      IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

                                        )
CHAILE STEINBERG, Derivatively          )
for the Benefit of and on Behalf of     )
Nominal Defendant HORTONWORKS, )
INC.,                                   )
                                        )
                           Plaintiff,   )
                                        )
       v.                               )   C.A. No. 2017-0286-AGB
                                        )
ROBERT G. BEARDEN, PAUL                 )
CORMIER, PETER FENTON,                  )
MARTIN FINK, KEVIN                      )
KLAUSMEYER, JAY ROSSITER,               )
MICHELANGELO VOLPI, and                 )
SCOTT J. DAVIDSON,                      )
                                        )
                           Defendants,  )
                                        )
       -and-                            )
                                        )
HORTONWORKS, INC., a Delaware           )
Corporation,                            )
                                        )
                     Nominal Defendant. )
                                        )

                       MEMORANDUM OPINION

                      Date Submitted: March 27, 2018
                        Date Decided: May 30, 2018

Seth D. Rigrodsky, Brian D. Long, Gina M. Serra, and Jeremy J. Riley of
RIGRODSKY & LONG, P.A., Wilmington, Delaware; Counsel for Plaintiff.
Elena C. Norman of YOUNG CONAWAY STARGATT & TAYLOR, LLP,
Wilmington, Delaware; Jordan Eth, Anna Erickson White, and Ryan Keats of
Morrison & Foerster LLP, San Francisco, California; Counsel for Defendants Robert
G. Bearden, Paul Cormier, Peter Fenton, Martin Fink, Kevin Klausmeyer, Jay
Rossiter, Michelangelo Volpi, Scott J. Davidson, and Nominal Defendant
Hortonworks, Inc.


BOUCHARD, C.
         In this action, a stockholder of Hortonworks, Inc. alleges that its board of

directors and two of its officers breached their fiduciary duties by making or

permitting to be made several materially false and misleading statements about the

Company’s financial condition. Specifically, the stockholder alleges that defendants

knowingly misled the market on four occasions in the latter half of 2015 by stating

that Hortonworks did not need a capital infusion, when the Company allegedly was

in need of cash and the board privately was considering raising additional funds in a

secondary public offering.

         The complaint asserts three interrelated derivative claims, which defendants

have moved to dismiss under Court of Chancery Rules 23.1 and 12(b)(6) for failure

to make a pre-suit demand on the board of directors and for failure to state a claim

for relief. For the reasons explained below, the motion will be granted because the

complaint fails to allege particularized facts to excuse plaintiff’s failure to make a

demand.

I.       BACKGROUND

         The facts recited herein are taken from the Verified Shareholder Derivative

Complaint filed on April 13, 2017 (the “Complaint”),1 and documents incorporated

therein, including documents produced to plaintiff in response to a request for books




1
    Dkt. 1.
and records under 8 Del. C. § 220.2 Any additional facts are either not subject to

reasonable dispute or subject to judicial notice.

         A.    The Parties
         Nominal defendant Hortonworks, Inc. (“Hortonworks” or the “Company”) is

a publicly traded corporation that “creates, distributes and supports a new class of

enterprise data management software solutions built on open source technology.” 3

Plaintiff Chaile Steinberg alleges she has been a Hortonworks stockholder

continuously since December 2014, which covers the period relevant to this case

between August 13, 2015 and January 15, 2016.

         The Complaint names eight individuals as defendants. They are all directors

and/or officers of Hortonworks. Defendant Robert G. Bearden co-founded the

Company, serves as its CEO, and is one of seven members who served on

Hortonworks’s board of directors (the “Board”) during the relevant period and when

this action was filed. The other six directors on the Board are defendants Paul

Cormier, Peter Fenton, Martin Fink, Kevin Klausmeyer, Jay Rossiter, and

Michelangelo Volpi (the “Director Defendants”). Klausmeyer, Fenton, and Volpi




2
  See Winshall v. Viacom Int’l, Inc., 76 A.3d 808, 818 (Del. 2013) (citation omitted)
(“[P]laintiff may not reference certain documents outside the complaint and at the same
time prevent the court from considering those documents’ actual terms” in connection with
a motion to dismiss).
3
    Compl. ¶ 17.

                                           2
served on the Board’s Audit Committee during the relevant period. The eighth

named defendant is Scott J. Davidson, Hortonworks’s CFO.

         B.     Alleged False and Misleading Statement #1
         On August 13, 2015, Hortonworks filed its Form 10-Q for the period ended

June 30, 2015 (the “Second Quarter 10-Q”).4 Addressing the Company’s future

liquidity expectations, the Second Quarter 10-Q stated: “We believe that our

existing cash and cash equivalents balance, together with cash generated from sales

of our support subscriptions and professional services to customers, will be sufficient

to meet our working capital and capital expenditure requirements for at least the next

