Court Dismisses Claim Against Board for Optimistic Earnings Guidance
In early 2016, the camera manufacturer, GoPro, Inc. 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 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 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 filed complaints which were consolidated into In Re GoPro, Inc. Stockholder Derivative Litigation in the Delaware Court of Chancery, the action discussed in this note, alleging certain GoPro officers and directors breached their fiduciary duties.
As is often the case, the central issue was whether the case should be dismissed because the Plaintiffs failed to make a pre-litigation demand on the board. The Court noted 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.” 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. With this in mind, the Court said it follows that directors who knowingly make materially misleading statements to stockholders “may be considered to be interested for the purposes of demand.”
Only one member of the relevant board (i.e., members of the Board when the complaint was filed) was alleged to have personally made a false or misleading public statement. Plaintiffs attempted to implicate a majority of the relevant board by alleging five of its members contributed to and approved GoPro’s revenue guidance while knowing it was impossible for the Company to achieve the projected results. In other words, Plaintiffs attempted to allege a majority of the relevant 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.
According to the Court, the “Bull and Bear Case” slide did not reasonably supports the inference Plaintiffs asked the Court to draw. First, the “Bull and Bear Case” slide appeared to be backwards-looking—not a forward-looking encouragement to continue misstating facts. Second, the Court stated all the slide showed was 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 Delaware law.
The Plaintiffs did not plead a Caremark claim, which is sometimes referred to as breach of the duty of oversight, and is invoked when a board fails to act. The result is Plaintiffs had to plead the board affirmatively took action that was actionable board misconduct. The Court found that board acquiescence with respect to the earnings guidance cannot support an inference of affirmative board level misconduct. Even if the board were told by its management that the Company was not going to meet its revenue projections, and then the board did nothing as management publicly stood by its market guidance, that factual predicate might support a “classic” Caremark claim for failure to respond to “red flags.” However, it did not support a claim against the board for affirmative action for causing the Company to make false disclosures.
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