In re GoPro, Inc Stockholder Derivative Litigation

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN RE GOPRO, INC. STOCKHOLDER ) CONSOLIDATED
DERIVATIVE LITIGATION ) C.A. No. 2018-0784-JRS
MEMORANDUM OPINION
Date Submitted: February 5, 2020
Date Decided: April 28, 2020
Seth D. Rigrodsky, Esquire, Brian D. Long, Esquire and Gina M. Serra, Esquire of
Rigrodsky & Long, P.A., Wilmington, Delaware and Melinda A. Nicholson, Esquire
and Nicolas Kravitz, Esquire of Kahn Swick & Foti, LLC, New Orleans, Louisiana,
Attorneys for Lead Plaintiffs Chaile Steinberg, Steve Noury, Barbara Silberfeld and
Richard Silberfeld.
R. Judson Scaggs, Jr., Esquire, Susan W. Waesco, Esquire and Riley T. Svikhart,
Esquire of Morris, Nichols, Arsht & Tunnell LLP, Wilmington, Delaware and
Susan S. Muck, Esquire, Catherine D. Kevane, Esquire and Marie C. Bafus, Esquire
of Fenwick & West LLP, San Francisco, California, Attorneys for Defendants
Nicholas Woodman, Brian McGee, Anthony Bates, Charles “CJ” Prober, Edward
Gilhuly, Kenneth Goldman, Peter Gotcher, Alexander Lurie, Susan Lyne, Michael
Marks, Frederic Welts and Lauren Zalaznick, and Nominal Defendant GoPro, Inc.
SLIGHTS, Vice Chancellor
In early 2016, the camera manufacturer, GoPro, Inc. (“GoPro” or the
“Company”), planned to roll out two new products to the market, a drone that would
house state of the art GoPro cameras and the latest iteration of its signature wearable
camera. GoPro provided revenue guidance for 2016 based on projected sales of both
products. The forecasts were positive. The product launch for the drone was
expected to occur in the first half of 2016, and the new camera was to be ready for
market well in advance of the 2016 holiday shopping season.
Unfortunately, the road to market, especially for the drone, was bumpier than
expected. GoPro announced that the product launch for the drone would be delayed
as it worked out several kinks in the product. Yet its revenue guidance remained
unchanged. Once the products were unveiled in the fall of 2016, the Company faced
production ramp-up issues, inventory shortages, higher than expected product
returns and ultimately a product recall of the drone. GoPro’s board of directors
(the “Board”) eventually caused the Company’s revenue guidance to be adjusted to
account for these problems. When the dust settled, GoPro generated $1.185 billion
in revenue during 2016—short of the Company’s updated revenue guidance of
$1.25–$1.3 billion. The Company’s stock price suffered a 12% decline in response
to the revenue miss.
In the wake of GoPro’s 2016 difficulties, Company stockholders filed class
action complaints in federal court alleging that certain GoPro fiduciaries violated
1
federal securities laws because, as of October 2015, they knew the Company could
not meet its annual revenue guidance yet failed timely to disclose this reality to
stockholders. Based on similar factual allegations, two groups of Plaintiffs have
filed complaints in this court alleging certain GoPro officers and directors breached
their fiduciary duties. In addition, Plaintiffs seek to hold certain fiduciaries liable
under the theory first articulated in this court’s decision in Brophy v. Cities Service
Co. for trading in GoPro stock in a manner that exploited their knowledge of non-
public Company information.1
The two actions in this court have been consolidated and a Verified
Stockholder Derivative Complaint (the “Complaint”) has now been designated as
the operative complaint.2 Defendants have filed a Motion to Dismiss (the “Motion”)
that Complaint for failure to state viable claims and failure to plead demand futility
with the particularity required by Delaware law.3
1
Brophy v. Cities Serv. Co., 70 A.2d 5 (Del. Ch. 1949).
2
See Verified S’holder Deriv. Compl. (“Compl.”) (D.I. 1) (filed in Consol. Action
No. 2018-0812); Steinberg v. Woodman, et al., C.A. No. 2018-0784-JRS (D.I. 1)
(the “Steinberg Action”); Order for Consolidation of the Related Actions, Appointment of
Co-Lead Counsel and Acceptance of Service (the “Consolidation Order”) (D.I. 5)
(consolidating the Steinberg Action with the later-filed case captioned Noury, et al. v.
Woodman, et al., C.A. No. 2018-0812-JRS).
3
D.I. 9.
2
As discussed below, the Motion must be granted. Plaintiffs have failed to
plead with particularity that a majority of the Board in place when the Complaint
was filed (the “Demand Board” as further defined below) is unfit to consider a
demand. Plaintiffs’ theory of demand futility hinges on their conclusory allegations
that a majority of the Demand Board face a substantial likelihood of liability for
breach of fiduciary duty because they knew GoPro could not meet its revenue
guidance even as its management repeated stale, overly optimistic revenue
projections.4 Yet the very Board presentations Plaintiffs point to as support for these
allegations (which have been incorporated by reference into the Complaint) reveal
that GoPro management was regularly advising the Board that, notwithstanding
production difficulties, GoPro was on track to meet its inventory projections and hit
its revenue guidance. The Board was under no obligation to disclose what it did not
know or did not believe to be true. Nor was it obliged to doubt the information it
was receiving from GoPro’s managers.
Plaintiffs have likewise failed to plead facts that support an inference the
Board could not competently consider a demand in the shadow of the federal
securities litigation for the simple reason that a majority of the Demand Board faced
no liability in that action. Plaintiffs’ final demand futility argument—that a majority
4
See Compl. ¶¶ 91–93; Pls.’ Answering Br. in Opp’n to Defs.’ Mot. to Dismiss the Verified
S’holder Deriv. Compl. (“PAB”) (D.I. 20) at 10–11.
3
of the Demand Board was beholden to the Company’s controlling stockholder/CEO
and could not, therefore, have competently considered a demand to prosecute claims
against him—is likewise not well pled. Alleging only that the controller/CEO could
remove Board members “at will” says nothing of their independence for purposes of
demand futility.
After carefully reviewing the Complaint, I have no reasonable doubt that a
majority of the Demand Board could exercise independent and disinterested business
judgment in responding to a demand. The Complaint, therefore, must be dismissed.5
I. FACTUAL BACKGROUND
I draw the facts from the allegations in the Complaint, documents
incorporated by reference or integral to that pleading and judicially noticeable facts.6
For purposes of this Motion, I accept as true the Complaint’s well-pled factual
allegations and draw all reasonable inferences in Plaintiffs’ favor.7
5
Given the Court’s conclusion that Plaintiffs have not met their pleading burden under
Rule 23.1, I do not reach the question of whether Plaintiffs have pled viable claims under
Rule 12(b)(6).
6
See Wal-Mart Stores, Inc. v. AIG Life Ins. Co., 860 A.2d 312, 320 (Del. 2004) (quoting
In re Santa Fe Pac. Corp. S’holder Litig., 669 A.2d 59, 69 (Del. 1995)) (noting that on a
motion to dismiss, the court may consider documents that are “incorporated by reference”
or “integral” to the complaint); D.R.E. 201–02 (codifying Delaware’s judicial notice
doctrine).
7
Savor, Inc. v. FMR Corp., 812 A.2d 894, 896–97 (Del. 2002).
4
Parties and Relevant Non-Parties
Nominal defendant, GoPro, is a publicly-traded Delaware corporation
engaged in the consumer electronics business.8 The Company manufactures and
sells mountable and wearable cameras, drones and related accessories.9
Defendant, Nicholas Woodman, founded GoPro in 2004 and has served as a
Board member and the Company’s CEO since the Company’s inception.10 As of the
time the Complaint was filed, Woodman is alleged to have owned 75.97% of
GoPro’s outstanding shares of common stock.11 In addition to Woodman,
Defendants, Brian McGee (CFO), Anthony Bates (President) and Charles Prober
(COO) (collectively, the “Officer Defendants”) were all GoPro officers during the
period of wrongdoing alleged in the Complaint.12
The nine-member Board in place as of the filing of the first complaint in this
action (the “Demand Board”) is comprised of Defendants, Woodman, Kenneth
Goldman, Peter Gotcher, Alexander Lurie, Lauren Zalaznick, Susan Lyne and
8
Compl. ¶¶ 28–29.
9
Compl. ¶ 3.
