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Something Ventured, but what was Gained?

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By Joshua Gelman, Esq. 

Uber, the ubiquitous ride-sharing application turned start-up tech success story, has had quite a lot of time in the public eye outside of its aspirational skyrocket to success. It has garnered considerable headlines within the last year with some stories, seen as more socially scandalous, having caught the public eye.

Nonetheless, Uber is now hitting the headlines and dockets for a less exciting (media-wise) shareholder dispute that offers a plethora of reasons worthy for companies, new and old, to pay very close attention. Specifically, an Uber venture capitalist investor, Benchmark, has sued to keep the former CEO from seating three new Board members. Benchmark alleges the right to do so was obtained fraudulently.

2017 has been a turbulent year for the tech-darling Uber. The big headline for weeks has been that Uber founder and former CEO, Travis Kalanick, has been removed from his official role no small thanks to Benchmark. To understand Benchmark’s history with Uber, a conflicting VC firm has said, “Benchmark’s investment of $27M is worth $8.4 billion today’, and criticized Benchmark for removing the CEO that assisted in creat[ing] such a high return for its investment.” Yet, to better understand the volatile dispute, it’s important to understand what has happened at Uber recently. A quick breakdown of a very challenging year for Uber shows a lot of bad press and multiple drives, through Twitter, to “#deleteUber” from consumers’ devices.

  • 1/28/17 – Uber gets flack for servicing J.F.K. Airport during taxi driver protests relating to the Travel Ban initiated by the Trump Administration;
  • 2/2/17 – Travis Kalanick, Uber founder and then it’s CEO, criticized by public for taking part in Trump Administration’s Advisory Counsel resulting in him stepping down from that advisory position;
  • 2/19/17 –Susan Fowler publishes an essay detailing her year as an Uber employee, which depicted some very severe cultural and gender bias problems with the company and resulted in the appointment of an investigation led by former Attorney General, Eric Holder;
  • 2/23/17 – Early investors in Uber criticize the company’s decision to have the investigation into Uber’s alleged toxic culture led by perceived insiders, Eric Holder and Ariana Huffington;
  • 2/23/17 – Many of Uber’s self-driving engineers step down or pursue positions elsewhere;
  • 2/24/17 – Whistleblower Susan Fowler claims that she had been contacted by investigators seeking personal information about her. Uber denies involvement;
  • 2/24/17 – Google holding company, Alphabet, sued Uber claiming that a former employee of a subsidiary stole 14,000 key files related to self-driving before becoming a Uber employee who has since created a self-driving company, Otto, which was subsequently acquired by Uber;
  • 2/27/17 – An Uber Senior Vice President was asked to resign for failing to disclose a sexual harassment claim that allegedly occurred while at his employer prior to Uber;
  • 2/28/17 – A video surfaces of the Uber CEO berating a driver prompting him to state, “[t]his is the first time I’ve been willing to admit that I need leadership help and I intend to get it”;
  • 3/3/17 – Another Senior Vice President resigns amidst allegations of sexual harassment;
  • 3/10/17 – Alphabet files an injunctive request against Uber related to its self-driving litigation;
  • 3/17/17 – Uber President Jeff Jones resigns blaming differences in “beliefs and approach to leadership”;
  • 3/20/20 – Uber Vice President Brian McClendon resigns. While identified in the Alphabet litigation, no direct correlation is identified;
  • 4/6/17 – The former Uber execute named in the Alphabet lawsuit pleads the 5th Amendment;
  • 4/27/17 – The Uber employee named in the Alphabet litigation, after asserting his 5th Amendment rights, steps down as head of the self-driving department;
  • 5/4/17 – The U.S. Department of Justice launches an investigation into a software allegedly utilized by Uber to circumvent certain regulations;
  • 5/31/17 – Uber’s highest-ranking finance officer steps down;
  • 6/8/17 – A communication from Uber CEO sent to employees in advance of a work party, warns against intimate congress amongst employees, stating:
"Do not have sex with another employee UNLESS a) you have asked that person for that privilege and they have responded with an emphatic ‘YES! I will have sex with you' AND b) the two (or more) of you do not work in the same chain of command. Yes, that means that Travis will be celibate on this trip. #CEOLife #FML";
  • 6/11/17 – In response to the Holder report, the CEO’s second-in-command was asked to resign and the Board accepts the entirety of the Holder Report’s recommendations;
  • 6/12/17 – CEO’s Second-in-command resigns;
  • 6/13/17 – Uber CEO, citing the tragic loss of his mother in a boating accident, temporarily steps down. That same day, the Board releases the Holder recommendations (not the report) to all Uber employees;
  • 6/14/17 – The FTC launces probe into Uber over privacy practices;
  • 6/20/17 – Uber CEO resigns amidst pressure from investors;
  • 6/22/17 – Uber employees send 1,000+ person petition to Uber Board to reinstate CEO.

While Uber has been undergoing a multitude of public relations issues, there has been a lot going on internally which ultimately led to the Benchmark lawsuit. The dispute boils down to a fight over control amidst the turmoil. According to Kalanick, prior to the Benchmark lawsuit, it requested he resign and execute a new agreement requiring any board appointments made by the CEO require all but unanimity by the Board. After his refusal, the lawsuit was filed alleging that Kalanick, amongst other things, defrauded the company into allowing the CEO to name three board members. The fraud is denied, and the former CEO countered that Benchmark had over a year until it agreed to his ability to seat the Board. 

How the litigation ultimately resolves (recently, a request to move the matter to arbitration was denied and some investors have offered to buyout Benchmark’s holdings), remains to be seen, but Uber shareholder dispute does provide significant lessons to those growing a new company or seeking to expand or provide liquidity through outside investors. It is of paramount importance to have commercial attorneys in place at every step of your business’s creation, development and growth to make sure that the founders retain a say in the business they created while investors are still confident that their investments are protected and the likelihood of a positive return is good. 

Investor funding is often necessary, but the amount of control that may be combined with that investment can be negotiated.  Being proactive today about how you see your company tomorrow is important. Of course, sales strategy, revenue generation, and market growth are important, but shareholder relations cannot be ignored. While business lawyers, like those in the Jacobs Law Group, are experienced in assisting in the creation and development of a business as well as in maximizing client interests in a business divorce, the best measures can be forward-thinking to minimize the very public problems that Uber must overcome in the public eye. 

No matter where your business may be in its life cycle, regular communication with a business attorney will be invaluable in assisting you to control how and under what conditions the next step in your company’s evolution will be undertaken.

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