12 months.”5 Steinberg contends that this statement “was materially false and

misleading because it omitted the fact that the Board approved” a secondary public

offering “on August 20, 2015, exactly one week later, and was undoubtedly

considering it at the time of the statement.”6

         Bearden and Davidson, as the Company’s CEO and CFO, each signed a

certification for the Second Quarter 10-Q pursuant to Rules 13a-14(a) and 15d-14(a)

under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of

the Sarbanes-Oxley Act of 2002 (“SOX”). In their SOX certifications, Bearden and



4
    Compl. ¶ 45.
5
    Compl. ¶ 45 (emphasis omitted).
6
    Pl.’s Answering Br. 24-25 (Dkt. 18).

                                           3
Davidson each attested, among other things, that they had reviewed the Second

Quarter 10-Q and that it “does not contain any untrue statement of a material fact or

omit to state a material fact necessary to make the statements made, in light of the

circumstances under which such statements were made, not misleading with respect

to the period covered by this report.”7

         C.     The Board Considers a Secondary Public Offering
         On August 20, 2015, the Board held a regularly-scheduled meeting during

which Davidson reviewed “the Company’s recent financial results and key

metrics.”8 During this review, Davidson made a presentation concerning a potential

$130 million secondary public offering, with 95% of the shares to be offered by

Hortonworks.9 Davidson’s presentation listed four reasons to complete the offering

at that time:

          Competitive dynamics (get ahead of potential IPOs from Cloudera
           and MapR)

          Increase liquidity and float as larger investors want more of both

          Alleviate investor concerns of our need to have more cash on the
           balance sheet


7
    Compl. ¶ 46.
8
    Compl. ¶ 41.
9
  Transmittal Affidavit of Nicholas J. Rohrer (“Rohrer Aff.”) Ex. D at H_S_14-20 (Dkt.
12). The slide deck for the August 20, 2015 Board meeting, which was produced to
Steinberg in response to her Section 220 demand, is quoted in part and cited in its entirety
in paragraph 43 of the Complaint.

                                             4
          CFO rulebook #1: “always take the $ when you don’t need it10

         At its August 20 meeting, the Board unanimously adopted resolutions

authorizing the Company to continue undertaking preparations for a secondary

public offering. The Board also appointed a pricing committee, consisting of

defendants Bearden, Fenton, and Klausmeyer, to negotiate with underwriters.11

Despite these preparations, Hortonworks did not pursue further a secondary public

offering at the time.

         D.     Alleged False and Misleading Statement #2
         On November 4, 2015, Hortonworks held an earnings call after releasing its

third quarter financial results that day.12 The following exchange occurred during

the call:

         Q: I think you gave the headcount number at about 800. Obviously,
         it’s good growth year-over-year. I know there was some acquisition in
         there. But when you think about just sort of feeding the beast of sales
         and marketing here, because you do keep acquiring more new
         customers but also the deal sizes to existing customers are getting
         bigger, I mean how should we think about how you are ramping that
         sales force? And then also kind of relative to some of those partnerships
         in the channel, et cetera that you also have?

         BEARDEN: Yes. So it is about actually overall enabling the model.
         There will be always organic adding of direct field reps, in addition to
         that though we are very focused on the ecosystem and creating [pull ph]
         markets with our partners. And we are actually seeing that part of our

10
     Rohrer Aff. Ex. D at H_S_15.
11
     Compl. ¶ 42.
12
     Compl. ¶¶ 49, 52.

                                            5
         business begin to gain real traction and seeing actual pull through
         revenue, that’s meaningful, come through. And that gives us leverage
         of course. The other thing that we are able to do now is also get
         incremental leverage from our existing sales organization with the new
         product that we just obviously outlined on this call and which is the
         Hortonworks DataFlow platform. And so now we can as a multi
         product company get more leverage per rep with incremental product.
         And so we are going to see the benefit of that going forward as well.13

         Steinberg asserts that Bearden’s statement on this call “was false and

misleading because he ‘knew the Company needed more cash than it was generating

going forward, hence the resolution approving the secondary offering, and that the

additional sources of revenue [he] cited . . . would be insufficient to meet the

Company’s needs.’”14

         E.     Alleged False and Misleading Statement #3
         On November 12, 2015, Hortonworks filed its Form 10-Q for the period ended

September 30, 2015 (the “Third Quarter 10-Q”) in which it included the same

statement about the Company’s future liquidity expectations as it did in the Second

Quarter 10-Q, i.e., “We believe that our existing cash and cash equivalents balance,

together with cash generated from sales of our support subscriptions and

professional services to customers, will be sufficient to meet our working capital and

capital expenditure requirements for at least the next 12 months.”15 Bearden and


13
     Compl. ¶¶ 52-53 (emphasis in original).
14
     Pl.’s Answering Br. 25-26 (citing Compl. ¶ 54 and emphasis in original).
15
     Compl. ¶ 66 (emphasis omitted).