10
Compl. ¶ 30. Woodman has also served as Chairman of the Board since 2014 and served
as President from 2004 until 2014. Id.11
Compl. ¶¶ 30, 195.
12
Compl. ¶¶ 30–34, 44.
5
Frederic Welts, as well as non-parties, Ty Ahmad-Taylor and James Lanzone.13
Goldman, Gotcher and Zalaznick also served on the Board’s Audit Committee
during some or all of the relevant time period.14 Seven of the nine members of the
Demand Board are named as Defendants in this action. The Complaint also names
as Defendants former Board members, Michael Marks and Edward Gilhuly
(collectively, with Woodman, Bates, Goldman, Gotcher, Lurie, Zalaznick, Lyne and
Welts, the “Director Defendants”), both of whom left the Board in June 2017.15
Plaintiffs, Charlie Steinberg, Steve Noury and Barbara and Richard Silberfeld
were GoPro stockholders during the events alleged in the Complaint and have
remained stockholders since.16 They purport to bring the Complaint derivatively on
behalf of the Company.17
GoPro’s 2016 Product Line
GoPro’s initial focus was terrestrial in that it developed cameras for users
either to handle or wear.18 Its first product was the wearable “HERO” camera and
13
Compl. ¶ 183.
14
Compl. ¶¶ 36–37, 42, 46, 191.
15
Compl. ¶¶ 35, 40.
16
Compl. ¶¶ 21–23; Consolidation Order ¶ 7.
17
Compl. ¶¶ 1, 21–23, 173.
18
Compl. ¶ 70.
6
the advanced iterations of this camera continue to comprise the Company’s core
product line.19 In 2016, GoPro planned to take to the air by expanding into the drone
market.20 The Company hoped to make its flying debut with a drone it called
“Karma.”21
GoPro’s 2016 Revenue Projections and Karma’s Pre-Launch
GoPro runs an inventory-driven business. And, like many manufacturers,
GoPro utilizes a “real-time” enterprise resource planning (“ERP”) management
system to monitor its supply chain.22 ERP software “integrates areas such as
planning, purchasing, inventory, sales, marketing, finance and human resources.”23
GoPro’s ERP system is enabled by the “NetSuite” software.24
On February 3, 2016, utilizing NetSuite, GoPro issued full-year revenue
guidance disclosing expected revenue of $1.35–$1.5 billion in 2016.25 As was
customary, the Company cautioned investors that its projections were “forward-
19
Id.20
Compl. ¶¶ 4, 70, 81–82.
21
Compl. ¶ 5.
22
Compl. ¶ 72.
23
Id.24
Compl. ¶ 74.
25
Compl. ¶¶ 4, 82.
7
looking statements regarding future events” that were laced with “risks and
uncertainties.”26 On the same day it disclosed annual revenue forecasts, the
Company announced its plan to enter the drone market “in the first half of 2016.”27
Three months later, during a May 3, 2016 Board meeting, management
advised the Board that the Company was experiencing “delays” with Karma.28 Even
so, management assured the Board that “Karma deliverables [were] on track” and
that management was “tracking” Karma’s “launch” for a “6/6 announce.”29
Slides presented to the Board at the May 3 meeting show the Company had
no Karma inventory “on hand” for “Q1’15” through “Q1-16.”30 The Board also
26
GoPro, Inc., Current Report Ex. 99.1 (Form 8-K) (Feb. 3, 2016) (the “February 8-K”)
(“Note on Forward-looking Statements”); In re Gen. Motors (Hughes) S’holder Litig.,
897 A.2d 162, 170 (Del. 2006) (noting that the trial court may take judicial notice of facts
in SEC filings that are “not subject to reasonable dispute”) (emphasis in original). The
Company identified multiple sources of risk including the Company’s (i) “dependence on
sales” and “third-party suppliers” to “provide components for our products” and
(ii) potential “inability to successfully manage frequent product introductions and
transitions.” See February 8-K.
27
Compl. ¶ 82.
28
Id. The Board was told Karma’s “delays [were] adding risk” to a related product referred
to as “Yellowstone,” which is described as a “storytelling, cloud service, subscription.”
Transmittal Aff. of Gina M. Serra in Supp. of Pls.’ Answering Br. in Opp’n to Defs.’ Mot.
to Dismiss the Verified S’holder Deriv. Compl. (“Serra Aff.”) (D.I. 20) Ex. 3 at
NOURY_GPRO220_000051. Bates numbers for documents produced in response to
shareholder inspection demands under 8 Del. C. § 220, cited in the affidavits submitted in
connection with the Motion, are referred to as “GoPro220_XXXXXX.”
29
Serra Aff. Ex. 3 at GoPro220_000051, 57.
30
Id. at GoPro220_000046.
8
learned that “Kirkwood” (a codename for the Karma drone) “repairs” were occurring
during the “Q4 2015” through “Q2 2016” timeframe.31
Two days later, on May 5, Woodman publicly disclosed that Karma’s launch
“would be delayed until [the 2016] holiday season,” even as he touted the drone’s
“revolutionary features.”32 At the same time, McGee, the CFO, reiterated the
Company’s revenue guidance range of $1.35–$1.5 billion.33
Two months later, in July, management reports to the Board continued to
show the Company had no Karma drones in inventory.34 Nevertheless, GoPro’s
release of Q2 2016 financial results stood by earlier revenue guidance.35 At this
juncture, Bates, the Company’s President, told investors GoPro was “closely
tracking [inventory] and making sure that [GoPro] can ramp into our second half
plans.”36 Similarly, McGee publicly opined the Company had “done a great job in
31
Compl. ¶ 83; Serra Aff. Ex. 3 at GoPro220_000069.
32
Compl. ¶¶ 5, 83, 189 (bullet 1).
33
Compl. ¶ 189 (bullet 2).
34
Compl. ¶ 85 (citing GoPro220_000093–95). The Complaint states that the Board viewed
these slides on August 2, 2016, when the slides, themselves, state they are part of the
Board’s “July 18, 2016” meeting materials. See Serra Aff. Ex. 5 at GoPro220_000093.
35
Compl. ¶¶ 84, 189 (bullet 3).
36
Compl. ¶¶ 87, 189 (bullet 5).
9
channel inventory” and predicted GoPro would “be ready for a heck of a launch in
the second half” of the year.37
Shortly after these public statements, during an August 2, 2016 meeting, the
Board received updates from GoPro’s management regarding the status of new
product development.38 The Complaint highlights several allegedly troublesome
slides from management’s presentation to the Board.39 In a slide titled “Operating
Expenses,” management disclosed the “spend” for the Karma “project” was
“unfavorable at $5.4M, ($2.9M) to Q2M1.”40 A separate slide titled “Aerial
Products Roadmap” advised the Board that certain aspects of the Karma project that
had been planned for 2017 and 2018 were “at risk.”41
About one month later, on September 19, 2016, the Company unveiled three
new, highly anticipated products—the HERO5, HERO5 Black and the Karma
drone.42 Karma was scheduled for launch on October 23, 2016, at “select retailers
around the world,” while the HERO5 camera would be distributed “globally”
37
Compl. ¶ 189 (bullet 4).
38
Compl. ¶ 88.
39
Id.
40
Id.; Serra Aff. Ex. 6 at GoPro220_00101.
41
Compl. ¶ 88; Serra Aff. Ex. 6 at GoPro220_00106.
42
Compl. ¶ 89.
10
beginning on October 2.43 Simultaneously with news of these new product launches,
McGee continued to reassure investors the Company was “on track” to meet its
revenue guidance of $1.35–$1.5 billion.44 This reaffirmation was based, in part, on
management’s projection that its trio of new offerings would account for the “vast
majority of GoPro’s full-year revenue occurring in the second half of the year.”45
As of September 19, the Company had only 2,500 Karma drones in inventory
(worth ~$2 million).46
Less than one month after Karma’s launch announcement, Woodman repeated
that GoPro was ready to make Karma drones “available on October 23.”47
Customers who had signed up for Karma’s pre-sale were told the drone would ship
on November 28, 2016.48
During the October 6, 2016 Board meeting, management presented a
“Summary” slide to the Board.49 This slide calculated the Company’s total
43
Compl. ¶¶ 89, 91, 106, 189 (bullet 8).
44
Compl. ¶¶ 6, 92, 105, 189 (bullet 7).
45
Compl. ¶ 90 (alteration in original).
