NJ Carpenters Pension Fund v. infoGROUP, Inc., C.A. No. 5334-VCN (Del. Ch. Sept. 30, 2011) (V.C. Noble)
In this opinion, the Court of Chancery held that plaintiff’s claim, challenging the merger of InfoGROUP, Inc. (“infoGROUP” or the “Company”) into a subsidiary of CCMP Capital Advisors, LLC (“CCMP”), was properly brought as a direct action and that plaintiff’s allegation that the merger was not approved by a disinterested and independent majority of directors was sufficient to survive defendant’s motion to dismiss pursuant to Court of Chancery Rule 12(b)(6). Plaintiff, a former shareholder of infoGROUP, alleged that the Company’s seemingly disinterested and independent board of directors (the “Board”) came under the control of a single interested director, Vinod Gupta (“Gupta”), who forced the Company to merge at an inopportune time and to utilize a flawed and inadequate sales process.
Plaintiff’s allegations concern the allegedly self-interested actions of Gupta, a Board member and the Company’s founder and largest shareholder, and his alleged desperate quest for liquidity. According to plaintiff’s well-pled allegations (which the Court accepted as true for purposes of deciding on the motion to dismiss), Gupta’s need for liquidity derived from the settlement of certain past legal actions regarding allegedly self-interested transactions that utilized Company funds. At the time the complaint was filed, Gupta owed over $12 million as a result of certain derivative and SEC settlements and held over $13 million in debt related to several personal loans. Gupta’s need for liquidity was further exacerbated by the fact that he was no longer receiving a salary since leaving his job as CEO of the Company and he was contemplating the launch of a new business. In 2008, Gupta hired personal bankers to facilitate the sale of his stock in infoGROUP. For multiple reasons, Gupta eventually determined that a sale of the entire Company was more advantageous than a sale of only his shares. For instance, the large size of Gupta’s position rendered it illiquid. It was therefore expected that Gupta would have had to accept a significant liquidity discount for a sale of his block.
Plaintiff further alleged that Gupta engaged in a series of threats and bullying tactics aimed at the Board and that the Board eventually capitulated to his demand for a sale of the Company. For example, in December 2008, Gupta, without Board approval, issued a press release recommending that the Company explore its strategic alternatives, including a possible sale of the Company. According to the Complaint, Gupta then applied pressure on the other directors by repeatedly threatening the Board with lawsuits if they did not take actions to sell the Company, telling the Board that he had uncovered evidence of financial fraud at the Company, and stating that he had a strong feeling that some of the directors would be sued personally for not acting in the stockholders’ best interests.
One month later, at least in part as a response to Gupta’s pressure, the Board recommended that an M & A Committee be formed to address proposals to acquire the Company. The Board also retained Evercore Partners Inc. (“Evercore”), which was given approval to commence a sales process in September 2009. Evercore contacted potential strategic and financial buyers including CCMP and Vector Capital (“Vector”). The M & A Committee determined that Vector’s offer of $8.00 per share was inferior to CCMP’s $8.40 per share offer. Even though CCMP’s price was ultimately lowered to $8.00 per share (which was below the market price of $8.16 per share just prior to the announcement of the merger), the Board unanimously approved the transaction with CCMP. Gupta signed a voting agreement pursuant to which he agreed to vote his shares in favor of the merger, which was approved by the stockholders in June 2010.
Plaintiff claimed that Gupta and the Board breached their duty of loyalty by approving the merger. First, plaintiff alleged that there were several deficiencies in the sales process. In particular, plaintiff claimed that CCMP was unfairly favored over Vector because CCMP was provided due diligence information refused to Vector and when CCMP lowered its bid, the Board failed to pursue a potentially higher offer from Vector. In addition, Plaintiff alleged that Gupta disrupted the sales process by influencing the list of potential bidders, conducting unsupervised negotiations, and leaking confidential information about the sale to various parties. Plaintiff also alleged that there were many material misrepresentations and omissions in the Company’s proxy statement, largely relating to Gupta’s alleged improper and disloyal activities, information regarding an Evercore fairness opinion, and the alleged unequal and unfair treatment of Vector and CCMP. Finally, plaintiff alleged that as a result of Gupta’s self-interested actions and the inadequate sales process conducted by a disloyal Board, the Company’s stockholders received an unfair price for their shares.
Gupta sought dismissal of plaintiff’s breach of loyalty claim. The Court stated that “a plaintiff can survive 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 the relevant decision.” The Court explained that a director is considered interested in a transaction if he receives a material and personal financial benefit from a transaction that is not equally shared by the stockholders. Gupta, who was described as being “in desperate need of liquidity,” received over $100 million in cash for the sale of his shares in the merger. The Court found this to be a material benefit to Gupta. Regarding whether the benefit was not equally shared by the stockholders, the Court found that while all stockholders received cash in the merger, Gupta’s large position in the Company at 34% made his shares illiquid, while every other stockholder held far smaller, liquid positions. Because every other stockholders’ investment was already liquid prior to the merger, the Court found that Gupta’s receipt of liquidity was a unique benefit to him. Therefore, the Court concluded that it was reasonable to infer that Gupta suffered a disabling interest when considering how to cast his vote in connection with the merger.
The Court also found that it was reasonable to infer from plaintiff’s allegations that Gupta dominated the Board and rendered them non-independent for purposes of approving the merger. The Court stated that “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 [such as] when the challenged director is controlled by another.” Gupta was alleged to have dominated the Board through a pattern of threats that could, arguably, have intimidated the Board. The Court concluded that plaintiff pled sufficient factual allegations to support a reasonable inference that a majority of the Board was interested or lacked independence. Gupta’s motion to dismiss the loyalty claim was therefore denied.
Gupta also argued that plaintiff’s claim is derivative and plaintiff lost standing to pursue the claim when the merger was accomplished. The Court applied the two-pronged test set forth by the Delaware Supreme Court in Tooley v. Donaldson, Lufkin & Jenrette, Inc., to determine whether plaintiff’s claim was direct or derivative. Under the test, the Court must consider “(1) who suffered the alleged harm—the corporation or the suing stockholders, individually—and (2) who would receive the benefit of any recovery or other remedy.” The Court found that “a 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 after the merger at issue has been consummated.” In regard to the second prong, which “should logically follow the first,” the Court found that if plaintiff’s loyalty claim succeeds, it is the stockholders who would be entitled to compensatory damages for the value they lost when the Company was improperly sold. Therefore, the Court concluded that plaintiff’s claim was direct.