ABRAHAM SHAFI and GENRIKH KHACHATRYAN, individually and derivatively, on behalf of GET TOGETHER INC., and KRUTAL DESAI, ELIJAH CHANCEY, INOU RIDDER, ALIA SHAFI, KUNAL LAKHAN-PAL, JACOB SHAFI, SHEHAB AMIN, and NOAH SHAFI, Plaintiffs, v. CHI-HUA CHIEN; SERENA DAYAL; MIKE MAPLES, JR.; SCOTT KAUFFMAN; GOODWATER CAPITAL, LLC; GOODWATER CAPITAL III, L.P.; SB INVESTMENT ADVISERS (US) INC. (aka SOFTBANK INVESTMENT ADVISERS); FLOODGATE FUND V, L.P., and GET TOGETHER INC., Defendants, and GET TOGETHER INC., Nominal Defendant.
C.A. No. 2023-1157-LWW
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
March 3, 2025
Date Submitted: November 15, 2024
Elena C. Norman, Daniel M. Kirshenbaum & Alex B. Haims, YOUNG CONAWAY STARGATT & TAYLOR LLP, Wilmington, Delaware; Alexander J. Willscher, SULLIVAN & CROMWELL LLP, New York, New York; Brendan P. Cullen, SULLIVAN & CROMWELL LLP, Palo Alto, California; Counsel for Defendants Serena Dayal and SB Investment Advisers (US) Inc. (aka SoftBank Investment Advisers)
Elena C. Norman, Daniel M. Kirshenbaum & Alex B. Haims, YOUNG CONAWAY STARGATT & TAYLOR LLP, Wilmington, Delaware; Benjamin Kleine, KLEINE PC, San Francisco, California; Counsel for Defendants Mike Maples, Jr. and Floodgate Fund V, L.P.
Matthew F. Fischer, Jacqueline A. Rogers & Eric J. Nascone, POTTER ANDERSON & CORROON LLP, Wilmington, Delaware; Anna Erickson White & Christin Hill, MORRISON & FOERSTER LLP, San Francisco, California; Counsel for Defendants Scott Kauffman and Get Together Inc.
A. Thompson Bayliss, E. Wade Houston & S. Michael Blochberger, ABRAMS & BAYLISS LLP, Wilmington, Delaware; Michael D. Celio, GIBSON, DUNN & CRUTCHER LLP, Palo Alto, California; Mark H. Mixon, Jr., GIBSON, DUNN & CRUTCHER LLP, New York, New York; Counsel for Defendants Chi-Hua Chien, Goodwater Capital, LLC, and Goodwater Capital III, L.P.
Will, Vice Chancellor
The company‘s investors were sold the promise of a thriving social media app. But rumors began to swirl that the social media platform was populated by bots with few active human users. The Securities and Exchange Commission launched an investigation into the matter.
The three venture capital-affiliated directors proceeded to remove the co-founder who served as CEO and installed an outsider to that role. That newly appointed CEO, acting as a voting proxy for the common stockholders, then voted to remove the co-founder from the board and elect himself to the vacancy. Days later, the directors voted to dissolve the company, citing a newly obtained consultant report that concluded the social media platform was overrun with bots. The dissolution allowed the preferred stockholders to access the company‘s remaining $40 million in cash—less than their total investments—through their liquidation preferences. The common stockholders received nothing.
According to the plaintiffs, the venture capital firms and their director designees panicked over the SEC investigation and feared reputational damage in Silicon Valley that would impair future investment prospects. To shield themselves, they blamed the co-founder and commissioned a sham report about bots on the platform as cover. By hastily dissolving IRL without regard to the common stockholders, they cut their losses and could focus on more profitable endeavors.
The defendants, however, insist that the co-founder sold them a bill of goods. They maintain that the social media platform was a hoax because its users were almost entirely bots. In their view, the co-founder was appropriately suspended for misconduct and removed from his CEO and board positions. They believe that shutting down the company promptly was the only responsible path for all investors.
At this stage, in resolving the defendants’ motion to dismiss, I cannot determine which story is accurate. Some of the plaintiffs’ theories rest only on aspersions about the startup and venture capital communities, which fall short of their pleading burden. But others are supported by well-pleaded facts, which I must accept as true, that bolster the plaintiffs’ tale.
Most of the plaintiffs’ claims survive. A few claims are non-viable, which I dismiss. Discovery will be necessary to determine the truth about Get Together‘s demise.