46
Compl. ¶ 93.
47
Compl. ¶ 96.
48
Id.
49
Compl. ¶¶ 97, 105; Serra Aff. Ex. 8 at GoPro220_000121.
11
“Q4 revenue risk” was “($45M–$110M),” of which “Karma” comprised “($20M–
$85M).”50 The Board also reviewed a slide titled “Bull and Bear Case,” which
appears to analyze the Company’s stock price in a “Q3” “Bull” or “Bear” market
assuming Karma was “in retail” or, alternatively, with “No Karma.”51
Karma’s Turbulent Flight
As fall approached, GoPro was entering the critical run-up to the holiday
season.52 On October 23, Karma sales began as the Company had projected, and
2,500 customers acquired the drone.53 But GoPro’s inventory fell short of demand.
Several would-be customers posted to GoPro’s customer service website “lamenting
the unavailability of the drone.”54 On October 24, TheStreet, Inc. reported that
shipment dates for “most” Karma drones had been moved to November 28 and that
HERO5 supply was low.55 Soon after, GoPro’s stock price fell ~7%.56
50
Compl. ¶¶ 97, 105; Serra Aff. Ex. 8 at GoPro220_000121.
51
Compl. ¶ 107; Serra Aff. Ex. 8 at GoPro220_000122.
52
See, e.g., Compl. ¶ 105 (highlighting quotes from an October 6, 2016 Board slide).
53
Compl. ¶ 100.
54
Compl. ¶¶ 9, 98.
55
Compl. ¶¶ 10, 99, 106.
56
Compl. ¶¶ 10, 99, 106.
12
On the same day TheStreet published its report, the Board’s Audit Committee
met to discuss GoPro’s “Q3” results for the period ended September 30.57 The
Complaint features two slides presented at this meeting.58 First, the committee
reviewed a report stating the Company had no “Aerial” in its inventory as of “Q3’16”
(i.e., before Karma’s October 23 launch).59 Second, the committee was apprised of
“Significant Accounting and Reporting Items,” which included, inter alia, a “Look[]
ahead” to “Q4’16.”60 The look ahead comprised three bullet points, one of which
was captioned “Revenue recognition—Karma sales returns reserve.”61
Five days after Karma first went on sale, on October 28, Brian Warholak, “one
of the first customers to purchase the Karma drone,” uploaded a video to YouTube
of his new drone crashing to the ground due to a battery defect.62 Other customers
reported the same defect on GoPro’s online support hub.63 The Company eventually
57
Compl. ¶ 108.
58
Id.
59
Compl. ¶¶ 108, 192; Serra Aff. Ex. 12 at GoPro220_000198. “Q3” ended on
“September 30, 2016”—which was before Karma was slated to be available for sale
(i.e., October 23). See Serra Aff. Ex. 12 at GoPro220_000195; Compl. ¶ 7.
60
Compl. ¶ 108; Serra Aff. Ex. 12 at GoPro220_000197.
61
Compl. ¶ 108; Serra Aff. Ex. 12 at GoPro220_000197.
62
Compl. ¶ 100.
63
Id.
13
determined that the drone’s battery could “pop out” in flight due to a defective latch;
the result, frequently, was a rapid, uncontrolled descent ending in a spectacular
crash.64
Nine days after Karma hit the shelves, the Board held a meeting on
November 1 to discuss “Supply Chain and Sales Status for HERO5 and Karma
products.”65 The Board reviewed a slide (the “Karma Production Forecast”)
summarizing the “Karma Supply Chain.”66 The Karma Production Forecast
reviewed management’s assessment of GoPro’s ability to manufacture additional
Karma drones, including the “yield rates” of the relevant manufacturing facilities.67
The upshot of the slide was that management’s “Very Early-Targeting” for Karma
production was “80K in 4th quarter.”68
64
Compl. ¶¶ 12, 100–01.
65
Transmittal Aff. of Riley T. Svikhart (“Svikhart Aff.”) (D.I. 14) Ex. 6 at
GoPro220_000135, 38; Compl. ¶¶ 98, 100 (Karma went on sale on October 23).
66
Svikhart Aff. Ex. 6 at GoPro220_000138.
67
The slide shows a grid of five separate suppliers for six component parts of the Karma
drone (e.g., “Drone,” “Grip,” “Charger,” “Stabilizer/Harness”) as well as the facilities
around the world where the parts were being produced. Each facility’s
“Workforce/Capacity” was listed, along with the facility’s “Rolled Yield” for the part it
manufactured. See Svikhart Aff. Ex. 6 at GoPro220_000138.
68
Svikhart Aff. Ex. 6 at GoPro220_000138.
14
Notwithstanding the optimistic report on inventory, GoPro was still having
difficulty getting Karma units on retailers’ shelves.69 In light of “production ramp
up issues,” on November 3, 2016, McGee issued a press release lowering GoPro’s
2016 full-year revenue guidance from $1.35 billion to $1.25–$1.3 billion.70 The
press release explained GoPro’s new fourth quarter projections assumed Karma sales
would account for ~10% of the Company’s fourth-quarter revenues.71 Analysts
calculated GoPro would need to generate $60 million in revenue from Karma to meet
the new guidance (~50,000–75,000 units).72
One day later, on November 4, the market reacted to the updated guidance,
and GoPro’s stock fell 6.5%.73 That same day, the Company filed its Form 10-Q for
the third quarter.74 The 10-Q added new cautionary language for investors, stating
the Company faced risk from potential inability to ensure “the availability of
products in appropriate quantities.”75 Yet, as of the November 4 filing, GoPro
69
Compl. ¶¶ 9, 98.
70
Compl. ¶¶ 11, 109.
71
Compl. ¶¶ 109–10, 189 (bullet 9).
72
Compl. ¶¶ 111–12.
73
Compl. ¶ 114.
74
Compl. ¶ 115.
75
Id.
15
reassured customers that Karma was and would be “available at major U.S.
retailers.”76
Shortly after Karma’s initial launch on October 23, and just eleven days after
the first online reports of Karma’s battery latch issue, the Board met on November 8,
2016, to discuss “recent information relating to a power issue with the Karma
drone.”77 Following the meeting, the Board directed a recall of the Karma drone
because of the defect at a time when the Company had sold only 2,500 units.78 The
next day, GoPro’s stock fell another 4%.79 As a result of Karma’s battery defect and
supply chain difficulties, the drone was not available for sale during the 2016 holiday
season.80
Karma Supply Fallout
On February 2, 2017, GoPro reported its 2016 results.81 The Company
disclosed it had generated $1.185 billion in revenue for the year (short of the updated
76
Compl. ¶¶ 117, 189 (bullet 10).
77
Compl. ¶¶ 98, 100 (noting the original online reports were posted on October 28), ¶ 116.
78
Compl. ¶¶ 12, 117.
79
Compl ¶ 117.
80
Compl. ¶¶ 118–19.
81
Compl. ¶ 119.
16
November 9 projection of $1.25–$1.3 billion).82 GoPro stated its “biggest
challenge” was the Karma drone.83 On this news, GoPro’s stock fell another 12%.84
Plaintiffs allege Defendants, Woodman, McGee, Bates, Gilhuly and Marks
(the “Selling Defendants”), sold GoPro stock between March and December 2016,
before the 2016 year-end results were released.85
Procedural Posture
Following the Company’s lowered Q4 revenue guidance and the resulting
6.5% decline in stock price, certain GoPro stockholders filed a class action complaint
on November 16, 2016, in the United States District Court for the Northern District
of California (the “California Court”) alleging violations of Sections 10(b) and 20(a)
of the Securities Exchange Act.86 On July 26, 2017, the California Court denied a
motion to dismiss, finding plaintiffs had well pled Woodman, McGee and Bates
made false or misleading statements concerning Karma.87
82
Compl. ¶¶ 109, 119–20.
83
Compl. ¶¶ 13, 119–20.
84
Compl. ¶ 120.
85
Compl. ¶¶ 17, 160–165.
86
Compl. ¶¶ 109–114; Bielousov v. GoPro, Inc., 2017 WL 3168522, at *1 (N.D. Cal.
July 26, 2017).
87
Bielousov, 2017 WL 3168522, at *4–6. On October 30, 2018, the California Court
granted an Order Preliminarily Approving Settlement in the Bielousov action. Svikhart
Aff. Ex. 11.
