Boards Behaving Badly: A Delaware Primer

Letting stand some shareholder claims against infoUSA directors and CEO Vinod Gupta, Chancery Court's Chandler rips 10-K deception and offers a study in board conflicts. Were stock options for President Clinton properly granted?

In a Delaware Court of Chancery case that he wrote “tests the boundaries of the business judgment rule,” Chancellor William B. Chandler III dealt infoUSA Inc. a setback, and drew guidelines for director conflicts of interest, and for board disclosures of internal investigations.

His opinion, handed down in revised form on Aug. 20, also challenged the propriety of a 100,000-share stock option grant to former President Bill Clinton, which the judge said could be rescinded if the plaintiffs prove in a trial that infoUSA CEO Vinod Gupta awarded the options without board approval. The former president has served as a consultant to infoUSA.

Mainly, however, the 79-page ruling painted a picture of a nine-member infoUSA board that facilitated or tolerated “a garish collection of self-interested transactions, principally engineered by the CEO, and largest shareholder, Vinod Gupta,” in Chandler’s characterization of the claims. “Such extravagances included the lease of aircraft and office space for personal use, the provision of a yacht, and a collection of luxury and collectible cars that would leave James Bond green with envy.”

Omaha-based infoUSA is a 35-year-old database marketing firm that is 41-percent-owned by Gupta, a large Democratic Party contributor who either personally, or using corporate assets, has provided services to former President Clinton and New York Sen. Hillary Rodham Clinton over the years, according to records filed in connection with Delaware suit. The company is incorporated in Delaware.

Chandler, known for his colorful opinions — but also for care in preserving Delaware’s business judgment rule — seemed to use the case of In Re: INFOUSA Inc Shareholders Litigation as a primer for detailing where boards might cross over into bad faith or disloyalty. (The business judgment rule protects executives and directors from liability for their decisions as long as they act in good faith and with a sense of loyalty to shareholders, rather than personal self-interest.)

In addition to discussing possible conflicts of interest among certain infoUSA directors, the judge at one point sharply criticized directors for signing off on what appeared to be an inaccurate statement that appeared in the company’s 2004 10-K, which was released on March 16, 2005.

While the 10-K statement said that about $1.5 million of payments to a contractor owned by Gupta were made for “usage of aircraft and related services,” Chandler said, the directors had been given a report on Feb. 8 by audit-committee chair Vasant H. Raval, a professor in Creighton University’s Department of Accounting, that presented quite another picture. The report revealed, said the judge, “that about 40 percent of these payments had no relationship whatever to aircraft, and were instead payments for the American Princess yacht, use of personal residences, and other undefined travel services.” Added the judge: “At least as alleged, these arrangements resulted in a very sweet deal for Vinod Gupta: using infoUSA’s money, he was able to purchase services from his own leasing company, pocket the profit on those services and then provide them to his personal friends and political associates.”

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