Unless otherwise noted, the following facts are drawn from the Verified Amended Complaint (the “Complaint“) and the documents it incorporates by reference.1
A. IRL‘s Founding and Funding
Get Together Inc. is a startup founded by Abraham Shafi, Krutal Desai, and Genrikh “Henry” Khachatryan in 2016.2 Shafi served as its CEO and Desai as its President.3 Get Together‘s founders had a vision of creating a new social media network that would help members form connections “in real life.”4 After raising seed funding in 2016, the founders began to build out a social media platform and app called In Real Life (or IRL).5
IRL raised $8 million in a 2018 Series A investment round and $16 million in a 2019 Series B round.6 These funding rounds were led by Goodwater Capital, a
In May 2021, IRL closed a Series C round, raising $170 million at a $1.17 billion post-money valuation.9 SB Investment Advisors (US) Inc., an affiliate of SoftBank Group, invested $150 million.10 SoftBank‘s investment was led by Serena Dayal, a Director at SB Investment Advisors.11
B. IRL‘s Board
IRL‘s Board of Directors has six seats. The company‘s Amended and Restated Certificate of Incorporation allocated three Board seats to directors elected by common stockholders, which included IRL‘s founders, employees, and earliest investors.12 The other three Board seats were allocated to directors elected by certain
After the Series C round, the Board had five members. The common stockholder directors were founders Shafi and Desai (each with 1.5 votes).15 An Amended and Restated Voting Agreement (the “Voting Agreement“) gave Goodwater, Floodgate, and SoftBank (together, the “VC Funds“) each the right to designate one director.16 Goodwater appointed Chien, Floodgate appointed Maples, and SoftBank appointed Dayal (together, the “VC Directors“).17
C. IRL‘s Progress
In September 2021, IRL reported ongoing user growth to its Board of approximately 3.8 million daily active users and 14 million monthly active users.18 This was an increase from the 3 million daily active users and 13 million active users
In December 2022, IRL launched a new meme-generating app called Memix.21 Memix allowed users to create and share memes on social media. It was ranked among the top free apps in the Apple App Store shortly after its launch.22
D. The SEC Investigation
In early 2022, certain IRL employees raised allegations that IRL‘s user base was “substantially inflated by bots.”23 That spring, tech-focused publication The Information reported that IRL employees had “expressed concern to managers about the usage figures the company ha[d] touted.”24 “[T]wo people with direct knowledge” conveyed that IRL “may have used an unconventional definition [of active users] to make the app appear bigger than it is.”25
Three months later, in August 2022, the Securities and Exchange Commission subpoenaed IRL for information about its user statistics.26 IRL hired outside counsel
In December 2022, after IRL retained Faegre, Cooley warned the VC Directors of their risk of exposure from the SEC‘s investigation.28 The VC Directors and their affiliated funds were concerned about the potential ramifications.29 But on January 27, 2023, Faegre provided its initial assessment that “concerns about a significant bot problem on IRL‘s platform were unfounded.”30 Faegre further investigated the bot allegations with the assistance of technology consulting firm Celerity and, in April, it concluded that the allegations were baseless.31
E. The Special Committee
On January 25, 2023, IRL‘s Board unanimously established a Special Committee to oversee IRL‘s response to the SEC investigation and examine the allegations about IRL‘s active user population.32 The Board appointed Chien, Dayal,
At this point, the SEC had not made any allegations of wrongdoing or misconduct. Its investigation was ongoing, and IRL was cooperating.35 Both Chien and Dayal were deposed by the SEC in April 2023.36
F. Shafi‘s Suspension
Two days after Chien‘s SEC deposition, the VC Directors met with Shafi.37 They told Shafi that unless he immediately resigned as IRL‘s CEO, he would be suspended and IRL would issue a press release describing his “pattern of misconduct” related to his use of an IRL credit card for personal expenses.38
When Shafi refused to resign, the Special Committee told him on April 28, 2023 that he was suspended as CEO.39 The Special Committee then appointed
The same day, The Information published an article with the headline “IRL‘s CEO Steps Down After Allegation of Inflated User Numbers.”42 It reported that Shafi “stepped down . . . following allegations that the company used bots to inflate the users it reported publicly and to investors, according to a person with direct knowledge.”43 Two days later, The Information published another article stating that “[a] special committee of messaging app IRL‘s board of directors suspended CEO Abraham Shafi . . . after receiving a report from outside counsel that outlined a pattern of misconduct by Shafi” according to “an IRL spokesperson.”44
G. IRL‘s Collapse