17
Shortly after proceedings began in the California Court, on September 26,
2017, Plaintiffs sent a series of four separate demands to the Company, requesting
books and records under 8 Del. C. § 220 of the Delaware General Corporation Law.88
In response, the Company produced ~1,100 pages of material.89
Armed with these documents, while litigation in the California Court was
ongoing and without making a litigation demand on the Board, Plaintiffs filed two
separate derivative complaints in this court.90 The first complaint, filed on
October 30, 2018, has since been consolidated with the operative Complaint, which
was filed days later on November 7, 2018.91
The Complaint comprises four derivative counts.92 Count I alleges the Officer
Defendants breached their fiduciary duties by, inter alia, “keep[ing] the market
88
Compl. ¶¶ 24–27, 174–77.
89
Compl. ¶¶ 24–27.
90
See Consolidation Order at 3.
91
See Consolidation Order ¶ 1. The Court entered a Consolidation Order on December 3,
2018 (i) directing all future filings to be submitted to Consolidated Action Number 2018-
0784, (ii) designating the Complaint as the operative complaint and (iii) designating
Plaintiffs, Steinberg, Noury and Barbara and Richard Silberfeld, as lead Plaintiffs.
See id. ¶¶ 2–7.
92
Compl. ¶¶ 170, 200–28. In their Answering Brief, Plaintiffs clarified they are no longer
pursuing claims based on the now-dismissed consolidated securities class action styled
Park v. GoPro, Inc., which had been filed in the California Court. PAB at 21 n.11.
Plaintiffs also disavowed any claims based on allegedly false and misleading statements
occurring after February 2, 2017. PAB at 21 n.11. In this regard, I note there is a
discrepancy in Plaintiffs’ Answering Brief regarding the cut-off date for their claims.
Compare PAB at 21 n.11 (“February 2, 2018), with PAB at 29 n.12 (“February 2017.”).
18
unaware of problems with inventory and sales.”93 Counts II and III allege the
Director Defendants breached their fiduciary duties when they “allowed, ignored, or
encouraged [] numerous materially false and misleading statements and omissions”
by certain Officer Defendants.94 Count IV is a Brophy claim brought against the
Selling Defendants.95
On May 2, 2019, Defendants filed the Motion in which they seek dismissal of
the Complaint under Court of Chancery Rules 12(b)(6) and 23.1.96 The Motion was
submitted for decision on February 5, 2020.97
II. ANALYSIS
As noted, Plaintiffs elected to forego making a pre-suit demand. Accordingly,
under Court of Chancery Rule 23.1, they must “state with particularity” their reasons
Based on the sections of the Complaint Plaintiffs direct the Court to disregard, it appears
the relevant cut-off date is February 2017, not February 2018. See PAB at 21 n.11
(citing Compl. ¶¶ 14–16, 122–59, 169, 185).
93
Compl. ¶¶ 200–04.
94
Compl. ¶¶ 205–20.
95
Compl. ¶¶ 221–28.
96
D.I. 9. Following briefing on the Motion, Plaintiffs filed a Motion to Strike certain
exhibits Defendants submitted in support of the Motion, arguing they were outside the
scope of documents referenced in the Complaint. D.I. 18. I do not reach the Motion to
Strike as I have not relied on any of the documents to which Plaintiffs object in reaching
my decision on the Motion.
97
D.I. 38.
19
for not asking the Demand Board to pursue their derivative claims.98 Plaintiffs
advance four arguments as to why their Complaint adequately pleads demand
futility. First, they maintain that a majority of the Demand Board “faces a substantial
likelihood of personal liability” because they “allowed and/or failed to correct”
certain false statements.99 Second, they argue that a majority of the Demand Board
is beholden to Woodman because he could “easily remove[]” any director who “took
an action antithetical to” his wishes.100 Third, they argue the Demand Board would
be interested in any decision to bring a Brophy claim against the Selling Defendants
because “pressing forward” with Count IV would subject them to “liability in
connection with the false and misleading statements” they allowed to be made with
regard to Karma.101 Finally, they allege the Bielousov action, itself, renders a
majority of the Demand Board “interested” in a hypothetical decision to bring
Plaintiffs’ claims because to do so would be “tantamount to admitting liability.”102
98
Compl. ¶ 182; Ct. Ch. R. 23.1(b); Aronson v. Lewis, 473 A.2d 805, 813–14 (Del. 1984),
overruled in part, Brehm v. Eisner, 746 A.2d 244, 253–54 (Del. 2000).
99
Compl. ¶¶ 187–89, 191–92.
100
Compl. ¶ 195.
101
Compl. ¶¶ 160–65; PAB at 49–50.
102
Compl. ¶ 184; PAB at 50.
20
The Rule 23.1 Standard
As Justice Moore emphasized in his seminal Aronson decision, 8 Del. C.
§ 141(a) codifies a bedrock of Delaware corporate law—the board of directors, not
stockholders, manages the business and affairs of the corporation, including the
business decision to cause the corporation to sue.103 When making this (or any other)
business decision, a board is entitled to “a presumption” that it “acted on an informed
basis, in good faith and in the honest belief that the action taken was in the best
interests of the company.”104
With these canons as a backdrop, our law has established certain procedural
imperatives to ensure that shareholders do not “imping[e] on the managerial freedom
of directors” lest the board’s judgment be “sterilize[ed].”105 To mount a successful
“challenge to a board of directors’ managerial power” and wrest control of a
corporation’s litigation asset away from that decision-making authority, the
stockholder must demonstrate that demand on the board to pursue the claim would
be futile such that the demand requirement should be excused.106
103
Aronson, 473 A.2d at 811 (citing 8 Del. C. § 141(a)).
104
Id. at 812 (citation omitted).
105
Id. at 811, 814; Pogostin v. Rice, 480 A.2d 619, 624 (Del. 1984), overruled on other
grounds, Brehm, 746 A.2d at 253–54.
106
Spiegel v. Buntrock, 571 A.2d 767, 773 (Del. 1990); Beam ex rel. Martha Stewart Living
Omnimedia, Inc. v. Stewart, 845 A.2d 1040, 1044 (Del. 2004).
21
In order to meet this heightened pleading burden, the Complaint must
“comply with stringent requirements of factual particularity that differ substantially
from the permissive notice pleadings” sanctioned by Chancery Rule 8.107
Specifically, the plaintiff pleading demand futility must “inform[] [the] defendants
of the precise transactions at issue” by describing “with particularity” the “specific
misconduct in which each defendant is alleged to have participated.”108 When
assessing whether the plaintiff has met this heightened burden under Rule 23.1, the
plaintiff is entitled to “all reasonable inferences” that logically flow from
“particularized facts” alleged in the complaint.109 But the court need not credit
“conclusory allegations” or “inferences that are not objectively reasonable” when
testing the sufficiency of a pleading.110
“Two tests are available to determine whether demand is futile.”111 “In simple
terms, [both] tests permit a corporation to terminate a derivative suit if its board is
107
Brehm, 746 A.2d at 254 (noting that conclusory statements or mere notice pleading are
insufficient to satisfy Rule 23.1).
108
Elburn v. Albanese, 2020 WL 1929169, at *9 (Del. Ch. Apr. 21, 2020) (citations
omitted).
109
Wood v. Baum, 953 A.2d 136, 140 (Del. 2008).
110
Id. (internal quotation omitted).
111
Id.22
comprised of directors who can impartially consider a demand.”112 The Aronson test
applies to claims “where it is alleged that the directors made a conscious business
decision in breach of their fiduciary duties.”113 The Rales test applies “where the
subject of a derivative suit is not a business decision of the Board” but rather a failure
to act.114
Although this court has observed that the demand futility analysis frequently
“would be no different” under either Aronson or Rales,115 this court has also noted
the incongruity in pleading that occurs when a plaintiff characterizes the same set of
underlying conduct as both a wrongful “failure to act” and a wrongful “affirmative
decision.”116 Even if acceptable as a matter of alternative pleading, when the
plaintiff struggles consistently to characterize the nature of the underlying wrongful
112
In re Oracle Corp. Deriv. Litig., 824 A.2d 917, 939 (Del. Ch. 2003).
113
Wood, 953 A.2d at 140 (emphasis supplied and citation omitted).
