Company, but to the insurance carriers who issued
policies concerning the conduct of TripAdvisor’s directors and officers,” some of
those costs may not be insurable at all—e.g., the operational disruptions that the
Company would face by litigating against its own executives. It is a stretch,
therefore, to characterize the Board’s consideration of those factors as
“contradicted by common sense.”105
Further, to the extent Friedman complains that the Demand Refusal Letter is
conclusory and lacks sufficiently detailed analyses, Friedman’s counsel
acknowledged at oral argument that she could have made a demand for the Special
Committee’s underlying, comprehensive report under 8 Del. C. § 220. Yet,
Friedman chose not to seek that report because she was satisfied with the Demand
Refusal Letter’s account of the Board’s decision to refuse her demand.106
Friedman’s argument regarding the absence of detailed analyses in the Board’s
Demand Refusal Letter might have more force had she demanded the Special
105
Pl.’s Answering Br. 44.
106
See supra note 64.
41
Committee’s report. Instead, Friedman knowingly avoided accessing that source
of potentially valuable information.107
C. Friedman May Not Amend the Complaint Under Rule 15(aaa).
Because I concluded above that the Complaint should be dismissed under
Rule 23.1, the last issue for consideration is whether that dismissal shall be with or
without prejudice as to Friedman’s ability to amend her Complaint. Under Rule
15(aaa):
[A] party that wishes to respond to a motion to dismiss
under Rules 12(b)(6) or 23.1 by amending its pleading
must file an amended complaint, or a motion to amend in
conformity with this Rule, no later than the time such
party’s answering brief in response to either of the
foregoing motions is due to be filed. In the event a party
fails to timely file an amended complaint or motion to
amend under this subsection (aaa) and the Court
thereafter concludes that the complaint should be
dismissed under Rule 12(b)(6) or 23.1, such dismissal
shall be with prejudice (and in the case of complaints
brought pursuant to Rules 23 or 23.1 with prejudice to
the named plaintiffs only) unless the Court, for good
107
The fact that Friedman chose not seek the Special Committee’s report serves as a
basis on which to distinguish Page from this case. In Page, the United States
District Court for the Northern District of California relied heavily on both the
defendant-board’s failure to provide its report and the conclusory nature of its
demand refusal letter in finding that the board had wrongfully refused the
plaintiff’s demand. 970 F. Supp. 2d at 1030-32. In this case, however, Friedman
could have demanded the Special Committee’s report, but instead chose to rely
solely on the Demand Refusal Letter which, as noted supra, is not “conclusory.”
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cause shown, shall find that dismissal with prejudice
would not be just under all the circumstances.108
Friedman did not file an amended complaint or a motion to amend the
Complaint. In her answering brief, Friedman “requests leave to amend the
Complaint to clarify and supplement the relevant allegations therein,”109 but she
does not provide any justification—let alone “good cause”—supporting a finding
that dismissal with prejudice would be unjust under these circumstances. The
Complaint, therefore, is dismissed with prejudice under Rule 15(aaa). Friedman
may not amend the Complaint.
III. CONCLUSION
For the foregoing reasons, Defendants’ Motion is granted, and the
Complaint is dismissed with prejudice.
IT IS SO ORDERED.
108
Ct. Ch. R. 15(aaa).
109
Pl.’s Answering Br. 46.
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