Between the end of April when Shafi was suspended and early May 2023, IRL‘s daily user population plummeted. IRL suffered a technical incident from April 26 to April 28 that did not affect user activity.45 But additional outages occurred between May 9 and 14, each taking the platform offline for several days
IRL employees grew disillusioned.49 Some felt that Kauffman was an ineffective leader.50 Although a plan to fix the platform and reengage users was developed by senior IRL employees, Kauffman refused to implement it.51 IRL‘s advertising spending suddenly ceased.52 Memix, too, was in limbo.53
H. Board Dissension
On June 1, 2023, Desai called an emergency Board meeting for June 8.54 He announced one agenda item: “the strategic direction of the company and the company‘s best interests in light of the recent decision by the Special Committee regarding Scott Kauffman as CEO and President.”55
I. The Keystone Report
By this point, the Special Committee had commissioned consulting firm Keystone Strategy to “analyze user activity on the IRL platform to confirm the presence of bot accounts.”59 Keystone‘s investigation report (the “Keystone Report“), dated June 22, 2023, stated that it had found extensive suspicious user behavior and clear signs of bot activity on the IRL platform.60
Keystone‘s work was allegedly rushed, contradictory, unreliable, and at odds with prior reported data.61 Keystone extracted IRL user data from an experimental database despite its understanding that a different database was the “source of truth
J. IRL‘s Dissolution
On June 12, 2023, Chien called a special meeting of the Board for June 20 “to discuss the conclusion of the Special Committee‘s investigation.”64 Three days later, on June 15, the VC Directors formed an entity called IRL LIQUIDATION, LLC.65 They had allegedly decided that it was best for their affiliated funds to shut IRL down.66
During the June 20 Board meeting, the Special Committee disclosed Keystone‘s findings to Shafi and Desai, who had been unaware of Keystone‘s retention.67 The Special Committee reported that Keystone had concluded 95% of the users on IRL‘s platform since mid-2022 were bots.68
Desai expressed his confusion over the conflicting information about bots provided by Faegre and Keystone, which he felt the Special Committee needed to address.72 Desai also asked whether the Special Committee had “an estimation of the potential net proceeds from a sale of the company, as referenced in the proposed resolution.”73 Shafi objected to the conclusions in the Keystone Report and to the timing of the dissolution vote.74
The same day, the Special Committee‘s counsel emailed IRL‘s co-founders (Desai, Shafi, and Khachatryan) and one other common stockholder to request that they sign a unanimous written consent removing Shafi from the Board and electing Kauffman in his place.75 The email requested that the consent be executed and
The newly-reconstituted IRL Board—consisting of the three VC Directors, Desai, and Kauffman—met on June 23, shortly after Kauffman had signed the consent.79 At the meeting, the VC Directors told Desai that they “had to shut down and dissolve the Company right away.”80 Their reasoning was that “they had heard that [] Shafi was going to talk to the press, and they had to beat him to the punch.”81
The Board (including Desai) then proceeded to vote unanimously to dissolve IRL.82 IRL had approximately $40 million in cash at the time, which would be distributed to investors.83
The story made headlines in various publications. For example, on June 23, The Information announced that IRL was shutting down and cited IRL‘s statement that the platform was overrun with bots.86 The article also suggested that Shafi might be linked to the problem, mentioning that the closure came two months after his suspension for “alleged misconduct.”87 Other news outlets took a similar spin.88
K. The California Action
On July 31, 2023, SoftBank—IRL‘s largest investor—sued Shafi and members of his family in federal district court in California (the “California Action“).89 SoftBank alleged that Shafi defrauded IRL‘s investors to enrich himself
On May 2, 2024, the federal court denied Shafi‘s motion to dismiss in part—including as to SoftBank‘s claims for fraud—and granted the motion in part with leave to amend.92 Claims against the other defendants were dismissed with leave to amend.93
SoftBank filed an amended complaint in the California Action on June 3, 2024.94 The California defendants again moved for dismissal.95 Their motion to dismiss the amended complaint was recently granted in part and denied in part.96
On November 15, 2023, Shafi and co-founder Khachatryan filed direct claims and derivative claims on behalf of IRL in this court.97 They named as defendants Goodwater, SoftBank, Floodgate, Chien, Dayal, Maples, and Kauffman. After the defendants moved to dismiss or stay the case, an amended complaint (the operative “Complaint“) was filed.98 In addition to Shafi and Khachatryan, co-founder Desai joined as a plaintiff, along with seven holders of IRL stock options. IRL was added as a defendant.