114
Id. (citing Rales v. Blasband, 634 A.2d 927, 932–33 (Del. 1993)); Zucker v. Andreessen,
2012 WL 2366448, at *6 (Del. Ch. June 21, 2012).
115
See Teamsters Union 25 Health Servs. & Ins. Plan v. Baiera, 119 A.3d 44, 68 n.132
(Del. Ch. July 13, 2015); In re China Agritech, Inc. S’holder Deriv. Litig., 2013
WL 2181514, at *16 (Del. Ch. May 21, 2013).
116
In re Duke Energy Corp. Deriv. Litig., 2016 WL 4543788, at *15 (Del. Ch. Aug. 31,
2016); Hubert Owens v. Tim M. Mayleben, 2020 WL 748023, at *6 (Del. Ch. Feb. 13,
2020).
23
conduct that gives rise to his claims, this imprecision signals that he may not have
pled such conduct with particularity.117
As discussed below, Plaintiffs’ Complaint is a model of this sort of
imprecision. On the one hand, Plaintiffs allege Defendants “caused” GoPro publicly
to issue false statements regarding the status of its new product releases and the
corresponding projections of revenue.118 On the other, Plaintiffs allege Defendants
failed to act when they “consciously failed to monitor [the] information and
reporting systems” that could have prevented the same false statements.119 In any
event, while many of Plaintiffs’ demand futility arguments are discordant, the one
clear note is that a majority of the Demand Board face “a substantial likelihood of
liability” for their actions (and/or inactions) surrounding GoPro’s public statements
in 2016.120 But, as discussed below, the Complaint lacks sufficient factual
particularity to support this assertion, either as an affirmative choice to mislead
stockholders or as a matter of poor oversight. Similarly, Plaintiffs’ last-ditch
117
See Brehm, 746 A.2d at 254.
118
Compl. ¶¶ 2, 65.
119
Compl. ¶ 209. Compare Compl. ¶ 210 (Defendants “encouraged” false statements”),
and Oral Arg. on Pls.’ Mot. to Strike and Defs.’ Mot. to Dismiss the Verified S’holder
Deriv. Compl. (“Tr.”) (D.I. 39) at 36–38 (“[W]e don’t think this is a Caremark claim.”),
with PAB at 41 (Defendants “face a substantial risk of liability under a classic Caremark
theory for failing to apprise themselves” of GoPro’s “inadequate Karma drone supply.”).
120
Compl. ¶¶ 187–92; PAB at 30, 36.
24
arguments related to either the Bielousov action or the Brophy claim also lack merit
as neither impugns the fitness of a majority of the Demand Board to consider a
demand.121
Plaintiffs Have Failed to Well Plead Demand Futility With Respect to
Counts II and III
Demand is excused when a plaintiff adequately alleges a majority of the
Demand Board is “interested” because they face “a substantial likelihood” of
liability if suit were filed.122 Where, as here, the corporation’s charter contains an
exculpatory clause, as authorized under 8 Del. C. § 102(b)(7), “a substantial
likelihood of liability may only be found to exist if the plaintiff pleads a non-
exculpated claim against the directors based on particularized facts.”123
As noted, to meet this burden, Plaintiffs allege a majority of the Demand
Board face a substantial likelihood of liability for authorizing or failing to prevent
121
See PAB at 49–53.
122
See Beam, 845 A.2d at 1049; Rattner v. Bidzos, 2003 WL 22284323, at *9 n.47 (Del. Ch.
Sept. 30, 2003) (“[F]or purposes of determining futility, the Individual Defendants who are
not Director Defendants are largely irrelevant.”); In re Ezcorp Inc. Consulting Agreement
Deriv. Litig., 2016 WL 301245, at *34 (Del. Ch. Jan 25, 2016) (“To determine whether the
Board could properly consider a demand, a court counts heads. If the board of directors
lacks a majority comprising independent and disinterested directors, then demand is
futile.”).
123
Teamsters Union, 119 A.3d at 62–63 (quotation omitted); Svikhart Aff. Ex. 3, Art. VIII
(the exculpatory provision); In re Tangoe, Inc. S’holders Litig., 2018 WL 6074435, at *12
n.79 (Del. Ch. Nov. 20, 2018) (“A court may take judicial notice of an exculpatory charter
provision in resolving a motion addressed to the pleadings.”) (citation omitted).
25
the alleged misstatements.124 The Complaint begins its narrative by leaving a
breadcrumb trail that appears to lead to a claim of oversight liability under
Caremark.125 But then the trail runs cold as Plaintiffs disclaim any attempt to plead
a failure of Board oversight.126 Then, just as the reader is about to fire the “help me
I’m lost” flare, the Complaint pivots to assert a claim of malfeasance by virtue of the
Board’s role in actively causing GoPro to release false and misleading statements to
its stockholders and the market.127 While Plaintiffs’ inconsistent proffers of their
claim(s) have made the analysis more challenging than, perhaps, it needed to be, at
124
Compl. ¶ 2. While Plaintiffs’ Answering Brief makes separate arguments concerning
Woodman (whose actions as CEO are unexculpated), the central inquiry remains whether
there exists a majority of independent directors on the Demand Board capable of
considering demand. PAB at 30; McPhadden v. Sidhu, 964 A.2d 1262, 1273 (Del. Ch.
2008) (stating officers do not benefit from a Section 102(b)(7) exculpatory charter
provision). As I find Plaintiffs have failed to allege a majority of the Demand Board is
unfit to consider demand, I do not reach the question whether Woodman faces a substantial
likelihood of liability for his actions as CEO.
125
See, e.g., Compl. ¶ 187 (“[T]he Demand Defendants learned about the issues with the
Karma drone and HERO5 cameras, and yet still allowed and/or failed to correct the
misleading statements issued by the Company.”), ¶ 189 (“[T]hese defendants permitted
and/or failed to correct multiple materially false and misleading statements.”), ¶ 209
(“In conscious disregard of their duties and responsibilities, the Director Defendants
allowed [or] ignored . . . the numerous materially false and misleading statements.”); PAB
at 41 (Defendants “face a substantial risk of liability under a classic Caremark theory for
failing to apprise themselves” of GoPro’s “inadequate Karma drone supply.”). See also
In re Caremark Intern. Inc. Deriv. Litig., 698 A.2d 959 (Del. Ch. 1996) (Chancellor Allen’s
seminal decision drawing the contours of a failure of oversight claim).
126
PAB at 39 (“Defendants [] mischaracterize Plaintiffs’ claims as ‘Caremark’ claims.”);
Tr. at 36–38 (“[W]e don’t think this is a Caremark claim.”).
127
Compl. ¶ 209; ¶ 210 (Defendants “encouraged” false statements”); PAB at 39.
26
the end of the day it does not matter since neither theory, as pled, supports a
reasonable inference that a majority of the Demand Board faces a threat of liability.
1. The False Disclosure Claim
“Whenever directors communicate publicly or directly with shareholders
about a corporation’s affairs, with or without a request for shareholder action,
directors have a fiduciary duty to shareholders to exercise due care, good faith and
loyalty.”128 If the board of directors intentionally misleads stockholders about the
business of the corporation it serves, then its members will be held liable for breach
of fiduciary duty.129 With this in mind, it follows that directors who knowingly make
materially misleading statements to stockholders “may be considered to be interested
for the purposes of demand.”130
Only one member of the Demand Board (Woodman) is alleged to have
personally made a false or misleading public statement.131 Plaintiffs attempt to
implicate a majority of the Demand Board by alleging five of its members
contributed to and approved GoPro’s revenue guidance while knowing it was
128
Malone v. Brincat, 722 A.2d 5, 10 (Del. 1998).
129
Id. at 14; In re InfoUSA, Inc. S’holders Litig., 953 A.2d 963, 990 (Del. Ch. 2007).
130
InfoUSA, 953 A.2d at 991.
131
See Compl. ¶ 189 (alleging false statements by Woodman, McGee and Bates); Tr. at 33
(Plaintiffs’ theory is that a majority of the Demand Board had “access to information that
conflicted” with what management was telling stockholders.).
27
impossible for the Company to achieve the projected results.132 In other words,
Plaintiffs attempt to allege a majority of the Demand Board acted with scienter.