                                               6
Davidson signed SOX certifications for the Third Quarter 10-Q, as they did for the

Second Quarter 10-Q.16          The Audit Committee “reviewed and discussed with

Management the Third Quarter 2015 financial statements and Form 10-Q” and

resolved that “the Company shall include the Company’s Third Quarter 2015

financial statements in the Company’s Quarterly Report on Form 10-Q to be

submitted to and filed with the SEC.”17

         Steinberg contends that the statement (quoted above) about the Company’s

future liquidity expectations “was materially false and misleading in that it omitted

the fact the Board approved the [secondary public offering] on August 20, 2015

because the Company needed more cash.”18

         F.     Alleged False and Misleading Statement #4
         On December 1, 2015, Bearden and Brian Marshall, Hortonworks’s Vice

President of Corporate Development, attended the Credit Suisse Technology, Media,

and Telecom Conference.19 During the Company’s session, questions were asked

about Hortonworks’s cash position:

         Q: You said the B word so I’m going to ask a question, burn. So cash
         burn because obviously I’ve been getting that question, you know, last
         night, this morning. You know, when you guys look at your sort of
         cash position, and you’re obviously in this point of your lifecycle where

16
     Compl. ¶ 67.
17
     Compl. ¶¶ 20, 22, 24, 68; Pls.’ Answering Br. Ex. 2 ¶ 2.
18
     Pl.’s Answering Br. 26; Tr. 22 (Mar. 27, 2018) (Dkt. 29).
19
     Compl. ¶¶ 70, 74.

                                               7
         you’re growing fast, you’re hiring people, big market opportunity you
         just talked about, and then big market opportunity hitting inflection
         point. You know, how do you sort of balance the need to invest, but
         also looking at your burn and at the, you know just the cash on the
         balance sheet? So kind of a question for both of you, like how do you
         think about that because—yeah, I’ll just leave it there.

         BEARDEN: Well, we have a model that today shows us getting the
         cash (inaudible) profitability in early 2017. Even with the two
         acquisitions that we’ve done, we’re very comfortable with that model.
         In fact we’re showing improved performance against that, that Brian
         [Marshall] just pointed out in Q3, quarter-over-quarter. And with that
         we have roughly $116 million in cash. It gives us a fully funded model
         to that point of profitability when you do, you know, when you
         extrapolate your model, we’re somewhere under $50 million in cash.
         We’re comfortable operating on that.

         Q: That was my next question.

         BEARDEN: Yeah. We’re comfortable operating on that. At some
         point we may choose to take an opportunistic view downstream into the
         markets, but we’ll do that on an opportunistic basis when the time is
         right.

         Q: Got it. Okay, so, because that’s the question, like I’ve given you
         this example before, you know plane taking off the aircraft carrier, you
         don’t mind getting close to the water, just don’t crash into it, you know.
         So there’s enough air, so to speak, between you and the water you feel
         comfortable with? Okay.

         BEARDEN: Very much so. And we see the market continuing to
         expand, and you know we’re very comfortable with our positioning and
         where we are from an execution against our model.20




20
     Compl. ¶ 74 (emphasis in original).

                                             8
         Steinberg contends that “[d]efendant Bearden’s statements at the Credit

Suisse Conference that the Company was comfortable operating on its cash model,

even if its cash balance dipped below $50 million, and that it ‘may choose’ to look

for . . . additional cash in the markets were false and misleading because, unknown

to investors, the Board had already approved the secondary public offering and

Bearden knew the Company needed additional cash.”21

         G.     Hortonworks Launches a Secondary Public Offering
         On January 13, 2016, the Board unanimously adopted resolutions authorizing

the Company to prepare for a new secondary public offering and appointed a pricing

committee consisting of Bearden, Fenton, and Volpi.22 This pricing committee was

different from the one that previously had been appointed on August 20, 2015, which

consisted of Bearden, Fenton, and Klausmeyer.

         On January 15, 2016, Hortonworks filed a Form S-3 and issued a press release

announcing that it would be conducting a secondary public offering.23 The Form S-

3 stated “[t]he principal purposes of this offering are to raise additional capital to

increase our financial flexibility. We intend to use the net proceeds that we receive




21
     Pl.’s Answering Br. 27.
22
     Compl. ¶ 84 n.5.
23
     Compl. ¶¶ 79-80.

                                           9
from this offering for working capital or other general corporate purposes, including

funding our growth strategies discussed in this prospectus.”24

         On January 19, 2016, the first trading day after the announcement of the

secondary public offering, the Company’s stock closed down 37 percent, falling

from $16.57 per share to $10.44 per share.25 The next day, on January 20, the Board

convened a special meeting to review the “market reaction to the Company’s filing

of a Registration Statement on Form S-3 on January 15, 2016.”26 During the

meeting, the Board:

         discussed possible timelines for completing an equity offering in a
         registered transaction and alternative methods for the Company to raise
         additional financing, including possible timelines and terms for doing
         so. Alternatives discussed included, but were not limited to, the follow-
         on equity offering (as planned or adjusted), private investments, and
         debt financing options. The Board agreed to continue discussions
         regarding the various financing options and to discuss such alternatives
         with the Company’s advisors.27

         On January 25, 2016, the Board appointed a Special Committee “to explore

one or more potential financing transactions.”28 The Special Committee held a series

of meetings to address the benefits and risks of the various options, consulted with




24
     Compl. ¶ 80.
25
     Compl. ¶ 83.
26
     Compl. ¶ 84 (internal quotations omitted).
27
     Compl. ¶ 84.
28
     Compl. ¶ 85 (internal quotations omitted).