The Complaint asserts four derivative and four direct claims:
- Count I is a breach of fiduciary duty claim brought by Shafi and Khachatryan derivatively on behalf of IRL against the VC Directors for removing Shafi, installing Kauffman, and shutting down IRL;99
- Count II is a breach of fiduciary duty claim brought by Shafi, Desai, and Khachatryan against the VC Directors for violating IRL‘s bylaws by appointing Kauffman CEO;100
- Count III is a breach of fiduciary duty claim brought by Shafi and Khachatryan derivatively on behalf of IRL against Kauffman for damaging IRL‘s business;101
Count IV is a claim for breach of IRL‘s Voting Agreement brought by Shafi, Desai, and Khachatryan against IRL for Kauffman‘s vote as a proxy for common stockholders;102 - Count V is a claim for vicarious liability and respondeat superior brought by Shafi and Khachatryan derivatively on behalf of IRL against the VC Firms;103
- Count VI is a claim for tortious interference with prospective economic advantage brought by all ten plaintiffs against all defendants for impairing the value of stock options;104 and
- Count VII and VIII are claims for defamation and false light invasion of privacy brought by Shafi against the VC Directors and Kauffman for making false statements about Shafi‘s “pattern of misconduct.”105
On May 24, 2024, the defendants moved to dismiss the Complaint or stay it in deference to the resolution of the California Action.106 The plaintiffs filed an answering brief in opposition to the motion on July 10, and the defendants filed a reply brief on August 9.107 Oral argument was presented on November 15.108
II. ANALYSIS
The arguments in the defendants’ motion fall into three categories. First, they argue that the derivative claims (Counts I, III, and V) must be dismissed for failure to plead demand futility. Second, they argue that the plaintiffs have failed to state any direct claims (Counts II, IV, and VI) on which relief can be granted. And third, they argue in the alternative that this action should be stayed in deference to the California Action.
On the direct claims, I conclude that two survive and one fails. The claims for breach of fiduciary duty for bylaw violations (Count II) and for breach of the Voting Agreement (Count IV) state viable claims. The tortious interference claim (Count VI) does not and is dismissed.
Finally, I decline to stay this action in deference to the California Action.
A. Derivative Claims and Demand Futility
“[T]he decision whether to initiate or pursue a lawsuit on behalf of the corporation is generally within the power and responsibility of the board of directors.”112 A stockholder may pursue claims on a corporation‘s behalf only “if (1) the corporation‘s directors wrongfully refused a demand to authorize the corporation to bring the suit or (2) a demand would have been futile because the directors were incapable of impartially considering the demand.”113 The plaintiffs here invoke the latter approach.
To assess demand futility, this court applies the “universal” three-part test established in United Food & Commercial Workers Union v. Zuckerberg.116 The court asks, on a director-by-director and claim-by-claim basis:
- whether the director received a material personal benefit from the alleged misconduct that is the subject of the litigation demand;
- whether the director faces a substantial likelihood of liability on any of the claims that would be the subject of the litigation demand; and
- whether the director lacks independence from someone who received a material personal benefit from the alleged misconduct that would be the subject of the litigation demand or who would
face a substantial likelihood of liability on any of the claims that are the subject of the litigation demand.117
If “the answer to any of the questions is ‘yes’ for at least half of the members of the demand board, then demand is excused as futile.”118
When this action was filed, IRL‘s Board had five members: Desai, Maples, Chien, Dayal, and Kauffman. Kauffman and Desai each had 1.5 Board votes; Maples, Dayal, and Chien each had one vote. The plaintiffs do not claim that Desai was incapable of impartially considering a demand. They focus on the other four Board members.
The plaintiffs raise various arguments about the partiality of these directors. They say that the VC Directors received material personal benefits from the alleged misconduct; that the VC Directors lacked independence from their affiliated VC Funds, which received material personal benefits from the alleged misconduct; and that the VC Directors and Kauffman each face a substantial likelihood of liability for the derivative claims in the Complaint.119 Although the plaintiffs organize their arguments by the Zuckerberg prongs, there is significant overlap. For example, the misconduct allegedly provided material benefits to both the directors and the funds from which they lack independence, while causing harm to the company and
I conclude that demand futility has been established for Count I. The plaintiffs adequately plead that the VC Directors put their interests, and those of the VC Funds, ahead of common stockholders.
Demand is also futile on Count III. The plaintiffs’ allegations about Kauffman either overlap with Count I such that the VC Directors could not impartially consider a demand or are sufficient to impugn Kauffman‘s decision-making.
Count V is a different matter. It rests on a flawed legal theory.120 It is therefore dismissed.