When pressed at oral argument for “some particularized facts that would show the
board was actually affirmatively saying to management, ‘yes, keep telling the market
that we’re going to meet our revenue guidance, notwithstanding these production
issues that we’re having,’” Plaintiffs’ counsel pointed to only one document: the
“Bull and Bear Case” slide the Board reviewed on October 6, 2016.133
Nether this slide, nor anything else in the Complaint, reasonably supports the
inference Plaintiffs ask the Court to draw. First, the “Bull and Bear Case” slide
appears to be backwards-looking—not a forward-looking encouragement to
continue misstating facts.134 Second, all this slide shows is that the Board was
considering the impact of product releases and macroeconomic trends on GoPro’s
stock price—i.e., that the Director Defendants “monitored” the Company’s
“business risk” as they were obliged to do under our law.135
132
Compl. ¶¶ 2, 65, 186, 188, 189, 191; PAB at 24.
133
Tr. at 37–38; Compl. ¶ 107; Serra Aff. Ex. 8 at GoPro220_000122.
Serra Aff. Ex. 8 at GoPro220_000122 (containing a grid with a “Q3” “Bull” or “Bear”
134
market and with Karma “in retail” or with “No Karma”).
135
In re Citigroup Inc. S’holder Deriv. Litig., 964 A.2d 106, 123 (Del. Ch. Feb. 24, 2009).
28
The fundamental problem with the inference Plaintiffs would have the Court
draw is that Board acquiescence cannot support an inference of affirmative Board-
level misconduct.136 Even if the Board were told by its management that the
Company was not going to meet its revenue projections, and then did nothing as
management publicly stood by its market guidance, that factual predicate would
support a “classic” Caremark claim for failure to respond to “red flags,” not a claim
against the Board for causing the Company to make false disclosures.137 Contrary
to Plaintiffs’ assertion, if directors have “actual knowledge” of wrongdoing and
“fail[] to take corrective action,” that is a Caremark claim.138
136
See McElrath on Behalf of Uber Tech., Inc. v. Kalanick, 2019 WL 1430210, at *8 n.125
(Del. Ch. Apr. 1, 2019) (“The distinction between affirmative action by a board and
inaction by the board is important when considering how to apply Rales and whether to
apply Aronson.”) (emphasis in original); Teamsters Union, 119 A.3d at 57–58 (holding
that, under Rule 23.1, a court need not draw “hyper-technical and unreasonable” inferences
that are based on “unsupported leap[s] of logic”).
137
Melbourne Mun. Firefighters’ Pension Trust Fund on Behalf of Qualcomm, Inc. v.
Jacobs, 2016 WL 4076369, at *8 (Del. Ch. Aug. 1, 2016) (describing a failure to respond
to “red flags” as a classic Caremark claim); Sandys v. Pincus, 2016 WL 769999, at *14–
15 (Del. Ch. Feb. 29, 2016), rev’d on other grounds, 152 A.3d 124 (Del. 2016)
(characterizing a claim that directors knowingly “failed to disclose material information to
the public” as a Caremark claim).
138
PAB at 40; Horman v. Abney, 2017 WL 242571, at *10 (Del. Ch. Jan 19, 2017)
(“To establish demand futility under Caremark’s second prong, the Complaint must plead
particularized facts that the board knew of evidence of corporate misconduct—the
proverbial ‘red flag’—yet acted in bad faith by consciously disregarding its duty to address
that misconduct.”) (emphasis supplied); South v. Baker, 62 A.3d 1, 18 (Del. Ch. 2012)
(reviewing a board’s alleged “knowledge of wrong-doing or conscious indifference to
alleged red flags” under Caremark).
29
It is not surprising Plaintiffs have failed to plead particularized facts to support
an inference of affirmative Board-level misconduct given that they have failed to
plead any facts that would offer a conceivable explanation of why a majority of the
Demand Board would intentionally cause the Company to release false statements
to the market knowing full well the Karma inventory shortage would be known to
stockholders and the market within a matter of weeks.139 While the Complaint
alleges the Selling Defendants sold shares during 2016 (which might, under different
circumstances, reveal some explanation of why the Board would affirmatively
mislead the market), only one Selling Defendant, Woodman, is a member of the
Demand Board.140 And, as explained below, the Complaint fails to plead any facts
that would allow a reasonable inference that a majority of the Demand Board was
beholden to Woodman or any of the other Selling Defendants such that they would
be motivated to facilitate or cover up illegal insider trading.141
Plaintiffs’ only half-hearted attempt at pleading the Demand Board lacked
independence is to allege Woodman “controls over 75% of . . . the Company’s
stockholders’ voting power” and could “remove[]” any director who voted against
139
See Ryan v. Armstrong, 2017 WL 2062902, at *5 (Del. Ch. May 15, 2017) (refusing to
credit allegations of bad faith absent credible motive).
140
Compl. ¶¶ 160, 183.
141
Compl. ¶¶ 160–65, 183; PAB at 49.
30
his interests.142 It is well-settled that a controlling stockholder’s voting power and
“select[ion]” of directors do not, without more, render directors “beholden” to the
controller.143 In the absence of a legally cognizable explanation for why the Demand
Board would lie so openly, especially when they were virtually certain to be caught
in the lie, it is unreasonable to infer bad faith malfeasance.144
2. The Apparent Caremark Claim
Although Plaintiffs disclaim any effort to plead a Caremark claim, it is
difficult to ignore the allegations in the Complaint that walk and talk like
Caremark.145 Lest there be any question that I have not considered all angles that
might reveal demand futility, I address the Caremark-like allegations below.
142
Compl. ¶ 195.
143
Beam, 845 A.2d at 1054 (Even in the face of “overwhelming voting control[,] . . .
[a] stockholder’s control of a corporation does not excuse presuit demand on the board
without particularized allegations of relationships between the directors and the controlling
stockholder demonstrating that the directors are beholden to the stockholder.”); Aronson,
473 A.2d at 815; In re Cornerstone Therapeutics Inc. S’holder Litig., 115 A.3d 1173, 1180
(Del. 2015). Similarly, Plaintiffs’ argument that members of the Demand Board have
“been heavily compensated for their service on the Board” is insufficient to excuse demand
because “ordinary director compensation alone is not enough to show demand futility.”
A.R. DeMarco Enter., Inc. v. Ocean Spray Cranberries, Inc., 2002 WL 31820970, at *5
(Del. Ch. Dec. 4, 2002) (citing cases); Compl. ¶ 196.
144
See In re Novell, Inc. S’holder Litig., 2014 WL 6686785, at *7 (Del. Ch. Nov. 25, 2014)
(“An analysis of motives is [] key to determining whether a fiduciary acted in bad faith.”);
Armstrong, 2017 WL 2062902, at *5 (same).
145
See Horman, 2017 WL 242571, at *7 (describing a board knowing “of evidence of
corporate misconduct . . . yet act[ing] in bad faith by consciously disregarding its duty to
address that misconduct” as a Caremark claim).
31
A director will face liability under Caremark when, in bad faith, she fails to
oversee company operations.146
Bad faith is established, under Caremark, when ‘the directors
[completely] fail[] to implement any reporting or information system
or controls[,] or . . . having implemented such a system or controls,
consciously fail[] to monitor or oversee its operations thus disabling
themselves from being informed of risks or problems requiring their
attention.’147
“Thus, to establish oversight liability a plaintiff must show the directors knew they
were not discharging their fiduciary obligations or that the directors demonstrated a
conscious disregard for their responsibilities such as by failing to act in the face of a
known duty to act.”148
Where, as here, there is an exculpatory clause in the corporate charter, “it is
not enough to allege that the misleading statements occurred on [the] directors’
watch; nor is it enough to plead facts from which [the court] may infer negligence,
or even gross negligence, in the directors’ failure to cure the misimpression created
by the statements.”149 Instead, Plaintiffs must well plead that the directors acted in
146
Marchand v. Barnhill, 212 A.3d 805, 820 (Del. 2019).
147
Id. at 821 (quoting Stone ex rel. AmSouth Bancorp v. Ritter, 911 A.2d 362, 370–72
(Del. 2006)).
148
Citigroup, 964 A.2d at 123 (emphasis in original).
149
Ellis v. Gonzalez, 2018 WL 3360816, at *11 (Del. Ch. July 10, 2018).
