UiPath: Southern District Of New York Allows Certain Investor Claims Against UiPath To Survive Dismissal

On November 4, 2024 , the US District Court for the Southern District of New York granted in part and denied in part a motion to dismiss a securities class action against UiPath, Inc. , a company that provides robotic process automation (RPA) software to its customers; its CEO and board chair; and its CFO, alleging violations of Sections 11 and 15 of the Securities Act of 1933, Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 in connection with UiPath's IPO. The plaintiff alleged that the defendants misled investors in four ways: 1) by using the annualized renewal run rate metric (ARR) to suggest that UiPath's financial outlook was stronger than it actually was; 2) improperly touting the success of UiPath's model for acquiring new customers and expanding their use of UiPath products; 3) understating the competitive threats UiPath faced in the RPA market, especially from Microsoft; and 4) describing certain risks as hypothetical when they had already materialized. The court found that the plaintiff failed to successfully allege that any of the statements falling under categories one, two, or four were materially misleading when viewed in the context of other publicly available information. For example, UiPath specifically warned against using ARR to predict future revenue; nothing in the operative complaint undermined statements about UiPath's business model because it failed to quantify the extent to which customers purportedly reduced or stopped business with UiPath ; and the challenged risk disclosures were not purely hypothetical statements. However, the court found two statements in the third category made during the Q&A portion of an earnings call downplaying competitive threats from Microsoft were actionable. In reaching this conclusion, the court relied on allegations that two confidential witnesses - an executive and a salesperson at UiPath before and during the class period - asserted that UiPath was competing for and losing customers to Microsoft, and that customers brought up Microsoft's robots in about half of their sales calls. The court held that, based on these allegations, the plaintiff sufficiently pled that statements that UiPath did "not see [Microsoft] a lot" and "even when we do, our win rate has no difference, compared to where they are not playing," were misleading. The court rejected UiPath's assertions that these were vague statements of corporate optimism, finding instead that they were statements of fact. Moreover, the court did not believe that a risk disclosure warning of potential negative impacts if UiPath failed to compete effectively and listing Microsoft as a competitor were sufficiently specific to render the statements, in context, not misleading. The court also found confidential witness statements that the officer who made the challenged statements instructed engineers at UiPath to assist in "responding to Microsoft," and that UiPath changed its marketing strategy to respond to Microsoft sufficient to allege scienter. Turning to the Securities Act claims, the court concluded that the plaintiff lacked standing because she did not plead that she purchased her shares pursuant to UiPath's Registration Statement. It further held that the claims were time-barred and tolling did not extend the operative one-year statute of limitations. This case reveals that executives should thoroughly vet all facts before providing new ones beyond the prepared remarks during the Q&A portion of earnings calls; such statements may provide plaintiffs with an easier path to surviving dismissal. Delaware Supreme Court Affirms the Court of Chancery's Dismissal of Derivative Claims Based on Demand Futility In a recent decision, the Delaware Supreme Court summarily affirmed the Delaware Court of Chancery's dismissal of a derivative lawsuit alleging breach of fiduciary duty, insider trading, unjust enrichment, and other claims arising out of nCino Inc.'s acquisition of SimpleNexus, LLC , relying entirely on the Chancery Court's December 28, 2023 , holding that the plaintiff failed to plead demand futility. Insight Venture Partners LLC was a majority owner in nCino until the company's IPO, at which point it was permitted to appoint its cofounder to serve on nCino's board of directors. After that, Insight held between 32% and 38% of the company's outstanding shares. After the IPO, nCino's board approved nCino's acquisition of SimpleNexus, a company in which Insight held a 62% stake, for $933.6 million . Insight's board representative did not attend any of the board meetings about this transaction and was not part of the board vote to approve the deal. As part of the acquisition, Insight entered into a lock-up agreement that restricted it from selling two-thirds of its nCino stock following closing. After the announcement of the deal, nCino's stock price dropped by nearly 30%. First, the lower court rejected the plaintiff's