1. Breach of Fiduciary Duty Against the VC Directors
The plaintiffs contend that the VC Directors each “put their own personal and financial interests“—and those of the VC Funds—“ahead of those of the Company and its stockholders.”121 The VC Directors allegedly did so in a variety of ways—from appointing Kauffman to blaming Shafi for IRL‘s failings and commissioning the Keystone Report. According to the Complaint, these actions were sequenced
According to the plaintiffs, as partners in their firms (Goodwater and Floodgate), Chien and Maples “received personal benefits whenever the funds did.”124 And Dayal, as a Director of SB Investment Advisors, was “beholden to SoftBank” for her pay and employment.125 The VC Directors were thus dual fiduciaries, owing duties to their respective funds, on one hand, and to IRL and its stockholders, on the other hand.126
But dual fiduciary status alone is insufficient to demonstrate that a director lacks independence for demand futility purposes. A “potential conflict of interest” cannot rebut the presumption of impartiality, which applies with equal force to
The plaintiffs cite to several benefits that they believe created actual conflicts that motivated the VC Directors to breach their fiduciary duties and shutter IRL. First, they say that the VC Directors decided to “cut bait” on IRL so that the VC Funds could redirect their resources toward more profitable ventures.129 Second, they assert that the VC Directors managed to protect their valuable reputations amid the SEC investigation.130 And third, they argue that the VC Directors funneled IRL‘s remaining cash to the VC Funds, which had liquidation preferences as preferred stockholders.
The first two purported benefits are insufficient to establish demand futility. They hinge on broad assumptions about the venture capital industry rather than particularized allegations. But the third benefit supports an inference that, based on the facts alleged in the Complaint, the VC Directors face a substantial likelihood of
a. Unicorn Hunting
The plaintiffs claim that the VC Directors’ dual fiduciary statuses drove them to cut the VC Funds’ losses on a failed investment. “Quickly shuttering IRL” allegedly benefitted the VC Funds because they could “stop investing time and resources into a company they had determined was no longer likely to give them quick and gigantic returns.”131 Although this assertion is in tension with the notion that IRL was on the verge of breakout success, the plaintiffs maintain that the VC Funds were following a standard venture capital playbook.132 The Complaint observes that the venture capital business model “incentivize[s]” firms “to liquidate even profitable ventures that fall short of their desired returns, particularly when those ventures would require extended investments of time and resources that could be devoted to more promising ventures.”133 Simply put, the plaintiffs say that the VC Funds had decided IRL was not a “unicorn” and decided to move on.134
There are no particularized allegations supporting this contention. Quite the opposite. It is based on sweeping generalizations about the venture capital industry, supported only by case law making similar observations.135 For example, the plaintiffs assert that venture capital firms “operate under a business model that causes them to seek outsized returns from a small subset of the investments they make, while expecting many of their investments to fail or generate insignificant returns.”136 It may be that some—even many—venture capital firms take this approach. But this court cannot fairly infer a party‘s company-specific motives based on industry-wide stereotypes. “Generalities, artistically ambiguous, all-encompassing conclusory allegations are not enough” to satisfy
b. Saving Face
The plaintiffs next contend that the VC Directors benefitted from their scheme to shut down IRL and blame Shafi for its failings because they kept their “reputations intact” and free of public scrutiny.138 But Delaware courts reject the idea that directors act improperly “for the purpose of avoiding speculative reputational risk.”139 The reasoning for doing so is logical: it would be unreasonable to infer that a person strove to protect her reputation by engaging in the sort of misconduct that could destroy it.140
The plaintiffs, however, say that this case is different. They maintain that the VC Directors sought to preserve their professional reputations at a “critical
Because of these purported features of the startup and venture capital communities, the plaintiffs believe that I should look askance at the VC Directors’ actions.144 To do so would upend the business judgment rule. This court will not reflexively view directors’ conduct with suspicion based upon broad aspersions
c. Preferential Treatment
Finally, the plaintiffs allege that the VC Directors were conflicted because they put the interests of the VC Funds as preferred stockholders ahead of IRL and its common stockholders by impairing and then dissolving the company.147 The VC Funds were preferred stockholders of IRL with liquidation preferences that entitled them to recoup their investments plus an 8% annual dividend amount.148 They stood to gain some return on their investments through distributions of IRL‘s $40 million in cash.149 By comparison, common stockholders like the plaintiffs gained nothing.
Delaware courts have observed that directors’ fiduciary obligations charge them with pursuing “the best interests of the corporation and its common stockholders, if that can be done faithfully with the contractual promises owed to the
Here, the plaintiffs contend that the interests of common and preferred stockholders were misaligned on whether IRL should be liquidated.153 The Complaint details that IRL was posed for success and growth. IRL had raised capital
If this were true, IRL‘s common stockholders might have favored the use of IRL‘s $40 million to revive IRL, monetize Memix, and foster the company‘s potential value.157 But by taking discretionary steps to dissolve the company, the VC Directors ensured that IRL‘s social media assets and corresponding financial prospects were lost. Common stockholders were left empty handed, while preferred stockholders would recover something through their liquidation preferences—albeit a portion of their total investments.
