Justia.com Opinion Summary: Plaintiff, a former shareholder of infoGroup, Inc., brought its Second Amended Class Action complaint asserting, on behalf of themselves and their fellow former shareholders, that the merger of infoGroup into a subsidiary of CCMP Capital Advisors, pursuant to an agreement entered on March 8, 2010, was the product of breaches by the then-directors of infoGroup of the fiduciary duty of loyalty. The court held that the claim which plaintiff sought to assert was individual in nature and that plaintiff had alleged sufficiently that the merger was not approved by a disinterested and independent majority of the directors. The court also held that, although plaintiff acknowledged that it was not asserting certain claims the dismissal of which had been sought by defendants, for purposes of avoiding confusion, those claims were dismissed. Accordingly, with that limited exception, the court denied defendants' motions to dismiss.
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EFiled: Oct 6 2011 1:09PM EDT
Transaction ID 40221326
Case No. 5334-VCN
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
NEW JERSEY CARPENTERS PENSION
FUND, Individually and On Behalf of All
Others Similarly Situated,
Plaintiff,
v.
INFOGROUP, INC., ROGER SIBONI,
BILL L. FAIRFIELD, VINOD GUPTA,
BERNARD W. REZNICEK, CLIFTON T.
WEATHERFORD, GEORGE KRAUSS,
GARY MORIN, THOMAS L. THOMAS,
JOHN STAPLES III, and LEE D. ROBERTS,
Defendants.
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C.A. No. 5334-VCN
MEMORANDUM OPINION
Date Submitted: June 21, 2011
Date Decided: September 30, 2011
Revised: October 6, 2011
Seth D. Rigrodsky, Esquire and Brian D. Long, Esquire of Rigrodsky & Long,
P.A., Wilmington, Delaware; Anita Kartalopoulos, Esquire, Benjamin Y.
Kaufman, Esquire, Kent A. Bronson, Esquire, Andrei V. Rado, Esquire, and
Jessica Sleater, Esquire of Milberg LLP, New York, New York; and Albert G.
Kroll, Esquire of Kroll Heineman, LLC, Iselin, New Jersey, Attorneys for Plaintiff.
Cover Page revised 10/6/11
Randall J. Baron, Esquire, Albert (Rick) Atwood, Jr., Esquire, David T.
Wissbroecker, Esquire, and David A. Knotts, Esquire of Robbins Geller
Rudman & Dowd LLP, San Diego, California, Attorneys for Nebraska Plaintiffs.
Collins J. Seitz, Jr., Esquire and Bradley R. Aronstam, Esquire of Seitz Ross
Aronstam & Moritz LLP, Wilmington, Delaware, and Steven M. Schatz, Esquire
and Steven Guggenheim, Esquire of Wilson Sonsini Goodrich & Rosati, Palo Alto,
California, Attorneys for Defendants infoGROUP, Inc., Roger Siboni, Bill L.
Fairfield, Bernard W. Reznicek, Clifton T. Weatherford, George Krauss, Gary
Morin, Thomas L. Thomas, John Staples III, and Lee D. Roberts.
Kevin G. Abrams, Esquire of Abrams & Bayliss LLP, Wilmington, Delaware;
Charles W. Cox, Esquire of Latham & Watkins LLP, Los Angeles, California; and
Derrick B. Farrell, Esquire of Latham & Watkins LLP, Washington, DC, Attorneys
for Defendant Vinod Gupta.
NOBLE, Vice Chancellor
I. INTRODUCTION
Plaintiff, a former shareholder of info
info
brings its Second Amended Class Action Complaint (the
of infoGROUP into a subsidiary of
shareholders, that the merger
CCMP Capital Advisors,
nt to an agreement entered on
March 8, 2010, was the product of breaches by the then-directors of infoGROUP of
the fiduciary duty of loyalty. Defendants have moved for partial and full dismissal.
They contend that (1) the allegations of the Complaint do not, under Court of
Chancery Rule 12(b)(6), state a claim upon which relief may be granted and (2) the
Plaintiff lacks standing to pursue its claim, which can be asserted, if at all, only in a
derivative action and not through a direct action.
The Court concludes in this Memorandum Opinion that the claim which the
Plaintiff seeks to assert is individual in nature and that the Plaintiff has alleged
sufficiently that the merger was not approved by a disinterested and independent
majority of the directors. Additionally, although the Plaintiff acknowledges that it
is not asserting certain claims the dismissal of which has been sought by
Defendants, for purposes of avoiding confusion, those claims are dismissed.
Accordingly, with that limited exception, the Court denies
dismiss.
1
II. PARTIES
Plaintiff New Jersey Carpenters Pension Fund was a shareholder of
infoGROUP at all times relevant to this action.
The individual defendants were all directors of infoGROUP.
) was a director of the Company and the
stock. He is also the founder of infoGROUP, and served as Chief Executive
d Chairman of the Board
Chairman
before the period
relevant for purposes of this lawsuit. In addition to voting in favor of the Merger
entered into a voting
agreement in which he agreed to vote his shares in favor of the Merger.
