In Re: infoUSA, Inc. Shareholders Litigation, 2007 WL 2332543 (Del. Ch., Aug. 13, 2007), read opinion here.[updated/revised opinion here.] This Chancery Court decision serves as a veritable “litigator’s guide” on how to successfully plead a derivative case to challenge allegedly excessive executive compensation. The opinion also provides a very practical “step by step tutorial” on how to draft a complaint to successfully allege a breach of fiduciary duty.
This is one of those cases where there is so much “meaty” hard core corporate law analysis, that it is challenging to briefly summarize it in a blog post without leaving out at least some "good stuff".
The court begins the opinion by describing the complaint as testing “the boundaries of the business judgment rule, the protection offered to defendant directors by Court of Chancery Rule 23.1, and the procedural rules by which a plaintiff brings a derivative complaint.” The complaint went into extensive detail to provide a basis for allegations of self-dealing in connection with what the court described as “extravagances [that] included the lease of aircraft and office space for personal use, the provision of a yacht, and the collection of luxury and collectible cars that would leave James Bond green with envy.” Among the requests for relief were an effort to recover derivatively the benefits expropriated from the company by the CEO. The court conducts an extensive analysis of the pre-suit demand requirement and demand futility under both Aronson v. Lewis, 473 A.2d 805, 815 (Del. 1984) and Rales v. Blasband, 634 A.2d 927, 933 (Del. 1993).
Although the court was critical of various deficiencies in the complaint, the court found that there were sufficient allegations to demonstrate that a majority of the directors were neither sufficiently disinterested nor independent enough to consider objectively a demand upon the board and thus demand was excused.
Similarly, under the separate, different standard under Rule 12(b)(6) for a Motion to Dismiss, the court found sufficient facts alleged to state a claim on which relief could be granted. The court lauded the plaintiffs for obtaining details as a factual basis for their allegations through the use of DGCL Section 220. Among the counts in the complaint in addition to breach of fiduciary duty for self-dealing and excessive compensation, the complaint alleged that the challenged transactions were void based on DGCL Section 144 in light of the absence of approval by either disinterested directors or a vote of disinterested shareholders–or transactions that were not fair to the company. In addition, the complaint sought to avoid stock options granted, in light of DGCL Section 157.
At pages 11 and 12 of the Westlaw version of the opinion, the court provides a “how to guide” for plaintiffs to plead a derivative claim for allegedly excessive executive compensation. The court emphasizes that the question of “how much is too much” is a question “far better suited to the boardroom to the courtroom." Nonetheless, the court instructs lawyers preparing such complaints as follows:
“Therefore, a skilled litigant and particularly a derivative plaintiff, recognizing the institutional advantages and competency of the judiciary reflected in our law, places before the Court allegations that question not the merits of a director’s decision, a matter about which a judge may have little to say, but allegations that call into doubt the motivations or the good faith of those charged with making the decision.”
The court explains the two ways that a plaintiff can show pre-suit demand is excused due to the lack of objectivity of a director. First, a plaintiff can show that a given director is personally interested in the outcome of the litigation in that the director will personally benefit or suffer as a result of the lawsuit (though simply being named as a defendant is not enough). Second, a plaintiff may challenge a director’s independence by putting forward specific allegations that raise a reasonable inference that a given director is dominated through a “close personal or familial relationship or through force of will,” or is so beholden to an interested director that his or her discretion would be sterilized. See cases cited at footnotes 31 through 35 explaining the detailed basis for establishing the prerequisite that a majority of directors is either interested or lacking in independence. This analysis must be done on a detailed, fact-intensive, director-by-director basis in light of the composition of the board at the time that a complaint is filed.
The Court’s opinion also provides a practical “how to guide” that is indispensable for lawyers who engage in business litigation to the extent that it explains in detail the successful method to prepare a complaint for a breach of fiduciary duty.
The court teaches as follows:
“An ideal complaint – – to say nothing of subsequent briefing – – would [i] separately address each challenged transaction; [ii] specifically mention whether the transaction was or was not approved by the board of directors (and provide the composition of the board; [iii] describe the purported consideration received by the company for the transaction, if known; [iv] and then conclude with an explanation of why the transaction could not have been made in good faith.”
But, the court observed that: “Rule 8(a) does not demand, however, that plaintiffs present a paragon of the well organized complaint.”
I want to note two classic “money quotes” regarding the Business Judgment Rule. Here they are:
“The rule does not require the Court to bless the conclusion of a director that is self-evidently nonsense on stilts, nor does it protect a board that looks into the sun and names it the moon.”
Moreover, the court continued: “Where, as here, the directors sought shareholder approval of an amendment to a stock option plan that could potentially enrich themselves and their patron, their concern for complete and honest disclosure should make Caesar appear positively casual about his wife’s infidelity.”
In closing, the last nugget that I subjectively selected for this short blog post is from footnote 82 where the Court acknowledges that even though demand was excused, one part of the complaint presents a direct claim for relief by shareholders. Specifically, the court noted that: “Where a disclosure claim states that a shareholder was denied the opportunity to exercise a fully-informed vote, the claim is direct, and where a significant shareholder’s interest is increased at the sole expense of the minority, such a claim is individual in nature and entitles plaintiffs to at least nominal damage. See In Re: J.P. Morgan and Co. S’holder Litig., 906 A.2d 766, 772-776 (Del. 2006) [compare dilution claim] [See blog summary here of the J.P. Morgan case].
UPDATE: Here is a March 2008 letter opinion in this case, courtesy of The Delaware Business Litigation Report, in which the court agreed to stay the case pending the review and determination of a Special Litigation Committee (SLC). The Chancery Court decided that it was not too late to form an SLC after the court ruled that pre-suit demand was excused. The citation is: In Re InfoUSA, Inc. Shareholders Litigation, 2008 WL 762482 (Del. Ch., Mar. 17, 2008). The court only stayed the case until June 30, 2008 and based on the court’s introductory description of this case’s "sordid history", I expect that we will be reading future opinions regarding this saga in the months to come.