New Jersey Carpenters Pension Fund v. infoGROUP, Inc.: Court of Chancery Finds Complaint Adequately States Claim that Entire Board Dominated by the Company’s Largest Stockholder
October 31, 2011
In New Jersey Carpenters Pension Fund v. infoGROUP, Inc., C.A. No. 5334-VCN (Del. Ch. Sept. 30, 2011, revised Oct. 6, 2011), the Court of Chancery refused to dismiss a breach of fiduciary duty claim where the plaintiff had adequately pled that the founder and largest stockholder of defendant infoGROUP, Inc. dominated his fellow directors and forced them to approve a sale of the company at an unfair price in order to provide himself with some much-needed liquidity.
Plaintiff challenged the July 1, 2010 merger between infoGROUP and a subsidiary of CCMP Capital Advisors, LLC (“CCMP”). The plaintiff alleged that the merger was orchestrated by Vinod Gupta, infoGROUP’s founder, former CEO and chairman of the board, and a beneficial owner of 37% of the company’s common stock, at an inopportune time and as a result of an inadequate sales process. Defendants moved to dismiss.
Plaintiff’s principal allegation was that Gupta controlled the infoGROUP board by engaging in “a pattern of threats aimed at other Board members and unpredictable, seemingly irrational actions that made managing [infoGROUP] difficult and holding the position of director undesirable.” Gupta’s motive, alleged plaintiff, was a need for liquidity arising from a desire to fund a new business and substantial debts Gupta owed from loans used to purchase infoGROUP stock and multi-million dollar settlements of recent derivative claims and an SEC investigation.
The plaintiff pled that Gupta, who admitted that he had no material source of cash flow from his other investments, had no way to liquidate his infoGROUP position in light of the size of his holdings. The Court held that this desire for liquidity, in light of the well-pled allegations regarding Gupta’s need for cash and lack of cash flow from other sources, was sufficient under the standards governing a motion to dismiss to establish that Gupta stood to receive a material financial benefit from the merger that was not equally shared by other investors: “while the other shareholders did receive [the same amount of] cash [per share as Gupta in the merger], 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.” On the issue of materiality, the Court commented that it would be naïve to conclude that the liquidity offered by the $100 million in cash Gupta stood to gain through the merger was immaterial.
Having established Gupta’s interest in the merger, the Court found that the well-pled allegations of the complaint, which included allegations that Gupta repeatedly threatened his fellow board members with lawsuits and excerpts from email communications among Board members decrying Gupta’s tactics and forewarning that other board members may want to “dump the company and run” – all of which were required to be accepted as true on a motion to dismiss – were sufficient to support plaintiff’s allegation that Gupta controlled and dominated the rest of the board. The Court therefore denied defendants’ motion to dismiss the counts for breach of the fiduciary duty of loyalty. Certain other counts, involving disclosures made in connection with the merger and potential claims based on Gupta’s post-merger activities, were dismissed.