                                              10
advisors, and ultimately resolved on January 26, 2016 to raise up to $100 million

through the secondary public offering announced on January 15.29 On February 1,

2016, the pricing committee approved the sale of shares in the offering at a price of

$9.50 per share.30

         H.     The Securities Class Action
         On February 29, 2016, a federal securities class action was filed in the

Northern District of California, captioned Monachelli v. Hortonworks, Inc. et al.,

Case No. 3:16-cv-980-SI (N.D. Cal.). The First Consolidated Amended Complaint

in Monachelli asserted securities fraud claims against Hortonworks, Bearden, and

Davidson.31 The six non-management directors on the Board were not named as

defendants.

         The First Consolidated Amended Complaint alleged that between August 5,

2015 and January 15, 2016, Hortonworks, Bearden, and Davidson “provided a

steady stream of false and misleading statements as to the strength of Hortonworks’

cash holdings, its revenues and cash being derived from sales to customers, and its

ability to meet capital needs from these sources of cash.”32 Plaintiffs in Monachelli

did not plead, and the court did not consider, the Board’s August 20, 2015 approval


29
     Compl. ¶¶ 85-88.
30
     Compl. ¶ 89.
31
     Compl. ¶ 11.
32
     Compl. ¶ 11; Rohrer Aff. Ex. L ¶ 8.

                                           11
of a secondary public offering as indicative of the purported falsity of the statements

in question.33

         On December 5, 2016, the district court granted defendants’ motion to dismiss

but with leave to amend.34 The court found that allegations about “the Company’s

state of rapid growth and increased expenses . . . do not adequately establish that any

of the statements made by defendants during the Class Period were false.”35

Plaintiffs in the Monachelli action later agreed to settle the case on behalf of the class

for $1.1 million.36 The court approved the settlement on October 10, 2017.37

II.      PROCEDURAL HISTORY

         On April 13, 2017, Steinberg filed the Complaint, asserting three claims

derivatively on behalf of Hortonworks. Count I asserts that defendants breached

their fiduciary duties “by making, allowing, or failing to correct the materially false

and misleading misrepresentations and omissions alleged herein.” 38 Count II “seeks

relief from defendants on the theory of contribution and indemnity to the extent that

the Company is liable for allegations that the Individual Defendants violated their



33
     Compl. ¶ 91.
34
     Compl. ¶ 91; Rohrer Aff. Ex. M.
35
     Rohrer Aff. Ex. M at 16.
36
     Compl. ¶ 12.
37
     Pl.’s Answering Br. Ex. 4.
38
     Compl. ¶ 112.

                                           12
fiduciary duties in connection with false statements about the Company’s cash

requirements, including but not limited to the liability agreed upon in the settlement

of the Monachelli Action.”39 Count III is a claim for unjust enrichment that seeks

restitution from defendants and “an order from this Court disgorging all profits,

including any performance-based compensation, obtained by the Defendants due to

their wrongful conduct and breach of their fiduciary duties.”40

         On July 3, 2017, defendants moved to dismiss this action under Court of

Chancery Rules 23.1 and 12(b)(6) for failure to make a pre-suit demand on the Board

and for failure to state a claim upon which relief may be granted.41 The court heard

argument on the motion on March 27, 2018.

III.     ANALYSIS

         I first consider defendants’ motion to dismiss under Rule 23.1 for failure to

make a demand on the Board. For the reasons explained below, I find that demand

is not excused and thus defendants’ motion to dismiss must be granted. Based on

this conclusion, it is not necessary to address defendants’ motion to dismiss under

Rule 12(b)(6) for failure to state a claim.




39
     Compl. ¶ 121.
40
     Compl. ¶ 126.
41
     Dkt. 4.

                                           13
           A.    Legal Standard Governing Demand Futility
           “The decision whether to initiate or pursue a lawsuit on behalf of the

corporation is generally within the power and responsibility of the board of

directors.”42 Accordingly, stockholders may not prosecute a claim derivatively on

behalf of a corporation unless they either “(1) make a pre-suit demand by presenting

the allegations to the corporation’s directors, requesting that they bring suit, and

showing that they wrongfully refused to do so, or (2) plead facts showing that

demand upon the board would have been futile.”43 Making a pre-suit demand is

futile when the directors upon whom demand would be made “are incapable of

making an impartial decision regarding such litigation.”44

           Because Steinberg did not make a demand on the Board before initiating this

action, she must allege with particularity that her failure to do so should be excused.45

In this analysis, the court accepts as true Steinberg’s particularized allegations of

fact and draws all reasonable inferences that logically flow from those allegations in

her favor.46




42
  In re Citigroup Inc. S’holder Derivative Litig., 964 A.2d 106, 120 (Del. Ch. 2009) (citing
8 Del. C. § 141(a)).
43
     Id.
44
     Rales v. Blasband, 634 A.2d 927, 932 (Del. 1993).
45
     Ct. Ch. R. 23.1; see Compl. ¶¶ 99-108.
46
     White v. Panic, 783 A.2d 543, 549 (Del. 2001).

