This post was prepared by Frank Reynolds, who has been following Delaware corporate law, and writing about it for various legal publications, for over 30 years.
The Delaware Court of Chancery recently grounded a GoPro Inc. investor suit over the troubled launch of the Karma camera drone for failure to show the directors faced liability for allegedly concealing product development and revenue problems that they knew would cause a major stock price drop in the matter styled In Re GoPro, Inc. Stockholder Derivative Litigation, No. 2018-0784-JRS, memorandum opinion issued (Del. Ch. April 28, 2020).
The Court’s April 28 memorandum opinion dismissed a consolidated breach-of-duty action because it failed to clear the pre-suit demand threshold hurdle by casting sufficient doubt that the directors could fairly review the charges either because of their action or inaction regarding the disastrous 2016 launch.
Not obliged to doubt
He found that the board, which got persistently optimistic development projections in the face of repeated setbacks, “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 management.”
The directors were not conflicted by a related federal securities suit over disclosures because they faced no liability in that action, and they were not beholden to CEO/founder Nicholas Woodman just because his 76% control of GoPro’s stock enabled him to remove them “at will,” the Vice Chancellor said.
According to the opinion, GoPro, a Delaware-chartered motion camera and software developer based in California announced early in 2016 that it would produce a drone to house the latest version of its HERO camera series; but it repeatedly delayed the launch due to production ramp-up issues, inventory shortages, abnormally high product returns and ultimately, a recall of the drone.
However, management’s revenue guidance remained unchanged during that period and the board eventually revised its estimate down from $1.5-$1.3 billion to $1.25-to $1.3 billion, but the company only generated $1.185 billion which resulted in a 12% stock price decline.
The securities action
That triggered a consolidated shareholder securities action in federal court in California claiming GoPro officers and directors hid an expected revenue shortfall through false and incomplete disclosures under Sections 10(b) and 20(a) of the Securities Exchange Act. Bielousov v. GoPro Inc., 2017 WL 3168522 preliminary settlement approved (N.D. Cal. Oct. 30, 2017).
Attorneys for those plaintiffs announced a tentative $6.75 million settlement in October 2017.
The derivative action
The Court of Chancery consolidated suit charged breach-of-duty, disclosure violations and insider trading on non-public information by some directors who exploited their non-public company information as first addressed in Brophy v. Cities Service Co., 70 A.2d 5 (Del. Ch. 1949).
By November, the full release of the Karma drone and Hero camera had been pushed back to December 2016 but even that promise was compromised by battery defects and supply chain problems in the first 2,500 drones that lowered GoPro’s 2016 revenues to $1.185 billion. Eventually the company issued a recall of the drones.
In May 2019, GoPro asked the Court to dismiss the combined Chancery suit for failure to first either seek board review of the charges or to show why the directors were too conflicted to do so.
Arguments for excusal
The Delaware plaintiffs argued that:
(1) a majority of the defendants faced a substantial likelihood of personal liability for allowing and failing to correct false statements,
(2) a majority of the board is beholden to Woodman,
(3) the directors would be conflicted about any suit against the Brophy defendants and
(4) the Bielousov action renders a majority of the directors interested.
The problem with those four arguments, the vice chancellor said, is that the plaintiffs lack sufficient factual particularity to support their false statement assertions “either as an affirmative choice to mislead stockholders or as a matter of poor oversight.”
There is ambiguity as to which type of claim they want to pursue, but whether they claim an intentional misrepresentation or a failure to supervise, the suit fails because of the deference of the business judgment rule and the protection of the exculpatory clause in the GoPro charter, the vice chancellor said.
That clause, authorized under 8 Del. C. § 102(b)(7), bars money liability for directors for any ordinary breach of the duty of care, and cannot be overcome without proof that the directors face a threat of liability, such as for a breach of the duty of loyalty; but only one member of the GoPro board – Woodman – is alleged to have personally made a false statement, the opinion says.
Even if the other directors acquiesced to Woodman’s alleged falsehood, that is not enough to support a claim of affirmative board misconduct, and it is well-settled that a controlling shareholder’s power to remove directors does not mean they lack independence from him, the Court wrote.
“Although plaintiffs throw everything against the wall, nothing sticks,” he said in granting the motion to dismiss. “While Plaintiffs urge the Court to infer scienter, the complaint pleads no facts that would allow a reasonable inference a majority of the board knew GoPro was misleading investors with any of its public statements during 2016.”