PayPal Directors Get Reprieve as Shareholder Venmo Suit Dismissed

PayPal directors caught a break in a shareholder derivative suit over alleged inadequate disclosures about problems with smartphone payment startup Venmo as a federal judge dismissed the case.

The shareholders failed to ask PayPay Holdings Inc. to bring suit on behalf of the corporation before they sued. Nor did they show that such a request was futile, the court said Jan. 18.

PayPal directors allegedly failed to disclose federal regulatory investigations of Venmo, then a service within PayPal, according to the shareholder derivative suitfiled a year ago in the U.S. District Court for the Northern District of California. Failure to disclose Venmo’s problems artificially inflated PayPal’s value, the shareholders said.

U.S. District Judge Richard Seeborg granted PayPal’s motion to dismiss but gave the shareholders 30 days to replead. A PayPal representative declined to comment.

Shareholders’ Lack of Pre-Suit Demand

PayPal shareholders brought suit after the Federal Trade Commission began investigating Venmo for unfair and deceptive trade practices in 2016. PayPal’s former parent company, eBay Inc., acquired Venmo when it bought Braintree Payments, according to the opinion.

To excuse pre-suit demand under Delaware law, the court said, the plaintiffs must show that board members face a substantial likelihood of liability.

The shareholders didn’t provide a basis to assume that PayPal’s board of directors knew about or ignored red flags about Venmo at the time, the court said. They thus failed to plead facts showing a majority of PayPal’s board faced a substantial likelihood of liability on the shareholders’ claims.

To contact the reporter on this story: Jennifer Bennett in Washington atjbennett@bloomberglaw.com

To contact the editor responsible for this story: Seth Stern atsstern@bloomberglaw.com