                                              14
         Under Delaware law, depending on the factual scenario, there are two tests

for determining whether demand may be excused: the Aronson test and the Rales

test.47 The test articulated in Aronson v. Lewis48 applies when “a decision of the

board of directors is being challenged in the derivative suit.”49 The test set forth in

Rales v. Blasband, on the other hand, governs when “the board that would be

considering the demand did not make a business decision which is being challenged

in the derivative suit,” such as instances “where directors are sued derivatively

because they have failed to do something.”50

         “A decision approved by at least half of the corporation’s directors who would

consider a demand, even when acting by committee, can be imputed to the entire

board and thus triggers the Aronson test . . . By contrast, the Rales test applies where

a derivative plaintiff challenges a decision approved by a board committee

consisting of less than half of the directors who would have considered a demand,

had one been made.”51 Under either test, plaintiff “must impugn the ability of at



47
   This court has noted in the past that, although “the Rales test looks somewhat different
from Aronson, in that [it] involves a singular inquiry[,] . . . that singular inquiry makes
germane all of the concerns relevant to both the first and second prongs of Aronson.”
Guttman v. Huang, 823 A.2d 492, 501 (Del. Ch. 2003) (Strine, V.C.).
48
     473 A.2d 805 (Del. 1984).
49
     Rales, 634 A.2d at 933 (emphasis in original).
50
     Id. at 933-34 & n.9.
51
  Teamsters Union 25 Health Servs. & Ins. Plan v. Baiera, 119 A.3d 44, 56-57 (Del. Ch.
2015) (citations omitted).

                                              15
least half the directors in office when it initiated [its] action . . . to have considered

a demand impartially.”52

         B.      Demand Futility is Governed by Rales
         Consistent with the principle that a demand futility analysis “is conducted on

a claim-by-claim basis” under Delaware law, the court must look at each of the four

purportedly false and misleading statements separately to determine whether the

Aronson or Rales test applies to them.53 In my opinion, the Rales test governs

Steinberg’s challenge concerning each of these statements.54

         The statements made by Bearden during an earnings call and at an industry

conference (Statements #2 and #4) are actions taken by one person and plainly were

not decisions approved by a majority of the Board. Steinberg makes no argument to

the contrary.55 Accordingly, the Rales test applies to Steinberg’s claim concerning

those two statements.




52
     Id. at 57 (citation omitted).
53
  Cambridge Ret. Sys. v. Bosnjak, 2014 WL 2930869, at *4 (Del. Ch. June 26, 2014) (citing
Beam ex rel. Martha Stewart Omnimedia, Inc. v. Stewart, 833 A.2d 961, 977 n.48 (Del.
Ch. 2003) aff’d, 845 A.2d 1040 (Del. 2004)).
54
   Ultimately it is inconsequential which test applies, because under both Rales and
Aronson, the relevant inquiry is whether Steinberg has pled sufficiently a non-exculpated
claim for bad faith against a majority of the Board. See In re infoUSA, Inc. S’holders Litig.,
953 A.2d 963, 986 (Del. Ch. 2007) (noting that both tests boil down to whether “the
derivative plaintiff has shown some reason to doubt that the board will exercise its
discretion impartially and in good faith”).
55
     See Pl.’s Answering Br. 25-27.

                                             16
         With respect to the representations about future liquidity expectations in the

Second and Third Quarter 10-Qs (Statements #1 and #3), Steinberg argues that the

Aronson test should apply on the theory that four of the seven directors on the Board

(Bearden and the three members of the Audit Committee) either made or approved

the statements. For example, with respect to Statement #3, Steinberg argues:

         Plaintiff alleged Chairman and CEO Bearden “knowingly, intentionally
         . . . made false and misleading statements.” Plaintiff also alleged Audit
         Committee members Fenton, Klausmeyer, and Volpi unanimously
         approved the false and misleading financial statements in the
         Company’s [Third Quarter 10-Q], and Bearden executed the SOX
         certifications for the filing. These are direct actions taken by a majority
         of the members of the Board in violation of their fiduciary duties.56

Similarly, with respect to Statement #1, Steinberg contends that “Bearden signed the

SOX certifications for the [Second Quarter 10-Q and] it is reasonable to infer the

three Audit Committee members approved the language in the [Second Quarter 10-

Q], because (1) it was their responsibility to do so; and (2) the Audit Committee

unanimously approved similar language in the [Third Quarter 10-Q].”57

         These contentions fail to establish the existence of a singular “decision” that

was made by at least half of the Board to trigger Aronson for two independent

reasons. First, Bearden’s decisions to sign SOX certifications for the Second and

Third Quarter 10-Qs constituted different decisions from the ones the Audit


56
     Pl.’s Answering Br. 20 (citing Compl. ¶¶ 67-68, 105, 111).
57
     Id. at 25 (citing Compl. ¶¶ 32, 68; Rohrer Aff. Ex. G).

                                               17
Committee made to approve the financial statements to be included in those reports.

Put differently, Steinberg is attempting, improperly in my view, to aggregate two

separate and distinct actions that Bearden, on the one hand, and the three members

of the Audit Committee, on the other hand, took in order to try to attain the Board

majority threshold to trigger Aronson. No authority has been cited to support

applying Aronson in this cumulative manner.