Yet, the dissolution of IRL was not necessarily a breach of fiduciary duty. The defendants paint a very different narrative. They describe IRL as a failure that
There is a reasonable inference to be drawn that the VC Directors concluded dissolving IRL was the best way to maximize the value of the firm. If the defendants are right that IRL‘s business was based on lies about active users on a platform overrun with bots, the common stockholders’ prospects were moribund. As Chancellor Chandler aptly observed in Trados I, it is not “necessarily [] a breach of fiduciary duty for a board to approve a transaction that, as a result of liquidation preferences, does not provide any consideration to the common stockholders.”161 It would unreasonable to punish directors who take an approach that they believe, in good faith, is certain to maximize the value of the corporation simply because a riskier decision could potentially yield some value for common stockholders in the
At this stage, however, I must accept as true the plaintiffs’ allegations that IRL was posed for success. I must overlook the defendant-friendly inference that the VC Directors made a wise business decision that maximized firm value. Instead, I must draw the plaintiff-friendly inference that the VC Directors gave no consideration to their obligations to common stockholders and focused only on the preferred stockholders’ interests.
This plaintiff-friendly inference is supported by particularized facts suggesting that the VC Directors were indifferent to the interests of common
Accordingly, demand is not futile on Count I as to any of the VC Directors.168
2. Breach of Fiduciary Duty Against Kauffman
The plaintiffs allege that Kauffman (as acting CEO and a director of IRL) breached his duty of loyalty by “elevat[ing] the interests of the VC Directors over the interests of the Company and its stockholders.”169 It is not immediately evident why Kauffman would do so. The Complaint states that Kauffman was a “longtime loyal ally” of Chien.170 It also suggests that Kauffman was “beholden” to the VC Directors because he depends on “other funds like theirs for employment.”171 Neither of these conclusory statements are adequate under
Nevertheless, I conclude that demand on this claim is futile. Kauffman‘s alleged misconduct was part and parcel of the VC Directors’ “scheme” to shut down IRL.172 The plaintiffs allege that “Kauffman‘s actions proximately caused the
As discussed above, the same deeds support a finding of demand futility against the VC Directors.175 The VC Directors, as three members of the five-person Board (with three of six Board votes), could not impartially consider a claim about the same issues on which they face liability themselves.176 Nor could Kauffman, who likewise purportedly failed to consider IRL‘s stockholders as a whole (including its common stockholders) when he set out to “preserve whatever investor capital he could—for the VC investors.”177
In addition, the Complaint sets out specific facts to support a reasonable inference that Kauffman faces a substantial likelihood of breaching his duty of care to IRL and its stockholders. As an officer of IRL, Kauffman would not be exculpated for a duty of care violation. The plaintiffs allege that he displayed a reckless disregard for IRL‘s business and employees.182 For instance, after significant
Demand is therefore futile on Count III as to the VC Directors and Kauffman.
3. Vicarious Liability Against the VC Funds
The plaintiffs attempt to extend vicarious liability to the VC Funds for actions taken by the VC Directors that were a “proximate cause of IRL‘s injuries.”184 Specifically, they seek to hold SoftBank accountable for Dayal‘s actions, Goodwater accountable for Chien‘s actions, and Floodgate accountable for Maples’ actions. The plaintiffs cite to agency principles, alleging that VC Directors’ actions were within the scope of their employment by and for the benefit of the VC Funds.185
This claim fails as a matter of law.