The remaining i
consist of the
other members of the Board during the relevant time period: Bill L. Fairfield
Roger Siboni
Krauss
Bernard W. Reznicek
), Clifton T. Weatherford
Thomas L. Thomas
John Staples III
George
Gary Morin
Lee D.
Roberts
Chairman beginning in July 2009, when
Reznicek stepped down from that position. Siboni, Morin, and Thomas composed
2
formed
to
review
info
strategic
alternatives,
and
ultimately,
recommended the Merger. Morin chaired the M&A Committee.
infoGROUP was an international marketing solutions provider incorporated
under the laws of Delaware, with its principal offices located in Omaha, Nebraska.
III. BACKGROUND1
The Complaint alleges that a seemingly disinterested (aside from Gupta) and
independent Board came under the control of Gupta, a fellow Board member and
Board arose not from financial dependence, business relationships, or interlocking
board memberships, but from a pattern of threats aimed at other Board members
and unpredictable, seemingly irrational actions that made managing the Company
difficult and holding the position of director undesirable. Having achieved the
necessary level of domination, Gupta forced the Merger on the Company at an
inopportune time and utilizing a flawed and inadequate sales process. This sale
was allegedly orchestrated so that Gupta could obtain desperately needed liquidity;
1
Unless otherwise noted, the factual background is taken from the Complaint, the well-pleaded
allegations of which, for present purposes, must be taken as true. Cent. Mortg. Co. v. Morgan
Stanley Mortg. Capital Holdings LLC, 2011 WL 3612992, at *5 (Del. Aug. 18, 2011). In certain
instances, the Court will rely upon info
ement (Schedule 14A)
filed on May 28, 2010
rule, the Court is limited to considering only the facts alleged in the complaint when deciding a
motion to dismiss under Court of Chancery Rule 12(b)(6), the Court may consider documents
both integral to and incorporated into the complaint, and documents not relied upon to prove the
truth of their contents. Orman v. Cullman, 794 A.2d 5, 15-16 (Del. Ch. 2002). Consideration of
the Proxy is appropriate in this case, as it is both integral to and incorporated into the Plaintiff s
complaint.
3
he is not alleged to have obtained any other additional financial benefit different
from the merger price paid to other shareholders.
A.
As alleged by the Plaintiff, Gu
largely from
past legal actions, whose relevance in the current proceeding pertains primarily to
his motivation for allegedly forcing the sale of infoGROUP. In 2007, Gupta settled
derivative claims arising from a series of allegedly self-interested transactions that
utilized Company funds.2 The resulting settlement order directed Gupta personally
to reimburse $9 million to infoGROUP over a five year period. At the time the
Complaint was filed, $4.6 million of this amount was still outstanding, and it was
due by January 2013. Under the terms of the settlement, Gupta also agreed to step
down as CEO and Chairman of infoGROUP.
The Securities and Exchange Commission ( SEC ) also launched an
A settlement of
was
announced on March 17, 2010, a little more than one week after the Board
approved the Merger and Gupta entered into a voting agreement with CCMP. The
settlement required Gupta to pay $5,190,400 of disgorgement plus interest to
infoGROUP and a $2,240,700 civil penalty to the SEC. Gupta was also barred for
life from acting as an officer or director of any public company, and by the time
2
, 953 A.2d 963 (Del. Ch. 2007).
4
the settlement was announced, Gupta had already resigned from the Board.
Furthermore, the settlement required Gupta to vote his shares in the same
proportion as other shareholders, although he secured a carve-out from this
requirement allowing him to enter into a voting agreement with CCMP in
connection with the Merger.
At the time the Complaint was filed, Gupta owed over $12 million as a result
of the derivative and SEC settlements. Gupta also had debt exceeding $13 million
related to several loans taken out to buy infoGROUP stock. This alleged liquidity
crunch was exacerbated by the facts that Gupta had not received a salary since
leaving his job as CEO under the terms of the derivative settlement, and that he did
not hold investments that provided him with meaningful cash.
3
-million dollar debts and his decreased cash inflow,
his desire for liquidity also, allegedly, stemmed from his plans to launch a new
business. Reportedly, Gupta had been contemplating starting a new business for
two years before the sale of infoGROUP, and within two months of the sale, Gupta
announced that he was founding a new online business, Database101.com.
According to press reports, Gupta plans to fund this business entirely with his own
money. Further, he reportedly expects the company to grow quickly, reaching
3
More than half
ted in infoGROUP, which had ceased paying a
dividend. See Compl. ¶ 32-33. When asked, Gupta could not identify investments that provided
hi
Id. at ¶ 31.
5
$100 million in revenues within three to four years, and expanding from 50 to 200
or 300 employees within a few years.
