UPDATED 16:03 EST / AUGUST 10 2017

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Big Uber investor Benchmark sues former CEO Travis Kalanick for fraud

Updated Friday

In a blockbuster lawsuit, Uber Technologies Inc. investor Benchmark Capital today sued embattled former Chief Executive Travis Kalanick for fraud and breach of contract and fiduciary duty in an effort to remove him from the board.

The 38-page complaint, filed today in Delaware Chancery Court, was first reported by Axios. It’s a surprising move by a venture capital firm, but it comes amid a constant stream of news about sexual harassment, gender discrimination, a lawsuit by Google Inc. self-driving car unit Waymo Inc. charging that a former Google executive’s self-driving truck startup Otto acquired by Uber involved stolen trade secrets, and other issues.

The language used in the suit indicates Benchmark, which owns 13 percent of Uber’s shares after an early investment, is taking a hard line against Kalanick, who was forced to resign in June following a shareholder revolt:

“Kalanick, the former CEO of Uber, to entrench himself on Uber’s Board of Directors and increase his power over Uber for his own selfish ends. 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.”

In particular, the lawsuit concerns a decision in June 2016 to expand Uber’s board from eight to 11, giving Kalanick the right to choose those seats. He subsequently chose himself to fill one seat after his resignation, though the other seats are still not filled. He also reportedly had lobbied remaining executives and some board members to persuade the board to return him to an operating role.

Benchmark said in the suit that it would not have allowed those new seats if it had known about the “gross mismanagement and other misconduct at Uber.” Kalanick hasn’t helped himself either, getting caught on camera berating an Uber driver and, in another incident, sending a memo to his staff on “sexual rules of engagement” that detailed under what situations they could and couldn’t have sex during an employee event in Miami.

The VC firm also charged that Kalanick promised in his resignation agreement that the two board seats would be independent, which is why Benchmark didn’t act earlier. Benchmark is asking for the June 2016 stockholder agreement to be invalidated, eliminating all three board seats — which would remove Kalanick from the board as well.

Kalanick was quick to respond through a spokesperson, according to Recode:

“The lawsuit is completely without merit and riddled with lies and false allegations. This is continued evidence of Benchmark acting in its own best interests contrary to the interests of Uber, its employees and its other shareholders. Benchmark’s lawsuit is a transparent attempt 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. Travis will continue to act in the interests of Uber and all of its stakeholders and is confident that these entirely baseless claims will be rejected.”

Update: Axios today reported that a group of Uber investors has asked Benchmark to give up its board seat and sell enough shares to eliminate its right to appoint directors. Those who signed the petition are Shervin Pishevar of Sherpa Capital, Ron Burkle of Yucaipa Cos. and Adam Leber of Maverick Management.

The move is highly unusual for a VC firm to take against one of its portfolio companies, though Uber itself is not the subject of the lawsuit. Although Benchmark partner Bill Gurley has publicly defended the company, it’s clear that he and Benchmark want Uber to cut all ties with Kalanick.

As some observers have pointed out, it’s hard to believe that the board wasn’t aware of many of the incidents of misconduct, especially since some of them were very prominently in the news. So although it may have been deceived by Kalanick about some aspects of his management, the lawsuit’s implication that Benchmark didn’t know about some of the problems seems more legal positioning than reality.

In other news, a top Uber executive also stepped down today. Ryan Graves, the first Uber employee who briefly was its first CEO before becoming senior vice president of global operations, said Thursday he’s vacating that position, though he will remain on the board. That’s interesting in part because Graves, Kalanick and co-founder Garrett Camp have voting control of Uber.

However the lawsuit plays out, and it could take a very long time to play out, the move would seem to make it nearly impossible for Kalanick to return — leaving Uber’s fate squarely in the hands of the board.

Photo: Heisenberg Media via Wikimedia Commons

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