      Second, this court has held in similar circumstances that the issuance of false

or misleading statements in public filings, including disclosures concerning

accounting practices, does not constitute “a business decision of the Board but rather

a violation of the Board’s oversight duties” and thus is governed by Rales for

purposes of a demand futility analysis.58 Here, the Audit Committee did not make

any affirmative statements, misleading or otherwise, regarding the Company’s

liquidity. Rather, the Audit Committee only approved the financial statements for




58
   See, e.g., Sandys v. Pincus, 2016 WL 769999, at *14-15 (Del. Ch. Feb. 16, 2016), rev’d
on other grounds, 152 A.3d 124 (Del. 2016) (citing Wood v. Baum, 953 A.2d 136, 140
(Del. 2008) and In re Dow Chem. Co. Derivative Litig., 2010 WL 66769, at *6 n.25 (Del.
Ch. Jan. 11, 2010)) (characterizing a claim that director defendants “failed to ensure that
[the company] maintained adequate controls regarding its public disclosures and failed to
disclose material information to the public” as “essentially a Caremark claim” and
applying the Rales test); In re China Auto. Sys. Inc. Derivative Litig., 2013 WL 4672059,
at *1, 7 (Del. Ch. Aug. 30, 2013) (applying the Rales test where an Audit Committee
purportedly “failed to monitor adequately the Company’s accounting practices” which led
to the company’s “issuance of false and misleading statements.”).

                                            18
inclusion in the Second and Third Quarter 10-Qs that allegedly omitted material

information in other sections of those quarterly reports.

         C.      Steinberg’s Failure to Make a Demand is Not Excused
         Under Rales, Steinberg’s claims must be dismissed under Rule 23.1 unless the

particularized allegations of the Complaint “create a reasonable doubt that, as of the

time the complaint is filed, the board of directors could have properly exercised its

independent and disinterested business judgment in responding to a demand.”59

When the Complaint was filed in this action, the Board consisted of the seven

Director Defendants. Thus, in order to establish that demand is excused, the

particularized allegations of the Complaint must create a reasonable doubt as to the

independence or disinterestedness of four of those individuals.

         “A director is considered interested where he or she will receive a personal

financial benefit from a transaction that is not equally shared by the stockholders.

Directorial interest also exists where a corporate decision will have a materially

detrimental impact on a director, but not on the corporation and the stockholders.”60

Accordingly, a director can be rendered “interested” with respect to whether




59
     634 A.2d at 934.
60
     Id. at 936 (citations omitted).

                                          19
litigation should be brought when the director would face a “substantial threat” of

personal liability.61

         “Independence means that a director’s decision is based on the corporate

merits of the subject before the board rather than extraneous considerations or

influences.”62 “A director lacks independence for purposes of determining demand

futility when he or she is sufficiently beholden to someone interested in the litigation

that he or she may be unable to consider the demand impartially.”63

         Steinberg does not argue that any of the Director Defendants received a

personal benefit in connection with any of the claims at issue in this case. No

allegations are made, for example, that any of the Director Defendants benefitted

from selling stock in connection with any of the challenged disclosures. Nor does

Steinberg argue that any of the Director Defendants lacked independence with

respect to the challenged statements. Rather, Steinberg’s sole basis for contending

that demand is excused is her contention that a majority of the Board faces a

substantial threat of personal liability with respect to her disclosure claims such that

the Board could not consider a demand impartially.64




61
     Kohls v. Duthie, 791 A.2d 772, 782 (Del. Ch. 2000).
62
     Aronson, 473 A.2d at 816.
63
     Sandys, 2016 WL 769999, at *7 (citing Beam, 845 A.2d at 1050).
64
     Tr. 25-26 (Mar. 27, 2018).

                                             20
         Hortonworks’s certificate of incorporation contains an exculpatory provision

adopted under 8 Del. C. § 102(b)(7).65 Thus, as Steinberg acknowledges, she “must

establish a breach of the duty of loyalty, i.e., bad faith, by a majority of the Board.”66

As this court has held on numerous occasions, “to state a bad-faith claim, a plaintiff

must show either [1] an extreme set of facts to establish that disinterested directors

were intentionally disregarding their duties or [2] that the decision under attack is so

far beyond the bounds of reasonable judgment that it seems essentially inexplicable

on any ground other than bad faith.”67

         Turning to the specific disclosures at issue, the court in In re Citigroup Inc.

Shareholder Derivative Litigation faced an analogous factual scenario.68 There,

plaintiffs alleged that the director defendants violated their duty of disclosure by not

disclosing adequately certain risks that the company faced.69 Former Chancellor

Chandler began his analysis of this derivative claim by explaining what the duty of

disclosure requires:

         Even in the absence of a request for shareholder action, shareholders
         are entitled to honest communication from directors, given with

65
     Rohrer Aff. Ex. A at Art. VII.
66
     Pl.’s Answering Br. 27-28.
67
  In re Meadwestvaco Stockholders Litig., 168 A.3d 675, 684 (Del. Ch. 2017) (quoting In
re Chelsea Therapeutics Int’l Ltd. Stockholders Litig., 2016 WL 3044721, at *7 (Del. Ch.
May 20, 2016) (internal quotations omitted)).
68
     964 A.2d 106.
69
     Id. at 131-32.

