Shafi v. Chien
C.A. No. 2023-1157-LWW
Del. Ch.Mar 3, 2025Background
- Get Together, Inc. (IRL), a social media startup, was founded in 2016 and received several rounds of venture capital (VC) investment from Goodwater Capital, Floodgate Fund, and SoftBank.
- The VC firms gained control over half of the six-member board following significant investments in IRL.
- Allegations arose in early 2022 that IRL’s user numbers were inflated by bots; an SEC investigation followed.
- The VC-affiliated directors removed the founder-CEO (Shafi), installed an external CEO (Kauffman), and ultimately dissolved IRL, distributing $40 million in cash to preferred (VC) stockholders, leaving common stockholders with nothing.
- Plaintiffs (founders and common stockholders) brought both derivative and direct claims in Delaware court, alleging breach of fiduciary duty, bylaw and contract violations, and other torts, challenging both the process and substance of Shafi’s removal and IRL’s dissolution.
- The court resolved a motion to dismiss, holding that most claims survived, except for vicarious liability against the VC funds and tortious interference, and denied defendants’ motion to stay pending parallel California litigation.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Demand futility on derivative fiduciary claims | VC directors and Kauffman face liability for favoring preferred over common | No actual conflicts; actions justified; only potential conflicts alleged | Demand excused; facts pled show actual conflict in preferring VC over common |
| Breach of fiduciary duty (bylaw violations) | Board/committee violated bylaws by bypassing proper succession in management | Special Committee authorized to act broadly, including appointing CEO | Claim survives; insufficient showing Special Committee was properly delegated |
| Vicarious liability/respondeat superior | VC funds should be liable for actions of their board designees | Delaware law does not extend such liability to non-fiduciary investors | Dismissed; no respondeat superior liability for VC funds under Delaware law |
| Breach of Voting Agreement (proxy voting) | Kauffman’s proxy voting to remove Shafi was unauthorized and invalid | Kauffman's appointment and actions were proper under company agreements | Claim survives; factual disputes prevent dismissal on pleadings |
| Tortious interference with econ. advantage | Destruction of value in stock options constituted actionable interference | No actionable expectancy or intentional interference alleged | Dismissed; no specific third-party expectancy or intentional interference pled |
| Motion to stay Delaware case | N/A | Parallel action in California should take precedence | Denied; different parties/issues and no risk of inconsistent outcomes |
Key Cases Cited
- In re Citigroup Inc. S’holder Deriv. Litig., 964 A.2d 106 (Del. Ch. 2009) (describes demand futility in derivative actions)
- United Food & Commercial Workers Union v. Zuckerberg, 262 A.3d 1034 (Del. 2021) (establishes test for demand futility)
- Firemen’s Ret. Sys. of St. Louis o/b/o Marriott Int’l, Inc. v. Sorenson, 2021 WL 4593777 (Del. Ch. 2021) (restates standard for stockholder derivative suits)
- Brehm v. Eisner, 746 A.2d 244 (Del. 2000) (pleading standards for derivative actions; business judgment rule)
- LC Cap. Master Fund, Ltd. v. James, 990 A.2d 435 (Del. Ch. 2010) (directors' duties to common v. preferred stockholders)
- In re Trados Inc. S’holder Litig., 73 A.3d 17 (Del. Ch. 2013) (duties of directors in favoring preferred stockholders; duty of loyalty)
- Khanna v. McMinn, 2006 WL 1388744 (Del. Ch. 2006) (limits on respondeat superior liability for venture backers)