32
bad faith when they allowed the alleged misstatements to be made and then failed to
correct them.150
To meet this standard, Plaintiffs’ core allegation is that by September 19, a
majority of the Demand Board knew “there was no way GoPro would meet” its
revenue guidance and yet it failed to cause that guidance to be corrected or to prevent
management from continuing to report that the guidance was attainable.151 I assume,
for this analysis, that Plaintiffs are characterizing this omission as a failure to
respond to “red flags” under Caremark’s second prong.152 Plaintiffs maintain the
Court can reasonably infer this Board-level knowledge because of the following
150
Id.; Okla. Firefighters Pension & Ret. Sys. v. Corbat, 2017 WL 6452240, at *14
(Del. Ch. Dec. 18, 2017) (“Scienter” requires a showing that a director “knew” he was
acting inconsistently with his fiduciary duties.).
151
Compl. ¶¶ 91–93; PAB at 10–12; Tr. at 36–39. While not clear, at times in their
Answering Brief, Plaintiffs hint that they may be faulting the Demand Board for not
requiring management to update revenue projections after the Karma recall on
November 8. See PAB at 42. To the extent this is Plaintiffs’ argument, Plaintiffs have not
pled that management knew the full financial impact of the Karma recall until the Company
was ready to release its full-year results. “Management cannot disclose projections that do
not exist.” In re BioClinica, Inc. S’holder Litig., 2013 WL 673736, at *5 (Del. Ch. Feb. 25,
2013). Instead, the Company disclosed what it did know (i.e., the need for the recall and
that GoPro had sold only 2,500 drones to date). Compl. ¶ 117.
152
Compl. ¶ 209; PAB at 41–42 (arguing Defendants failed to respond to “red flags”). It is
no surprise Plaintiffs do not allege a total failure to implement an oversight system under
Caremark’s first prong because the Board maintained an active Audit Committee and
GoPro had a “real-time” supply chain “monitoring system,” which the Audit Committee
and the Board writ large regularly reviewed with the assistance of Company management.
Compl. ¶¶ 72–75, 85.
33
facts: a majority of the Demand Board had “access to the Netsuite ERP system;”153
consumers posted videos showing Karma’s defect;154 GoPro “had an existing supply
of only 2,500 Karma drones” at the beginning of the fourth quarter;155 Karma had
limited availability after its launch;156 and members of the Board saw various slides
at Board meetings discussing “risk” surrounding Karma.157
Although Plaintiffs throw everything against the wall, nothing sticks. While
Plaintiffs urge the Court to infer scienter, the Complaint pleads no facts that would
allow a reasonable inference a majority of the Demand Board knew GoPro was
misleading investors with any of its public statements during 2016.
First, Plaintiffs incorrectly assert Board members had a duty to “access”
Netsuite and extrapolate on its own that the Company had incurable inventory
shortages.158 As Chancellor Allen noted in Caremark, “the duty to act in good faith
to be informed cannot be thought to require directors to possess detailed information
about all aspects of the operation of the enterprise. Such a requirement would simply
153
Compl. ¶¶ 75, 80.
154
Compl. ¶ 100; PAB at 36 (alleging Goldman, Gotcher, Lurie and Zalaznick face a
substantial likelihood of liability); see also PAB at 41–42.
155
Compl. ¶¶ 8, 93, 109.
156
Compl. ¶¶ 99–100.
157
Compl. ¶¶ 83, 97, 108.
158
Compl. ¶ 95.
34
be inconsistent with the scale and scope of efficient organization size in this
technological age.”159 Taking a self-guided tour through an ERP system to check
inventory levels for a product that would comprise only 10% of the Company’s
revenue is not the sort of “oversight” Caremark contemplates.160
In a similar vein, a few YouTube videos showing Karma’s battery defect
cannot be considered “red flags” that were “waived” in front of the Board.161 Even
if they were red flags, the Board met to discuss “proposed recall plans” just eleven
days after the first video was posted.162 A Caremark claim cannot be squared with
an allegation the Board responded to red flags.163
Continuing with their unrealistic expectations, Plaintiffs claim the Board
“would have been made aware of [Karma’s] obvious battery defect had [GoPro]
159
Caremark, 698 A.2d at 971.
160
Compl. ¶¶ 109–10, 189 (bullet 9). This is especially true when considered against the
backdrop of the Karma Production Forecast, which I discuss in more detail below.
“‘Red flags’ are only useful when they are [] waived in one’s face or displayed so that they
are visible to the careful observer.” In re Citigroup Inc. S’holders Litig., 2003
WL 21384599, at *2 (Del. Ch. June 5, 2003).
161
Compl. ¶ 76; Citigroup, 2003 WL 21384599, at *2 (To constitute a red flag, Plaintiffs
must plead information “came to the attention of the board.”).
162
Compl. ¶¶ 98, 100, 116.
163
White v. Panic, 793 A.2d 356, 371 (Del. Ch. 2000); South, 62 A.3d at 18; Horman, 2017
WL 242571, at *14 (stating that a Caremark claim is incongruous with allegations that
when “red flags were waived,” the “Board responded”).
35
adequately tested the drones.”164 This conclusory pleading is insufficient under
Rule 23.1. Delaware law has long-rejected the notion that board members should
be held personally liable for a company’s “ineffective” attempts to manage business
risk unless the court finds it reasonable to infer a conscious, subjective awareness on
the part of a board member that she was not fulfilling her fiduciary duties.165
Plaintiffs offer no well-pled facts supporting an inference that a majority of the
Demand Board personally knew about Karma’s defect, could meaningfully address
the issue at the Board level and yet elected to do nothing.
Second, Plaintiffs strenuously assert the Board knew there was “no way
GoPro would meet” its revenue guidance as of September 19 because the Company
had only 2,500 drones in inventory.166 But Plaintiffs offer no reason to infer the
Board should have disregarded management’s November 1 Karma Production
Forecast stating the “Very early-Targeting” for Karma production was “80K in 4th
164
Compl. ¶ 103.
165
Citigroup, 964 A.2d at 130 (“[T]he mere fact that a company takes on business risk and
suffers losses” or that a board does not “properly evaluate business risk” “does not evidence
misconduct.”); Stone, 911 A.2d at 368 (same); Desimone v. Barrows, 924 A.2d 908, 935,
936 n.97 (Del. Ch. 2007) (“[T]o hold directors liable for a failure in monitoring, the
directors have to have acted with a state of mind consistent with a conscious decision to
breach their duty of care.”); Okla. Firefighters, 2017 WL 6452240, at *14, *20
(“[A]n ineffective response does not, without more, indicate bad faith.”).
166
Compl. ¶¶ 91, 93.
36
quarter”—a number of units within the range Plaintiffs allege GoPro needed to meet
its revenue guidance.167
Considering the presumption of directorial good faith, as well as the Board’s
statutory right to rely on management’s reports, the Karma Production Forecast
renders unreasonable any inference the Board knew GoPro was headed for a
significant revenue miss.168 Management told the Board the Company was capable
of producing 80,000 drones in the fourth quarter based on specific suppliers and
167
Compl. ¶¶ 91, 93, 111–12 (alleging the Company would need to sell “around 50,000–
75,000 units” to meet its revenue guidance); Svikhart Aff. Ex. 6 at GoPro220_000138.
While Plaintiffs’ Motion to Strike challenges Defendants’ reliance on certain documents,
the Karma Production Forecast is not among the challenged documents. See D.I. 18. I may
review documents cited in the Complaint “to ensure that the plaintiff has not
misrepresented [their] contents and that any inference the plaintiff seeks to have drawn is
a reasonable one.” Amalgamated Bank v. Yahoo! Inc., 132 A.3d 752, 797 (Del. Ch. 2016),
rev’d on other grounds, Tiger v. Boast Apparel, Inc., 2014 A.3d 933 (Del. 2019). Plaintiffs
argue I cannot weigh competing factual interpretations of incorporated documents on a
motion to dismiss. PAB at 34. That is true. But a plaintiff likewise “may not reference
certain documents outside the complaint and at the same time prevent the court from
considering those documents’ actual terms.” Winshall v. Viacom Int’l, Inc., 76 A.3d 808,
818 (Del. 2013). I am permitted to review incorporated documents “to ensure that the
plaintiff cannot seize on a document, take it out of context, and insist on an unreasonable
inference that the court could not draw if it considered related documents.” Id. at 798.
See also In re Clovis Oncology, Inc. Deriv. Litig., 2019 WL 4850188, at *14 n.216
(Del. Ch. Oct. 1, 2019) (noting that while “Section 220 documents, hand selected by the
company, cannot be offered to rewrite an otherwise well-pled complaint,” they can be
offered, and considered by the Court, to ensure the plaintiff is not taking documents out of
context). That is all I have done here. Plaintiffs make much of management’s slides
showing the Company had only 2,500 drones in its inventory as it entered Q4.