                                           21
         complete candor and in good faith. When there is no request for
         shareholder action, a shareholder plaintiff can demonstrate a breach of
         fiduciary duty by showing that the directors deliberately misinformed
         shareholders about the business of the corporation, either directly or by
         a public statement.70

         Applying this standard, the Chancellor found that the pleadings in Citigroup

failed to demonstrate that the director defendants faced a substantial likelihood of

liability for essentially three reasons, two of which are relevant here.71 Specifically,

he found that plaintiffs failed to plead “specific factual allegations that reasonably

suggest sufficient board involvement in the preparation of the disclosures that would

allow [him] to reasonably conclude that the director defendants face a substantial

likelihood of personal liability.”72 The Chancellor also found that plaintiffs did “not

sufficiently allege that the director defendants had knowledge that any disclosures

or omissions were false or misleading or that the director defendants acted in bad

faith in not adequately informing themselves.”73 As discussed below, these two

reasons apply with equal force here, leading me to conclude that a majority of the

Director Defendants does not face a substantial threat of personal liability for

violating the duty of disclosure.


70
     Id. at 132 (citations, internal quotations, and alterations omitted).
71
   Id. at 132-34. The third reason, which is not applicable here, was that plaintiffs had
failed “to allege with sufficient specificity the actual misstatements or omissions that
constituted a violation of the board’s duty of disclosure.” Id. at 132-33 (citation omitted).
72
     Id. at 134 (citation omitted).
73
     Id. (citation omitted).

                                                22
              1.     Statements #2 and #4

       According to the Complaint, Bearden is the person who made the challenged

statements during the November 4, 2015 earnings call and at the industry conference

held on December 1, 2015 (i.e., Statements #2 and #4). Critically, the Complaint

fails to allege facts suggesting that any of the other six directors on the Board were

present at these events or had any personal involvement in making any of these

statements.74 The Complaint also is devoid of any particularized factual allegations

that any of these six directors had knowledge that any of the specific statements

Bearden made during the earnings call or at the industry conference were false or

misleading. For these two reasons, a majority of the Board clearly does not face a

substantial threat of personal liability with respect to Statements #2 and #4.

              2.     Statements #1 and #3

       Statements #1 and #3 consist of an identical disclosure in the Second and

Third Quarter 10-Qs concerning the Company’s liquidity expectations for the next

twelve months: “We believe that our existing cash and cash equivalents balance,

together with cash generated from sales of our support subscriptions and




74
  See id. (“Plaintiffs do not allege facts suggesting that the director defendants prepared
the financial statements or that they were directly responsible for the misstatements or
omissions.”).

                                            23
professional services to customers, will be sufficient to meet our working capital and

capital expenditure requirements for at least the next 12 months.”75

         Steinberg contends that her strongest claim concerns the disclosure in the

Third Quarter 10-Q (Statement #3) because it was made after the August 20, 2015

meeting during which the Board authorized the Company to continue undertaking

preparations for a secondary public offering after hearing a presentation on the

subject.76 According to Steinberg, four of the seven directors on the Board face a

substantial threat of personal liability for acting in bad faith with respect to that

disclosure because (i) Bearden signed a SOX certification for the Third Quarter 10-

Q and (ii) the three members of the Audit Committee (Fenton, Klausmeyer, and

Volpi) approved Hortonworks’s financial statements for inclusion in the Third

Quarter 10-Q, despite knowing that “the Board had approved the [secondary public

offering] and could announce it at any time.”77

         Steinberg’s argument fails in my opinion for two reasons. First, putting aside

Bearden, who is differently situated from all of the other directors because he signed


75
     Compl. ¶¶ 45, 66.
76
  Tr. 32, 45-46 (Mar. 27, 2018). The disclosure of Statement #1 in the Second Quarter 10-
Q was made one week before the August 20 Board presentation that is the lynchpin of
Steinberg’s case and thus, as Steinberg tacitly concedes, that presentation has limited
probative value concerning the directors’ state of mind at an earlier point in time.
77
   Pl.’s Answering Br. 26. Steinberg does not contend that the three remaining directors
(Cormier, Fink, or Rossiter) acted in bad faith with respect to any of the challenged
statements, including the ones in the Second and Third Quarter 10-Qs.

                                           24
a SOX certification for the Third Quarter 10-Q, the problem with this argument is

that merely pleading that the Audit Committee “‘caused’ or ‘caused or allowed’ the

Company to issue certain statements is not sufficient particularized pleading to

excuse demand under Rule 23.1”78 Absent from the Complaint is any particularized

allegation that the members of the Audit Committee played any specific role

concerning the inclusion of Statement #3 in the Third Quarter 10-Q. As the court

explained in Citigroup, these are the types of “factual details that are crucial to

determining whether demand on the board of directors would have been excused as

futile,”79 but they are missing here.