James & Associates Inc. to discuss the possibility that Gupta could sell his shares
4
problems and how they might impact the Company.
connection to the sale of infoGROUP was
laid bare in late 2008 when he engaged his personal bankers, Blackstone Advisory
, to facilitate either his purchase of infoGROUP or the
sale of his stock. In an email to Blackstone regarding a possible sale of his shares,
ty for the [Gupta] family thru sale of Info
5
Gupta eventually abandoned his efforts to purchase the Company due to the
unavailability of financing. This left him with only one option to achieve his
desired liquidity: sale of infoGROUP to a third-party. It is alleged that sale of the
4
Id. at ¶ 38 (quoting Transmittal Aff. of Kent A. Bronson, Ex. 27 (Email from Fairfield to
Joseph Estes of Raymond James dated Oct. 13, 2009 and reply from Estes to Fairfield dated Jan.
13, 2010)).
5
Id. at ¶ 36 (quoting Transmittal Aff. of Kent A. Bronson, Ex. 26 (Email from Gupta to A.J.
Agarwal of Blackstone dated May 6, 2009)).
6
entire company, as opposed to a sale of only his shares, was highly advantageous
to Gupta, since the size of his position rendered it illiquid. In order to consummate
a block sale of his shares, it was expected that Gupta would have to accept a
significant liquidity discount. Likewise, selling his shares into the market was not
an attractive option, as selling such a large number of shares would exert
downward pressure on the share price. Thus, for Gupta, the sale of infoGROUP
was the best option to fulfill his need for liquidity, regardless of whether the
timing, price, or process employed were in the best interests o
other shareholders.
B.
The Complaint alleges that the catalyst for the eventual sale of infoGROUP
came in the form of Gupta
,
6
at a time when info
future prospects were improving and the market was ill-suited for a sale, and that
s for a sale after succumbing to
pressure exerted through a pattern of threats and bullying. In early 2009, in
ss release encouraging a sale (discussed
below), then-Chairman Reznicek issued a press release stating that market
conditions would make it difficult to obtain a good price for the Company, and that
his plan included cutting
6
Id. (quoting Fairfield Dep. Tr. at 42).
7
of
entities, and measures aimed at increasing organic growth. Even Evercore Partners
which the Board retained to help the Company explore strategic
7
Despite info
&A market, Gupta
issued a press release on December 18, 2008, recommending that the Company
explore its strategic alternatives, including a possible sale of the company. This
press release was issued without Board approval, and other Board members were
Soon after the press release, Gupta advised the
at the company needs to be sold . . . as it will provide a
8
elicate methods of
persuasion. As alleged in the Complaint, Gupta repeatedly threatened other Board
members with lawsuits if they did not take actions to sell the company. Gupta also
told the Board that he had uncovered evidence of financial fraud at the Company,
s will be sued again, even
7
Id. at ¶ 45 (quoting Sobol Dep. Tr. at 19-20).
Id. at ¶ 36 (quoting Transmittal Aff. of Kent A. Bronson, Ex. 25 (Memorandum from Gupta to
the Board dated Dec. 22, 2008)).
8
8
9
Throughout
2009,
management, including then-CEO and Board member Fairfield. This conduct
allegedly drove down the morale and performance of management.
behavior. Morin described
resulting in inefficiency and frustration on the part of other Board members.10 Due
to
Reznicek did resign his position as Chairman because of Gupta. Ultimately, as
alleged by the Plaintiff, the Board was simply overwhelmed by Gupta. An email
exchange between Thomas and Roberts gives voice to this concern. In his email,
certainly the ones with the most in depth perspective as to opinions. The others,
Bernie, George, Bill, John Staples, have history and may be tired for a lot of
9
Id. at ¶ 51 (quoting Transmittal Aff. of Kent A. Bronson, Ex. 35 (Email from Gupta to the
Board dated June 14, 2009)).
10
See id. at ¶ 68 (quoting Morin Dep. Tr. at 37).
9
11
C. The Sale of infoGROUP
ase
earlier that day, the Board announced that the Company would retain Evercore as
the financial advisor to the independent directors to help them analyze the
.12
be formed to address proposals to acquire the Company. The next day, the Board
approved the formation of the M&A Committee comprised of purportedly
independent directors Morin, Siboni, and Thomas.13 Morin was appointed as the
chair of the M&A Committee.14
The Board instructed Evercore to begin preparing the necessary information
and materials to conduct a formal transaction process on August 25, 2009. On
September 29, 2009, the Board gave final approval to commence the sales process.
11
Id. at ¶ 76 (quoting Transmittal Aff. of Kent A. Bronson, Ex. 62 (Email from Thomas to
Roberts, Morin, and Siboni dated Jan. 26, 2010 and reply from Roberts to Thomas, Morin, and
Siboni dated Jan. 26, 2010)). This exchange is hardly dispositive of the question of whether the
Board was under the control of Gupta, and very well could show that the Board was diligent in
fulfilling its fiduciary duties by assessing every risk facing the Company in the proposed merger.
Of course, for purposes of a motion to dismiss, the Court must draw all reasonable inferences in
favor of the non-moving party, and will do so when considering this allegation.
12
Proxy at 17.
13
Id. at 18.
14
Id.
10
From October 1, 2009, through October 5, 2009, Evercore contacted potential
).
Initial bids were submitted on or shortly after November 3, 2009, and based upon
these bids, certain parties were invited to participate in the second round of
bidding.