See Compl. ¶¶ 93, 109, 113. The Karma Production Forecast merely places that piece of
information in the full context of what management was telling the Board in real time.
168
Aronson, 473 A.2d at 812; 8 Del. C. § 141(e).
37
specific yield rates.169 The Director Defendants had a right to rely on this report and,
in turn, had a basis reasonably to conclude GoPro would overcome its inventory
shortage.170 The fact that GoPro’s Karma inventory was only 2,500 in the run-up to
the 2016 holiday season is, therefore, not a basis to infer bad faith.171
Finally, in their Answering Brief, Plaintiffs underscore a number of slides
discussing “risk” associated with Karma, specifically, (i) the May 3 slide stating
Karma’s “delays [were] adding risk”;172 (ii) the October 6 Board slide discussing a
169
Svikhart Aff. Ex. 6 at GoPro220_000138. Similarly, with the Karma Production
Forecast in hand, the Board could reasonably conclude Woodman’s September 19
representation that Karma would be “distributed . . . globally” was not a misrepresentation.
Compl. ¶ 91.
170
8 Del. C. § 141(e). While the California Court may have inferred the Bielousov
Defendants “knew that 2,500 drones would be insufficient,” the inquiry this Court must
undertake is different. See Bielousov v. GoPro, Inc., 2017 WL 3168522, at *6 (inferring
certain GoPro officers “knew that 2,500 drones would be insufficient”). First, as noted,
the Court may consider Section 220 documents (such as the Karma Production Forecast)
that have been incorporated by reference. The plaintiffs in the California Court “did not
have access to” the Section 220 materials made available to Plaintiffs here. Tr. at 33.
Second, the claims before the California Court pertained to the conduct of the Bielousov
Defendants (all of whom were GoPro officers). Here, the relevant inquiry is whether
Plaintiffs have well pled a majority of the Demand Board acted with scienter—a standard
that requires Plaintiffs to plead these defendants were “conscious” they were not fulfilling
their fiduciary duties. Desimone, 924 A.2d at 935.
171
Compl. ¶ 117. Plaintiffs argue “[p]rior [i]nventory [i]ssues” GoPro had with the HERO4
line of cameras in 2015 were “red flags” that the Board ignored in regards to the Company’s
Karma inventory. PAB at 41. Plaintiffs offer no reason why overproduction of an
unrelated product would or should have led the Board to question the Karma Production
Forecast.
172
Compl. ¶ 83.
38
total “Q4 revenue risk” of “$45–110M” of which “$20M–$85M” was attributed to
Karma;173 and (iii) the October 24 Audit Committee slide “looking ahead” to
“significant accounting and reporting items” for “Q4’16”—one of which was
“revenue recognition—Karma sales returns reserve.”174 I gather Plaintiffs present
these slides as factual support for an allegation the Board ignored red flags since
they reveal “it was almost certain” GoPro could not meet its revenue guidance.175
Nothing about these slides supports a reasonable inference the Board knew the
Company would miss its guidance or consciously disregarded risk. Rather, at best,
they show the Board was making a good faith effort to monitor GoPro’s business
risk as Karma production continued.
As GoPro warned its stockholders, every business involves risk.176
“The essence of the business judgment of . . . directors is deciding how the company
will evaluate the trade-off between risk and return.”177 Whether the Board properly
struck that balance in the exercise of its business judgment is irrelevant to Plaintiffs’
173
Compl. ¶ 97; Serra Aff. Ex. 8 at GoPro220_000121.
174
Compl. ¶ 108; Serra Aff. Ex. 12 at GoPro220_000197.
175
PAB at 10–11.
176
See February 8-K.
177
Citigroup, 964 A.2d at 126.
39
effort to excuse their failure to make a demand. In other words, Plaintiffs cannot
“equate a bad outcome with bad faith.”178
Plaintiffs Have Failed to Well Plead Demand Futility With Respect to
Counts I and IV
In Counts I and IV, Plaintiffs bring claims against the Officer Defendants and
Selling Defendants.179 While Plaintiffs concede the gravamen of their demand
futility allegations pertain to the Demand Board’s alleged liability stemming from
GoPro’s public statements, they make two last-ditch demand futility arguments
related to the Bielousov action and their Brophy claim.180 First, based on this court’s
rulings in In re Fitbit and Pfeiffer v. Toll, Plaintiffs argue that “not a single member
of the Demand Board could have considered a demand impartially because doing so
would have been tantamount to admitting liability in the then-pending Bielousov
178
Stone, 911 A.2d at 373. Plaintiffs ask for an inference the Board knew the Company
would miss its projections because “the difference between the $54 million in Karma’s
fourth quarter sales that GoPro had led the market to believe would be realized and the
$2.75 million that was actually attainable at the time [was] $51.25 million [which] falls in
the mid-range of the Karma risk profile that the Board internally acknowledged during the
October 6, 2016 Board update.” Compl. ¶ 113. This math shows the Board accurately
assessed risk (not certainty) associated with rolling out the Karma drone. As noted,
management told the Board on November 1, 2016, that the Company was going to be able
to produce enough units to meet inventory projections. This renders unreasonable the
allegation the Board knew GoPro was headed for a significant revenue miss.
179
Compl. ¶¶ 200–04, 221–28.
180
PAB at 43, 50.
40
Action.”181 Second, Plaintiffs argue demand is futile as to Count IV because
“pressing forward” with the Brophy claim would “compromise or undercut
[a majority of the Demand Board’s] defense for another claim.”182
Plaintiffs’ reliance on Fitbit and Pfeiffer is misplaced. Both cases held
demand was futile based on a companion federal securities action in which at least
a majority of the relevant demand board was named as a defendant.183 Here, only
one member of the Demand Board (Woodman) is named as a defendant in either the
Bielousov action or with respect to the Brophy claim sub judice.184 And, as noted,
Plaintiffs have not well pled any member of the Demand Board is beholden to
Woodman.185
181
PAB at 50 (citing Pfeiffer v. Toll, 989 A.2d 683, 689 (Del. Ch. 2010), rev’d on other
grounds, Kahn v. Kolberg Kravis Roberts & Co., L.P., 23 A.3d 831 (Del. 2011); In re
Fitbit, Inc. S’holder Deriv. Litig., 2018 WL 6587159, at *16 (Del. Ch. Dec. 14, 2018);
Guttman v. Huang, 823 A.2d 492, 502 (Del. Ch. May 5, 2008) (explaining that, under
certain circumstances, demand may be excused under Rales if a majority of a demand board
is “influenced by improper considerations” such as a “substantial likelihood of personal
liability” in related litigation) (quotations omitted).
182
PAB at 49.
183
See Pfeiffer, 989 A.2d at 690 (“All of the individual defendants . . . are named as
defendants in a companion federal securities action.”); In re Fitbit, 2018 WL 6587159,
at *11, *16 (Four of seven demand board members were defendants in a federal securities
class action.).
184
Compl. ¶¶ 30, 183, 189, 222.
185
Rojas v. Ellison, 2019 WL 3408812, at *14 (Del. Ch. July 29, 2019) (reaching the same
conclusion on similar facts); In re J.P. Morgan Chase & Co. S’holder Litig., 906 A.2d 808,
821–22 (Del. Ch. 2005) (stating that directors are neither interested nor beholden to an
41
Given Plaintiffs’ failure to plead a majority of the Demand Board faces a
substantial likelihood of personal liability, either with respect to the related securities
litigation or the Brophy claim pending here, neither can be deemed a basis to excuse
demand.186 As Plaintiffs have failed to plead particularized facts to support an
inference that the Demand Board cannot manage the Company’s litigation asset,
including its potential claims against the Officer Defendants and the Selling
Defendants for breach of fiduciary duty, these claims also must fail under Rule 23.1.
III. CONCLUSION
For the foregoing reasons, Defendants’ Motion must be GRANTED. The
Complaint is dismissed with prejudice.
IT IS SO ORDERED.
interested person if their “decision is based on the corporate merits of the subject before
the board rather than extraneous considerations or influences”).
186
Orman v. Cullman, 794 A.2d 5, 23 (Del. Ch. 2002) (Only a substantial likelihood of
liability would make it “improbable that the director could perform her fiduciary duties to
the shareholders.”) (internal quotation omitted).
42