argument that demand was futile because nCino's directors faced a substantial likelihood of liability for approving the transaction in bad faith. The Court of Chancery engaged in a detailed analysis into the merits of the breach of fiduciary duty claim and the mechanics of the board's process to reject this argument. The court noted that the board met multiple times during negotiations and spoke with SimpleNexus's management as part of the due diligence process. Further, nCino's management had negotiated the cash portion of the deal down from 50% to 20% and obtained a lock-up agreement with Insight, showing that the directors did not disregard their duties by taking an "ostrich-like" approach to the transaction and instead were actively engaged in the process. In light of these facts, the court found it would be unreasonable to infer the directors acted in bad faith. Second, the lower court rejected the plaintiff's contention that each director owed their current and future directorship to Insight and thus lacked independence. The court explained that Insight's power to appoint and elect directors as a controller, without more, is insufficient under Delaware law to render the directors beholden to Insight. Finally, the lower court addressed the plaintiff's specific allegations that each director lacked independence due to ties to Insight. The court found that the plaintiff failed to plead with particularity that nCino's CEO lacked independence because he was dependent on his CEO salary. The plaintiff also failed to allege that another director, an investment banker at Piper Sandler , was beholden to Insight (a firm client) because the plaintiff did not allege that Insight's business was so important to the director as to establish a lack of independence. The court found that allegations regarding a director who served as a consultant to nCino failed to establish that his compensation was either material or attributable to Insight. The fact that the same director served on the boards of two other Insight portfolio companies likewise did not rebut the presumption of his independence. The court reached the same conclusion regarding allegations against another director who also served on other Insight portfolio company boards, and the court rejected the allegation that his director compensation undercut independence because there was no allegation that Insight had the power to remove him from the board. This decision shines further light on the extent of the allegations necessary to succeed in a bad faith argument for demand futility. It also provides helpful precedent that practitioners can look to when countering arguments asserting lack of director independence in the M&A context. District Court for the District of Columbia Denies Class Certification in "Meme Stock" Decision As a matter of apparent first impression, on March 6, 2025 , the US District Court for the District of Columbia denied reconsideration of a September 27, 2024 , order denying certification of a putative class of Bed Bath & Beyond investors alleging violations of the Securities Exchange Act of 1934, on the grounds that unusually high trading volume in Bed Bath & Beyond stock weighed in favor of finding that market was inefficient during the class period. In March 2022 , billionaire Ryan Cohen and his investment firm bought a nearly 10% stake in the struggling home goods retailer. Despite efforts to turn things around, the company continued to announce disappointing results. By August 2022 , 46% of Bed Bath shares were shorted, which drummed up excitement about a potential short squeeze opportunity among the "meme stock" community - retail investors using social media platforms to share research and generate buzz around certain stocks. Then on August 12 , in response to a negative article about the company, Cohen posted on Twitter (now X) a "smiling moon emoji," which meme stock investors interpreted as a "rallying cry to buy Bed Bath stock." On August 16 , the stock's price peaked at $26.60 per share, up from $10.65 per share on August 11 . This run was cut short on August 18 , however, when it became public that Cohen and his investment firm RC Ventures sold their entire position (earning Cohen a profit of $68 million ). By August 23 , the stock was slashed almost in half, trading at $8.78 per share. Investors filed a putative securities class action against the company, its CEO, Cohen, and his firm, challenging the "moon emoji" post and certain SEC filings and asserting claims for violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and SEC Rule 10b-5; and Sections 9(a), 9(f), and 20A of the Exchange Act. The court dismissed claims against the CEO and stayed claims against the company, but the claims against Cohen and his firm survived a motion to dismiss and were allowed to proceed. Shortly thereafter, the lead plaintiff sought to certify a class of investors in Bed Bath stock and long call options who acquired the securities between August 12 and 18, 2022 ,