On February 12, 2010, Vector submitted an offer of $8 per share.
It
and
requested an additional three weeks to complete its due diligence. Vector sought
exclusivity in negotiating with infoGROUP, a request that was denied. Vector
later relented on its request for exclusive negotiations.
The same day, CCMP submitted its offer of $8.40 per share. It similarly
provided a debt financing commitment letter from BofA and requested one
additional week to complete its due diligence. Like Vector, CCMP sought and was
denied exclusivity in negotiating with infoGROUP.
The M&A Co
in terms of price, but also because of the additional due diligence requested, its
request for exclusivity, unfavorable merger terms, and the fact that its debt
commitment letter was more prelim
swiftly
informed CCMP that it was the high bidder, and encouraged it to finish due
diligence quickly so a definitive agreement could be executed.
11
The Board then authorized the M&A Committee to negotiate with CCMP on
a non-exclusive basis, and to inform Vector that its proposal was inferior and the
Company would be moving forward with a different bidder. Vector reacted to this
news on February 17, 2010, by retracting its request for exclusivity, assuring
Evercore that
the claim that its merger terms were at all onerous. Vector further stated that it
might be able to raise its price, if granted the additional due diligence it had
requested. Allegedly, Vector was told by Evercore not to bother.15
On March 3, 2010, CCMP lowered its bid to $7.60, purportedly based upon
preliminary February 2010 revenue results, limited evidence regarding the
ebt commitment,
and the discovery of additional tax liabilities through due diligence. A few days
later, on March 7, 2010, the Company agreed to accept an offer of $8.00 per share
from CCMP. The CCMP offer provided infoGROUP with a 21period, but included a termination fee and matching rights that allowed CCMP to
match any competing superior offer within five days of receiving the required
notification of such a proposal from infoGROUP.
Later on March 7, the Board unanimously approved the transaction and
Merger Agreement, and authorized the M&A Committee to prepare the definitive
15
Compl. ¶ 61.
12
documents. The next day, March 8, the Merger Agreement was entered and Gupta
vote his shares in favor of the Merger. The Merger was announced on March 8,
2010. The infoGROUP shareholders approved the Merger on June 29, 2010, and it
closed on July 1, 2010.
D. Alleged Deficiencies in the Sales Process and Unfair Price
The Plaintiff alleges that there were several deficiencies in the sales process,
and that info
alleged that not all bidders were treated equally, and, specifically, that CCMP was
favored in the bidding process and Vector disadvantaged. For example, during the
second round of bidding,
data and given permission to contact its customers in order to perform direct
customer due diligence. Vector asked for this type of customer due diligence and
was denied it. Vector also requested and was denied details of the pending SEC
settlement with Gupta that were provided to CCMP. Further
ownership was seemingly treated as a foregone conclusion. For example, on
16
Finally, after CCMP lowered its bid, the
16
Id. at ¶ 60 (quoting Transmittal Aff. of Kent A. Bronson, Ex. 59 (Email from Fairfield to
Vignesh Rajendran of Evercore dated Feb. 21, 2010)).
13
Board failed to pursue a potentially higher offer from Vector, despite overtures
from Vector on March 4 and March 7.
the threats aimed at the Board and management, Gupta is alleged to have disrupted
the sales process by influencing the list of potential bidders, conducting
unsupervised negotiations, and leaking confidential information about the sale to
various parties.
First, Gupta influenced the list of potential bidders. In September 2009, the
. He
These changes were ultimately made.
Gupta also spoke to many bidders without Board supervision. Gupta spoke
with Vector, CCMP, Silver Lake, D&B, and Apex Capital, among other bidders,
often without the supervision of the Board, the M&A Committee, or Evercore.
Gupta persisted in this behavior even after the Board asked him to stop. Gupta
justified this conduct by explaining that it was acceptable, so long as he was acting
as a shareholder, not a director.
Further, Gupta is alleged to have leaked confidential information to third
parties.
These leaks include a leak of the Vector interest letter to a large
infoGROUP shareholder and possible improper communications with the sole
14
analyst covering the Company, Carter Malloy of Stephens Inc. In both cases, the
Board suspected that Gupta was the source of the leak. Similarly, the Board
suspected that Gupta was the source for a leaked story that appeared in the Omaha
World Herald. As a result of this story and the related market reaction, Evercore
reported on November 5, 2009, that a few potential bidders were unwilling to
proceed with the process.
The Plaintiff also alleges that there were many material misrepresentations
re the
same that were before this Court in the Plaintiff s previous motion for a
preliminary injunction. Broadly speaking, the alleged disclosure deficiencies relate
lleged improper and disloyal activities, information regarding
in its efforts to make a bid for the Company.
Finally, the Plaintiff alleges
self-interested actions
shareholders received an unfair price for their shares. In support of this contention,
the Plaintiff notes that the final sales price of $8.00 per share was below the market
price of $8.16 per share just prior to the announcement of the Merger.