         Second, and more fundamentally, the Complaint fails to plead facts

demonstrating that the members of the Audit Committee acted with the requisite

scienter to support a claim for bad faith.80 Steinberg argues that the Audit Committee



78
   Citigroup, 964 A.2d at 133 n.88; see also id. at 135 (“Although the members of the ARM
Committee were charged with reviewing and ensuring the accuracy of Citigroup’s financial
statements under the ARM Committee charter, director liability is not measured by the
aspirational standard established by the internal documents detailing a company’s
oversight system. Under our law, to establish liability for misstatements when the board
is not seeking shareholder action, shareholder plaintiffs must show that the misstatement
was made knowingly or in bad faith.”); South v. Baker, 62 A.3d 1, 17 (Del. Ch. 2012) (“As
numerous Delaware decisions make clear, an allegation that the underlying cause of
corporate trauma falls within the delegated authority of a board committee does not support
an inference that the directors on that committee knew of and consciously disregarded the
problem for purposes of Rule 23.1.”).
79
     964 A.2d at 133 n.88
80
  Wood, 953 A.2d at 141 (citation omitted) (defining scienter as having “‘actual or
constructive knowledge’ that [one’s] conduct was legally improper”).

                                            25
members (and Bearden) “knew” Statement #3 was false because the entire Board

“heard Davidson’s presentation and approved the [secondary public offering].”81

The critical deficiency in this argument is that Steinberg fails to point to anything in

Davidson’s August 20, 2015 presentation that, fairly read, could be said to

demonstrate knowledge of falsity on the part of the Audit Committee members.

         As her best evidence, Steinberg relies on the second and third reasons listed

in the August 20 presentation explaining why the Company should launch the

secondary public offering at that time:

             Increase liquidity and float as larger investors want more of both

             Alleviate investor concerns of our need to have more cash on the
              balance sheet82

The plain language of these bullet points, however, focuses on stockholder desires

or concerns and not on management’s belief about the Company’s cash position or

operational needs.

         To be more specific, neither of these bullet points negates the truthfulness of

management’s stated belief several months later (i.e., as of November 12, 2015) that

Hortonworks’s “existing cash and cash equivalents balance, together with cash

generated from sales” would be sufficient to meet the Company’s “working capital



81
     Pl.’s Answering Br. 30.
82
     Pl.’s Answering Br. 29 (emphasis omitted).

                                            26
and capital expenditure requirements for at least the next 12 months.” Rather, these

points merely reference, in a generalized way, what “larger investors” want (i.e.,

increased liquidity and float) and “investor concerns” about having “more cash on

the balance sheet.” These statements do not demonstrate that management actually

believed as of November 12, 2015, contrary to Statement #3, that the Company’s

cash on hand and cash expected from sales would not be sufficient to meet the

Company’s working capital and capital expenditure requirements for the next twelve

months or more. Indeed, the fourth and final reason cited in the August 20

presentation for undertaking the secondary public offering—“CFO rulebook #1:

‘always take the $ when you don’t need it’”—strongly implies that management did

not believe it needed to raise cash at the time.83

         In sum, Steinberg has failed to allege with particularity, as the law requires,

facts sufficient to demonstrate that the members of the Audit Committee (or any of

the other three outside directors) (i) were personally involved in including

Statements #1 and #3 in the Second and Third Quarter 10-Qs or (ii) had reason to

know that those statements were false so as to support a reasonable inference that

they intentionally disregarded their fiduciary duties or otherwise acted in bad faith.

As such, I have no reason to believe that at least six of the seven members of the




83
     Rohrer Aff. Ex. D at H_S_15.

                                           27
Board—all outside directors whose independence and disinterestedness are

otherwise conceded—face a substantial threat of personal liability so as to call into

question the ability of a majority of the Board to consider a demand impartially with

respect to those claims.

                                      *****

      For the reasons explained above, demand is not excused for Steinberg’s

breach of fiduciary duty claim. Thus, Count I must be dismissed under Rule 23.1.

      D.     Counts II and III are Derivative of Count I and Must be Dismissed
      Steinberg’s remaining claims, for indemnification and contribution (Count II)

and unjust enrichment (Count III), are both contingent on her ability to adequately

plead Count I.84   Accordingly, because demand is not excused as to Count I, the

same holds true for Counts II and III, which also must be dismissed under Rule 23.1.

IV.   CONCLUSION

      For the reasons explained above, defendants’ motion to dismiss is

GRANTED.

      IT IS SO ORDERED.



84
   See Commonwealth Land Title Ins. Co. v. Funk, 2015 WL 1870287, at *4 (Del. Super.
Ct. Apr. 22, 2015) (dismissing under Rule 12(b)(6) indemnification and contribution
claims where no underlying wrong or common liability was successfully pled); Highland
Legacy Ltd. v. Singer, 2006 WL 741939, at *7 n.73 (Del. Ch. Mar. 17, 2006) (granting
motion to dismiss an unjust enrichment claim where complaint failed to allege how
“individual defendants personally benefitted from the challenged transaction”).

                                         28