The plaintiffs here ask that I interpret Khanna narrowly as standing only for the proposition that “a stockholder‘s mere appointment or nomination of an independent director cannot alone form the basis for respondeat superior liability.”189 To bolster this argument, they rely on cases in the aiding and abetting
The plaintiffs have not brought an aiding and abetting claim against the VC Funds. They have not pleaded knowing participation by the VC Funds, which requires a showing of “active participation” in the misconduct.192 It would be inconsistent with Delaware law to permit the plaintiffs to bypass this deficiency and extend liability to the non-fiduciary VC Funds using the doctrine of respondeat superior.193
B. Direct Claims
The defendants also seek dismissal of the Complaint under
(i) all well-pleaded factual allegations are accepted as true; (ii) even vague allegations are “well-pleaded” if they give the opposing party notice of the claim; (iii) the Court must draw all reasonable inferences in favor of the non-moving party; and [(iv)] dismissal is inappropriate unless the “plaintiff would not be entitled to recover under any reasonably conceivable set of circumstances susceptible of proof.”195
The court will neither “blindly accept conclusory allegations unsupported by specific facts” nor “draw unreasonable inferences in the plaintiffs’ favor.”196 It will accept “only those reasonable inferences that logically flow from the face of the complaint and is not required to accept every strained interpretation of the allegations proposed by the plaintiff.”197
Count II is a direct claim for breach of fiduciary duty against the VC Directors for violating IRL‘s corporate bylaws.198 The plaintiffs allege that the VC Directors—acting as members of the Special Committee—intentionally violated IRL‘s bylaws in two ways. First, they failed to appoint Desai (IRL‘s President) the CEO after Shafi‘s suspension for placing personal expenses on a company credit card.199 And second, they appointed Kauffman as CEO.200
IRL‘s bylaws permit the Board to fill vacant officer positions. Section 29(a) of the bylaws states:
Any officer elected or appointed by the Board of Directors may be removed at any time by the Board of Directors. If the office of any officer becomes vacant for any reason, the vacancy may be filled by the Board of Directors, or by the Chief Executive
Officer or other officer if so authorized by the Board of Directors.201
If the CEO position is vacant, the bylaws contemplate that the President “will be” the CEO. Section 29(c) of the bylaws states:
If the office of Chief Executive Officer is vacant, the President will be the chief executive officer of the corporation (including for purposes of any reference to Chief Executive Officer in these Bylaws) and will, subject to the control of the Board of Directors, have general supervision, direction and control of the business and officers of the corporation.202
Despite being President, Desai did not ascend to the CEO position after Shafi‘s suspension. The plaintiffs assert that this violated Section 29(c) of the bylaws. Rather than allow Desai to step into the CEO role, the Special Committee—not the full Board—appointed Kauffman. The plaintiffs assert that this violated Section 29(a) of the bylaws.203 Because these bylaw violations were allegedly part of the VC Directors’ plan to take over and shut down IRL, the plaintiffs claim that their actions breached the directors’ duties of loyalty.204
In arguing otherwise, the defendants contend that the Special Committee was vested with broad authority.207 They point out that Section 29(a) of the bylaws permits the Board to delegate its appointment powers to any “other officer so authorized by the Board of Directors.”208 They further cite to the Special Committee‘s authorizing resolutions, which grant it “all the powers of the Board necessary to carry out its purpose and responsibilities with respect to its review, investigation, and resolution of the Allegations” raised in the SEC investigation.209
There are two problems with this argument. First, the bylaws contemplate delegation to an “officer“—not a Board committee. Second, the Special Committee‘s authorizing resolutions do not clearly delegate to it the Board‘s
review, investigate, resolve, and decide what action, if any, the Company should take in response to, in any manner that the Special Committee deems appropriate or necessary in the exercise of its unfettered discretion, the Allegations, as well as any related facts, allegations, circumstances, or issues that may be brought to the Special Committee‘s attention as a result of its review.210
“Allegations” is a defined term that refers to any “allegations of wrongdoing against the Company or the Company‘s management” made by the SEC.211
It may be that the Special Committee learned about Shafi‘s purported credit card misuse during its investigation into the subjects of the SEC inquiry. If the defendants’ reading of the resolutions is correct, perhaps the Special Committee had the power to suspend Shafi. But to dismiss Count II on that basis would require me to accept facts and inferences presented by the defendants, in contravention of the operative standard. I cannot say, as a matter of law, that the Special Committee had the authority to appoint a new CEO given the terms of Section 29(a) of the bylaws. The motion to dismiss is therefore denied as to Count II.
Count IV seeks to impose liability on IRL for breaching the Voting Agreement.212 This is a breach of contract claim.213 “Under Delaware law, the elements of a breach of contract claim are: 1) a contractual obligation; 2) a breach of that obligation by the defendant; and 3) a resulting damage to the plaintiff.”214
Section 4.2 of the Voting Agreement, which is among the Company and certain of its investors, confers proxy voting on the “President and Treasurer of the Company.”215 The provision provides, in relevant part:
Each party to this Agreement hereby constitutes and appoints as the proxies of the party and hereby grants a power of attorney to the President and Treasurer of the Company, . . . with full power of substitution, with respect to the matters set forth herein, including without limitation, election of persons as members of the Board in accordance with Section 1 hereto . . . and hereby authorizes each of them to represent and to vote, if and only if the party (i) fails to vote or (ii) attempts to vote (whether by proxy, in person or by written consent), in a manner which is inconsistent with the terms of this Agreement, all of such party‘s
Shares in favor of the election of persons as members of the Board.216
The plaintiffs assert that the Company, through Kauffman, violated the Voting Agreement when Kauffman purported to vote Shafi‘s, Desai‘s, and Khachatryan‘s shares to remove Shafi from the Board and appoint himself in Shafi‘s place.217 They assert that this constituted a breach of Section 4.2 of the Voting Agreement for two reasons. First, Kauffman “was not properly appointed President of IRL” and lacked the authority to vote the shares.218 Second, Shafi, Desai, and Khachatryan had not “failed to vote” but only failed to meet the “arbitrary deadline” of 24 hours after notice of the request to vote.219
The defendants argue that Kauffman had validly been appointed President of IRL by the Special Committee.220 Again, the defendants say that the Special Committee had “broad authority” to make the appointment.221 This argument is not dispositive for the reasons explained above.222 Without resolving whether the
That alone is grounds to deny the motion to dismiss on Count IV. I need not address whether the failure to sign a written consent within 24 hours (when a Board meeting was scheduled for the day after the request was made) constitutes a “failure to vote” under Section 4.2 of the Voting Agreement.