15
IV. THE CONTENTIONS
The Plaintiff alleges that Gupta used his status as a director and the
e expense of
the other infoGROUP shareholders. It contends that Gupta was interested in the
Merger due to his desire for liquidity, and that his conduct tainted the merger
process and denied info
The
Plaintiff further alleges
ntrol
after being cowed by his threats and hostile, erratic behavior, and as a result, they
breached their duty of loyalty by approving a merger that provided Gupta with a
unique financial benefit at the expense of other shareholders.
In response, the Board Defendants argue that this Court resolved the
question of whether the alleged disclosure deficiencies were material when it
denied the Plaintiff s request for a preliminary injunction. They further maintain
that even if this Court were to find that there were material disclosure violations,
money damages would not be an appropriate remedy for these violations. Finally,
the Board Defendants argue that to the extent the Plaintiff is asserting a claim
-merger actions
namely, his creation of a new
infoGROUP
this claim must fail. They
contend that the Plaintiff makes no allegations that any of the Board Defendants
were a
plans or that otherwise link any of the Board Defendants to
16
-merger activities. They further maintain that the allegations describe,
at best, a claim for a misappropriation of a corporate opportunity, a claim that
could only be brought by infoGROUP and for which the Plaintiff has no standing
to bring as a derivative action, since it is no longer a shareholder of infoGROUP.
Gupta joins the Board Defendants in the above arguments addressing the
Plaintiff s disclosure claims and claims relating to Database101.com.
Gupta
further contends that the Plaintiff s complaint does not contain specific factual
allegations to support a claim that Gupta breached his fiduciary duties, either by
red bidder.17 Gupta also argues that,
to the extent the Plaintiff is asserting a claim against Gupta for disclosure
violations in the Proxy, Gupta cannot be held liable, since the Proxy was not filed
until after Gupta resigned from the Board. Similarly, Gupta contends that any
claim related to his creation of a competing business must fail, as
Database101.com was not launched until after he had left the Board. Finally,
Gupta maintains that the Plaintiff
loyalty claim is derivative in nature, and thus,
17
See Mills Acquisition Co. v. Macmillan, Inc., 559 A.2d 1261, 1282-84 (Del. 1989). Both of
these contentions seek to challenge the Plaintiff s duty of loyalty claim. As discussed below, the
Court finds that the Plaintiff has pled sufficient facts that, if accepted as true along with all
reasonable favorable inferences, support a duty of loyalty claim based upon the theory that Gupta
was interested in the Merger and the Board Defendants lacked independence. Since the
Plaintiff s loyalty claim ultimately survives this motion to dismiss, the Court will not now rule
on various alternative ways a loyalty claim could be framed or articulated.
17
the Plaintiff lost standing to assert this claim when its status as a shareholder of
infoGROUP was terminated as a result of the Merger.18
V. ANALYSIS
A. Applicable Standard
As was recently reaffirmed by the Delaware Supreme Court, the pleading
standards governing a motion to dismiss are minimal.19 When considering a
motion to dismiss under Court of Chancery Rule 12(b)(6), the Court should
accept all well-pleaded factual allegations in the Complaint as true, accept even
vague allegations in the Complain
-
if they provide the defendant
notice of the claim, draw all reasonable inferences in favor of the plaintiff, and
deny the motion unless the plaintiff could not recover under any reasonably
conceivable set of circumstances susceptible of proof.
20
B. Loyalty Claim
The Plaintiff asserts that the Board breached its duty of loyalty to the
shareholders in connection with its approval of the Merger, and that as a
consequence of this breach, Gupta received a unique financial benefit, liquidity, at
the expense of other infoGROUP shareholders. Gupta seeks full dismissal of the
Plaintiff s duty of loyalty claim; the Board Defendants do not join him in seeking
18
See Lewis v. Anderson, 477 A.2d 1040, 1049 (Del. 1984).
Cent. Mortg. Co., 2011 WL 3612992 at *5.
20
Id.
19
18
full dismissal of this claim. In their briefs, Gupta and the Plaintiff disagree about
how this claim should be characterized and the precise grounds upon which it is
being brought.21 Semantics aside, two important points are abundantly clear. First,
the Plaintiff brings forth a claim that Gupta and the Board Defendants approved the
Merger in breach of their duty of loyalty. The crux of this claim is that, at the time
the Merger was approved, Gupta was an interested director and the remaining
directors were controlled by him, and thus, not independent. Second, Gupta seeks
full dismissal of this loyalty claim under Rule 12(b)(6). With this basic framework
in mind, the Court will assess the Plaintiff s loya
to
it under the standards for dismissal under Rule 12(b)(6).
1. Business Judgment Rule and Entire Fairness
The business judgment rule is at the foundation and core of Delaware
corporate law.22 The rule is a presumption that directors of a corporation act
23
actions were in the
Since the board is presumed to
have acted properly, the burden is on the plaintiff challenging the decision to
establish facts rebutting this presumption.24
21
See Pl s
Br. at 3, 28-29, 36-37.
