Benchmark Sues Travis Kalanick For Fraud, Breach Of Contract And “Gross Mismanagement”

The life of embattaled Uber ex-CEO just went from bad to worse, when on Thursday afternoon venture capital firm Benchmark Capital, one of the early investors in Uber – perhaps sensing that instead of an IPO, Uber’s next valuation will be a 40% down round – just sued Kalanick for fraud, breaches of fiduciary duty, and breaches of contractual obligations in Delaware Chancery Court. If the lawsuit is successful, it is likely that the now former CEO will also be kicked off the board of the company that he launched.

Some of the choice highlights from the lawsuit which will attract another round of media attention to the company which has had more than its fair share of public debacles so far this year:

Plaintiff Benchmark brings this action to redress the fraud, breaches of fiduciary duty, and breaches of contractual obligations perpetrated by Kalanick, the former CEO of Uber, to entrench himself on Uber’s Board of Directors and increase his power over Uber for his own selfish ends. Kalanick’s overarching objective is to pack Uber’s Board with loyal allies in an effort to insulate his prior conduct from scrutiny and clear the path for his eventual return as CEO—all to the detriment of Uber’s stockholders, employees, driver-partners, and customers.

 

As explained in detail below, in 2016, Kalanick fraudulently obtained control of three newly created seats on Uber’s Board by his material misstatements and fraudulent concealment from Benchmark of material information that would have led Benchmark to reject the creation of the seats, and by his intentional failure to disclose to Benchmark and other stockholders adequate information for them to evaluate the requested stockholder consent to create the Board seats. After resigning as CEO, Kalanick purported to appoint himself to one of these fraudulently procured seats.

 

On or around June 1, 2016, Kalanick induced Benchmark to (a) execute a stockholder consent approving an amendment to Uber’s Certificate of Incorporation, and (b) execute an amended voting agreement (the “Voting Agreement”). Among the various changes made by these amendments, upon information and belief, Kalanick caused the insertion of provisions purporting to grant him the absolute right to designate directors to occupy three newly created Board seats. Uber’s Board had been comprised of eight voting directors. The June 2016 amendments purportedly expanded the Board to eleven voting directors, with the three new seats expressly reserved for directors to be designated by Kalanick.

 

Unknown to Benchmark at the time, in obtaining control over the three new Board seats for his personal benefit, Kalanick intentionally concealed and failed to disclose his gross mismanagement and other misconduct at Uber. These matters included, among others, Kalanick’s personal involvement in causing Uber to acquire a self-driving vehicle start-up that, according to a confidential report not disclosed to Benchmark at the time (the “Stroz Report”), allegedly harbored trade secrets stolen from a competitor; an Uber executive’s alleged theft of the medical records of a woman who was raped by her Uber driver in India; a pervasive culture of gender discrimination and sexual harassment that ultimately prompted an investigation by the former U.S. Attorney General Eric Holder; and a host of other inappropriate and unethical directives issued by Kalanick.

 

Upon information and belief, Kalanick knew Benchmark never would have approved the amended Certificate of Incorporation or the Voting Agreement as to the three new Board seats if Benchmark had known the truth about Kalanick’s prior conduct. Kalanick also understood that these matters, once revealed, would likely force him to resign as Uber’s CEO, and thus sought to grant himself a way to play an ongoing leadership role at Uber once the truth came out. Kalanick therefore knowingly concealed these matters from Benchmark and Uber’s Board to obtain, for his personal benefit, the unilateral right to pack the Board with three additional directors of his choosing. In doing so, Kalanick acquired a disproportionate level of influence over the Board, ensuring that he would continue to have an outsized role in Uber’s strategic direction even if forced to resign as CEO.

 

When Kalanick’s mismanagement and related issues were revealed in 2017, Kalanick was quickly forced to resign as CEO, in significant part due to the efforts of Benchmark and other investors. In resigning, Kalanick expressly committed to Uber and Benchmark in a signed letter dated June 20, 2017 (attached as Exhibit A), that any individuals he appoints to two of the three vacant Board seats he purports to control will be independent, experienced, unbiased, and diverse—which Uber sorely needs. Further, these two directors are not to be designated by Kalanick alone, but instead are subject to the approval of all then-current directors other than one. Importantly, Kalanick expressly committed in his letter to vote “as a director and stockholder” in accordance with these commitments, as well as make “conforming amendments to the Voting Agreement as soon as possible.” In reliance upon these commitments, Benchmark refrained from bringing a fraud action against Kalanick and joining with other large stockholders in taking action publicly to remove Kalanick as CEO.

What does Benchmark want:

Benchmark seeks (a) to invalidate the 2016 stockholder vote and subsequent amendment of the Certificate of Incorporation as to the creation of the three Board seats, which was tainted by Kalanick’s fraudulent statements and omissions in connection with the vote, and (b) to invalidate Kalanick’s appointment of himself to one of the three seats. Pending these determinations, Benchmark seeks a status quo order declaring that: (i) Kalanick shall not attempt to fill the two disputed Board seats that are currently vacant, or otherwise attempt to change the current size or composition of the Board; (ii) in the event Kalanick resigns from the Board, Kalanick shall not attempt to fill the disputed Board seat he purportedly held immediately before his resignation; (iii) Uber’s Board shall not take any action requiring Board approval unless such action is approved by a majority of the remaining directors after excluding the vote of Kalanick (and, for the avoidance of doubt, the votes of any persons occupying any of the three Board seats whose validity is disputed in this action); and (iv) Kalanick shall not take any actions that would have the effect of disrupting the continuing management of the business and affairs of Uber by its current Board in the ordinary course.

And so on: the full filing is below (link)

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