An attorney representing Cardinal Value Equity Partners, R. Bruce McNew of the Wilmington, Del., firm of Taylor & McNew LLP, said the most important corporate lesson in Chandler’s opinion was: “Make sure your public disclosures don’t conflict with internal reports or investigations.” Asked about the criticism Chandler reserved for plaintiffs, McNew responded: “He felt there was room for great improvement in the presentation of the claims.” But McNew said he didn’t see the opinion as breaking new ground, and added that it represented an extreme case of corporate behavior that is unlikely to be widely relevant. “There’s no way most executives would let this happen at their own companies,” he said.
Chandler reserved some of his strongest language for what he saw as the inadequate disclosure in the 10-K. In the case of infoUSA, when information about related-party transactions was later disclosed, board members in 2006 “were narrowly re-elected in a proxy contest that can only be described as an open revolt of unaffiliated shareholders,” Chandler wrote. This “rising tide” of dissatisfaction suggested that the board-member defendants had been motivated “to conceal the true nature of the massive hidden perquisites being provide to Vinod Gupta, and that their failure of candor misled stockholders and damaged the company.”
Among Delaware-incorporated companies, “shareholders are entitled to honest communication from directors, given with complete candor and in good faith.” he wrote. “Communications that depart from this expectation, particularly where it can be shown that the directors involved issued their communication with the knowledge that it was deceptive or incomplete, violate the fiduciary duties that protect shareholders. Such violations are sufficient to subject directors to liability in a derivative claim.”
Attorney McNew said the next step in the case will be discovery, followed by trial.