Binks v. DSL.net, Inc., 2010 WL 1713629, at *5 (Del. Ch. April 29, 2010) (quoting In re
, 2005 WL 2481325, at *5 (Del. Ch. Sept. 29, 2005)).
23
Williams v. Geier, 671 A.2d 1368, 1376 (Del. 1996).
24
Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984).
22
19
One way to overcome this burden is to allege facts which, if accepted as
interest in the transaction or were dominated or controlled by a materially
25
If such facts are sufficiently alleged, the business judgment
rule is rebutted and entire fairness standard of review is applicable.26
Notwithstanding the effects of any procedural safeguards utilized in approving the
transaction, the initial burden of proving the entire fairness of the transaction is
borne by the defendants.27
a motion to dismiss under
Rule 12(b)(6) by pleading facts from which a reasonable inference can be drawn
that a majority of the board was interested or lacked independence with respect to
28
2. Director Gupta
A director is considered interested in a transaction if he rec
financial benefit from a transaction that is not equally shared by the
stock
29
This benefit must have been material to the director.30 A benefit
was material when it was significant enough
25
Orman, 794 A.2d at 22 (quoting Crescent/Mach I Partners, L.P. v. Turner, 846 A.2d 963, 979
(Del. Ch. 2000)).
26
See id.
27
See Orman, 794 A.2d at 20.
28
, 2009 WL 2225958, at *6 (Del. Ch. July 24, 2009) (citing
Orman, 794 A.2d at 22-23).
29
Rales v. Blasband, 634 A.2d 927, 936 (Del. 1993).
30
Orman, 794 A.2d at 23.
20
economic circumstances, as to have made it improbable that the director could
perform her fiduciary duties to the . . . shareholders without being influenced by
her overriding pe
31
The Plaintiff alleges that Gupta was materially interested in the Merger
because it provided him with desperately needed liquidity. Liquidity has been
recognized as a benefit that may lead directors to breach their fiduciary duties.32
As alleged by the Plaintiff, this need for liquidity arose from a confluence of
factors. On one side of the ledger were debts and investments that required cash.
The Plaintiff asserts that, at the time the Complaint was filed, Gupta owed an
amount exceeding $12 million under the SEC and derivative settlements, and over
$13 million related to loans used to buy infoGROUP shares.33 Furthermore, it is
reasonable to infer from the original and outstanding derivative settlement balances
pled in the Complaint, that Gupta had reimbursed the Company approximately
31
, 734 A.2d 611, 617 (Del. 1999). Furthermore,
s not a magic word that must be recited in a complaint before
Orman, 794 A.2d at 23. A finding of interest may
benefit received from a challenged transaction by that director to the exclusion of the
Id. Thus, if the facts alleged and favorable
was material
to him, it is of no consequence that the Plaintiff
relation to this purported benefit.
32
See McMullin v. Beran, 765 A.2d 910, 922the fac
potential shareholder value in order to obtain immediate cash for ARCO).
Compl. ¶ 29.
33
21
$4.4 million in recent years under the terms of the derivative settlement,34 which
would have further depleted his available cash. Finally, as alleged by the Plaintiff,
lans to start a new business were another reason he needed to raise
cash.35 As contended by the Plaintiff, Gupta launched Database101.com shortly
after the Merger, and had been planning to start a new business for two years; 36
thus, it is reasonable to infer that he would have been contemplating its funding
during the time in question. Based upon the well-pleaded facts that Gupta plans to
self-fund this new venture and expects rapid growth,37 it is also reasonable to infer
that he would anticipate a need for a significant amount of cash to fund the
uirements were allegedly quite large, the Plaintiff
asserts that he had no discernible, significant sources of cash inflow. It alleges that
he has not received a salary since he was forced from his role as info
CEO in 2008, and was no longer receiving dividends from his infoGROUP stock.38
The Plaintiff also asserts that,
investments that provide him with mean
;39 from this the Court infers
that he had no such investments because, otherwise, one would reasonably be
34
See id. at ¶ 26.
Id. at ¶ 40.
36
Id. at ¶¶ 40, 43.
37
See id. at ¶ 41.
38
Id. at ¶¶ 31, 33.
39
Id. at ¶ 31.
35
22
expected to be able to identify any investments one holds
The Plaintiff further alleges that Gupta could not obtain the necessary
magnitude of liquidity, absent a sale of the entire Company or a willingness to
accept a significant liquidity discount on the sale of his block of shares.40 As
king with
41
In order to be considered interested, a director need not merely receive a
benefit, but must receive a material benefit.42 Gupta ultimately received over $100
million in cash for the sale of his shares in the Merger.43 Accepting the Plaintiff s
well-pleaded factual allegations as true, the Court cannot find as a matter of law
that receipt of $100 million in cash by a man purportedly in desperate need of
liquidity is immaterial. In a similar
44
yet somewhat different
scenario, the Court
Similarly, it would naïve to say, as a matter of law, that $100
40
Id. at ¶ 53.
Id. at ¶36 (quoting Transmittal Aff. of Kent A. Bronson, Ex. 26 (Email from Gupta to A.J.
Agarwal of Blackstone dated May 6, 2009)).