3. Tortious Interference
Count VI is a claim for tortious interference with prospective economic advantage.224 The plaintiffs allege that the defendants’ misconduct “destroyed the value of stock options [they] held in IRL,” which the plaintiffs “intended to exercise or sell.”225 To prevail, the plaintiffs must demonstrate the existence of “(a) the reasonable probability of a business opportunity, (b) the intentional interference by [the] defendant with that opportunity, (c) proximate causation, and (d) damages.”226
To show a reasonable probability of a business opportunity, the plaintiffs must sufficiently plead “an actionable expectancy.”227 Delaware courts have held that
The plaintiffs have put forward more than a vague hope that their options had the potential for profit. According to the Complaint, many of the plaintiffs’ options were issued before the Series C round and had a strike price of $0.32 per share.231 They were allegedly “in the money” at the time of the Series C transaction in 2021 and after, when IRL had a valuation exceeding that amount.232 Series C investors purchased IRL stock in May 2021 at a price of $22.63 per share.233 As of 2022, a 409A valuation assessed IRL‘s common stock at $4.50 per share.234
But the plaintiffs make no attempt to plead that they intended to exercise their stock options. Demonstrating a bona fide expectancy involves the identification of “a specific party who was prepared to enter into a business relationship but was
The plaintiffs also have not met the “intentional interference” element. They neglect to allege that the defendants even knew about their stock options or of any intention the plaintiffs had to sell them.238 The plaintiffs argue in their answering brief that the “[d]efendants were on the Board and must have known that the stock options existed.”239 This assertion does not appear in the Complaint. Even if it did, the plaintiffs do not explain how the defendants would have known about any third
Count VI is dismissed for failure to plead the elements of a tortious interference with prospective economic advantage claim.
C. The Motion to Stay
If the Complaint is not dismissed, the defendants ask, in the alternative, that I stay the case pending resolution of the California Action.241 I decline to grant a stay.
The framework guiding a Delaware court‘s discretion to grant or deny a motion to stay is outlined in McWane Cast Iron Pipe Corp. v. McDowell-Wellman Engineering Co.242 “Under the McWane doctrine, the court‘s discretion to grant a stay should be freely exercised where ‘there is a prior action pending elsewhere, in a court capable of doing prompt and complete justice, involving the same parties and the same issues.‘”243 The court is guided by “considerations of comity and the necessities of an orderly and efficient administration of justice.”244
The California Action involves claims of federal securities fraud and conspiracy, unjust enrichment, and aiding and abetting under California law.245 The claims here, by contrast, are brought under Delaware law and involve alleged breaches of fiduciary duty. There is some factual overlap insofar as both courts may need to resolve whether IRL predominantly hosted bots or authentic human users.246 This overlapping issue of fact may bear on the defendants’ affirmative defenses and the plaintiffs’ access to equitable relief. But there are different time periods at play. The California Action is concerned with whether affirmative misrepresentations about IRL‘s active users were made to SoftBank when it invested in 2021. This case centers on whether the platform had millions of active human users when the Keystone Report was issued and IRL was shut down in 2023.
The parties are also dissimilar. Of the twenty parties involved in this action, only four are named in the California Action.247 None of the defendants here are parties to the California Action. The plaintiff in that action is a different SoftBank
The California court therefore cannot do “prompt and complete justice” that extends to the parties here. The presence of bots at the time of the Series C round will have little bearing on the resolution of the claims before me. As such, I hardly see a risk of conflicting rulings. I decline to stay this case while litigation among completely different parties involving a different timeframe and separate legal theories proceeds in California.
The motion to stay is therefore denied.
III. CONCLUSION
The motion to dismiss the derivative claims under Rule 23.1 is denied, except that Count V fails as a matter of law and is dismissed. The motion to dismiss the direct claims under Rule 12(b)(6) is granted in part insofar as Count VI is dismissed, and otherwise denied. The motion to stay is also denied.
The parties are asked to meet and confer on a schedule to govern this action, and to file a proposed scheduling order within 30 days.