Benchmark Capital was an early investor in Uber, and one of its partners sits on Uber's board. Now, the venture capital firm is suing former Uber CEO Travis Kalanick, claiming he fraudulently engineered a scheme to retain control of the company.
The lawsuit, filed in Chancery Court in Delaware, centers on a plan, approved by Uber stockholders in June 2016, to expand the board from eight members to 11. The arrangement gave Kalanick the power to choose the additional members. And when Kalanick lost the board seat reserved for the CEO following his forced resignation in June, he took one of those seats.
Benchmark claims that Kalanick engineered the board expansion to insulate himself from the consequences of the various scandals plaguing the company, including allegations of widespread sexual harassment and discrimination within the company, a theft-of-trade-secrets lawsuit filed by Google's Waymo, Uber's alleged use of software to deceive law enforcement authorities, and a report that an Uber executive acquired the confidential medical records of a woman who was raped by an Uber driver in India in 2014.
"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," the lawsuit, first reported by Axios, alleges. It also claims that Kalanick agreed to give up his power to appoint other board members, but has not yet done so.
Benchmark wants to overturn the expansion of the board--which would leave Kalanick without a seat--or at the very least force the former CEO into relinquishing his control over the other two additional seats. In short, the firm wants Kalanick to have as little influence of the future of Uber as possible.
"The lawsuit is completely without merit and riddled with lies and false allegations," a spokesperson for Kalanick said in a statement. "This is continued evidence of Benchmark acting in its own best interests contrary to the interests of Uber, its employees and its other shareholders." The statement says the suit aims to "deprive Travis Kalanick of his rights as a founder and shareholder and to silence his voice regarding the management of the company he helped create."
Uber declined to comment, and Benchmark did not respond to a request for comment.
The suit is unusual, because Benchmark's Bill Gurley was on the board that approved the expansion plan. (Gurley resigned from Uber's board in June and was replaced by another Benchmark partner, Matt Cohler.) Benchmark now says Kalanick committed fraud by failing to sufficiently disclose the company's problems, and so the plan should be discarded.
If Kalanick did deliberately withhold information about the pending scandals, Benchmark could have a case, says Robert Bartlett, a law professor at the University of California Berkeley. "There's an affirmative obligation on the company to disclose anything they think is going to matter to their stockholders before they get their votes," he says.
But Bartlett says Gurley's role as Benchmark's representative on the board will be a big hurdle. "Benchmark needs to look uninformed to win on the fraudulent inducement claim," Bartlett says. "But it makes it look this was a board that let management have free reign."
Marcel Kahan, a professor at New York University Law School, agrees, saying that a court may well decide that Benchmark simply should have been more careful before deciding to cede so much power to Kalanick. He also points out that some of Benchmark's claims are highly speculative: it may be hard to prove that Kalanick actually knew that he would soon be forced to resign as CEO and plotted to retain control of the board.