42
See Orman, 794 A.2d at 23.
43
Compl. ¶ 8.
44
Orman, 794 A.2d at 31. These two scenarios are not directly comparable because in Orman
41
if it was not. In the instant case, Gupta would have owned a valuable asset
23
either infoGROUP
million in cash is immaterial to a man in need of liquidity. In addition to the size
of the benefit received by Gupta, the alleged ultimate use of the cash also supports
a reasonable inference that this benefit was material to him. As alleged by the
Plaintiff, Gupta used some of this money to start a new business. If this new
business is successful
and, as alleged by the Plaintiff, Gupta himself strongly
believes it will be45
it is reasonable to infer that it can provide a long-term
dividends.
The Plaintiff s well-pleaded facts also support an inference that the liquidity
benefit received by Gupta was a personal benefit not equally shared by other
shareholders. All shareholders, including Gupta, received $8 per share in cash for
their shares.46
There are no allegations that Gupta received any additional
compensation as a result of the Merger from, for example, side deals, a golden
parachute, or compensation as an executive under info
As
stock or cash regardless of whether the deal went through. Instead, the Merger provided him
with liquidity, which, accepting the Plaintiff s well-pled facts as true, was a benefit he sorely
needed. But, the basic premise regarding materiality is the same. Just as a $3.3 million fee
contingent on a merger cannot be easily dismissed as immaterial, neither can receipt of $100
million in cash contingent on a merger when it is to be received by a person desperately seeking
liquidity.
45
See Compl. ¶ 41.
46
Proxy at 59. In addition to shares of common stock, Gupta also owned options entitling him to
224,999 shares of common stock upon their exercise. Compl. ¶ 8. According to the Complaint,
all of these options had vested by the time the Merger was consummated. See id. Aside from
liquidity, the Plaintiff makes no allegations that Gupta received any improper benefit resulting
from his ownership of these options.
24
explained above, the Plaintiff alleges that Gupta received a benefit in the form of
liquidity for his large and, allegedly, illiquid stake in the Company.
While all of the shareholders received cash in the Merger, liquidity was a
position resulted from its size,47
stock.48
T
nd largest shareholder held less than 6% of its
stock.49 While not an insignificant stake, these holdings were far smaller than
These well-pleaded facts support a reasonable inference that, with the exception of
Gupta, info
Thus, while the other shareholders did receive cash, liquidity was not a benefit to
them, as it was to Gupta, because their investment in infoGROUP stock was
already a relatively liquid asset prior to the Merger.
As discussed above, it is reasonable to infer that Gupta suffered a disabling
interest when considering how to cast his vote in connection with the Merger,
which would provide him with over $100 million in cash.
47
See Compl. ¶ 53 (discussing the liquidity discount required for Gupta to sell his shares in a
block trade due to the size of his stake and his inability to sell his shares into the market due to
48
49
Id. at ¶ 33.
Id. at ¶ 79.
25
3. Board Defendants
As defined by the Aronson
decision is based on the corporate merits of the subject before the board rather than
50
These extraneous considerations and
influences may exist when the challenged director is controlled by another.51
hat the directors
52
are . . . so
Control
may also occur where a director is in fact dominated by another party, and
domination can occur through force of will.53
from their financial dependence upon him or any sort of close familial or business
relationships. Instead, he is alleged to have dominated the Board Defendants
through a pattern of threats that could, arguably, have intimidated the Board
Defendants. As alleged in the Complaint, Gupta repeatedly threatened the Board
Defendants with lawsuits if they did not take actions to sell the company. 54 Gupta
also reported to the Board Defendants that he had uncovered evidence of financial
fraud at the Company,
some directors would be
50
Aronson, 473 A.2d at 816.
Orman, 794 A.2d at 24.
52
Id. (quoting Rales, 634 A.2d at 936).
53
Id. at 25 n. 50.
54
Compl. ¶ 48.
51
26
55
sued for not
Also, throughout 2009
Gupta
including then-CEO and Board member Fairfield.56
Taken as true, one may reasonably infer from these allegations that Gupta
sought to intimidate the Board Defendants, and in doing so, dominate them, so that
they would capitulate to his demands to sell the Company. The Plaintiff has
, indeed, have a significant impact on other
members of the Board.
Allegedly, Reznicek resigned as Chairman and
Weatherford threatened to resign from the Board altogether as a
behavior.57 Furthermore, in an email exchange between Board Defendants Thomas
and Roberts, the two voice concerns tha
58
Keeping in mind that on a motion to dismiss under Rule 12(b)(6) the Court
must accept all well-pleaded factual allegations in the Complaint as true, accept
even vague allegations . . .
-
55
Id. at ¶ 51 (quoting Transmittal Aff. of Kent A. Bronson, Ex. 35 (Email from Gupta to the
Board dated June 14, 2009)). See also id. at ¶ 90 (citing various other instances in which Gupta
raised the specter of legal actions against the Board).
56
Id. at ¶ 48.
57
Id. at ¶ 49.
58
Id. at ¶ 76.
27
the claim, [and] draw all reasonable inferences in favor of the plaintiff
59
it is
reasonable to infer that Gupta dominated the Board Defendants through a pattern
of threats aimed at intimidating them, thus rendering them non-independent for
purposes of voting on the Merger.60
Having found that the Plaintiff pleaded sufficient factual allegations to
support a reasonable inference that a majority of the Board was interested or lacked
independence,
the Plaintiff s loyalty claim under Court
of Chancery Rule 12(b)(6) is denied.
C. Disclosure Claims
Gupta and the Board Defendants seek dismissal of any and all disclosure
claims. At oral argument, the Plaintiff acknowledged that it is no longer bringing a
separate disclosure claim,61 and that the factual allegations regarding the allegedly
59
Cent. Mortg. Co., 2011 WL 3612992 at *5.
The Board did create a purportedly independent committee, the M&A Committee, to review
proposals to acquire the Company. Compl. ¶ 52. According to the Proxy, the M&A Committee
ultimately recommended the Merger to the full board of directors. Proxy at 34. As previously
noted, the M&A Committee was composed of Siboni, Morin, and Thomas, all Board Defendants
and members of the Board. As members of the Board, they were subjected to the threats and
intimidating behavior described above. As previously noted, one may reasonably infer that the
Board Defendants were dominated by Gupta, and thus, not independent for purposes of voting
for the Merger. This reasonable inference of non-independence extends to Siboni, Morin, and
Thomas in their capacity as M&A Committee members; therefore, for present purposes, the
Court need not consider the effect the approval by an independent committee would have had on
this transaction.
61
The Plaintiff seems, at times, to be reluctant to give up its disclosure claims. It asserts that the
Court, after trial, could determine that certain of its disclosure claims were material.
at 4. A blunderbuss reference to prior briefs, without any focus, does not suffice to rebut a
motion to dismiss that is otherwise not contested.
60
28
deficient disclosures are set forth in support of its loyalty claim.62 Thus, the
disclosure claims are dismissed.63
-Merger Activities
D.
Gupta and the Board Defendants seek dismissal of any claims against them
based upon G
-merger activities. In its
motions to dismiss, the Plaintiff acknowledges that it is not making a claim against
the Board Defendants or Gupta based upon Gupt
post-merger activities.64 The Plaintiff further explains that
it included allegations regarding these activities in its
post-merger actions are probative of his interest in the Merger, namely, liquidity,
which was allegedly needed, in part, to fund Database101.com.65 Accordingly,
claims
62
-merger activities, if there are any, are dismissed.
See Oral Arg. on Mots. to Dismiss Tr. 27-30 (June 21, 2011).
63
al
allegations. Instead, it is an effort to clarify what claims have been asserted and remain for
resolution. Facts that do not on their own establish liability may, nonetheless, still inform and
assist the decision-making process.
64
See Pl s
Br.
id.
65
See id. at 2motive for harassing and threatening the Board into pushing through the Merger . . .
for liquidity); id.
his motive for harassing and threatening the Board into selling infoGROUP, which was to gain
29
E. Direct or Derivative Claim
Ultimately, the viability of the Plaintiff s claim depends upon whether it is
direct or derivative. If it is derivative, as argued by Gupta, then the Plaintiff lost
standing to pursue the claim when the Merger was accomplished. The analysis of
whether a claim is direct or derivative is performed using the two-pronged test set
forth by Tooley v. Donaldson, Lufkin & Jenrette, Inc.66 Under this test, the Court
the corporation or the suing
stockholders, individually
or other remedy
and (2) who would receive the benefit of any recovery
67
The firs
and considering the nature of the wrong alleged and the relief requested, has the
plaintiff demonstrated that he or she can prevail without showing an injury to the
68
In the instant case, the Plaintiff directly challenges the merger, and
alleges that the merger was invalid due to the fact that a majority of the Board was
interested or lacked independence. As such,
stockholder who directly attacks the fairness or validity of a merger alleges an
injury to the stockholders, not the corporation, and may pursue such a claim even
66
845 A.2d 1031 (Del. 2004).
Id. at 1033.
68
Id. at 1036 (quoting Agostino v. Hicks, 845 A.2d 1110, 1122 (Del. Ch. 2004)).
67
30
69
Furthermore, the alleged
wrong here was suffered by the shareholders, whose company was sold in an
allegedly tainted transaction.
70
and this case is no
exception. If the Plaintiff s loyalty claim succeeds, it is the shareholders who
would be entitled to compensatory damages for the value they lost when the
Company was improperly sold. As described above, both prongs of the Tooley test
indicate that the Plaintiff s claim is direct, and accordingly
dismiss on the grounds that it is derivative fails.
VI. CONCLUSION
granted in
part and denied in part.71
An Order will be entered in accordance with this
Memorandum Opinion.
69
, 722 A.2d 1243, 1245 (Del. 1999).
Tooley, 845 A.2d at 1036.
71
To the extent that the Complaint may be read as an attempt to allege either a separate
-infoGROUP business efforts, those claims are
dismissed.
70
31
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