In Re InfoUSA, Inc. Shareholders Litigation
2007 WL 2419611 (Del.Ch. 2007)

  • Gupta owned 41% of InfoUSA and was the CEO and a director. He, as well as the other directors of InfoUSA were using InfoUSA money for things that they probably shouldn’t have been using it for.
    • According to the Court, “the bulk of the complaint presents a vast, gaudy panoply of gilded excess, expressed either through frequent and allegedly unquestioned related-party transactions or through payments made directly for the benefit of Gupta and his family.” Including:
      • Spending $8.2M renting private jets and a yacht from a company Gupta owned on the side to fly Gupta around.
      • Gupta granting himself very lucrative stock options.
      • Gupta gifting himself and his relatives with cars and fancy things at InfoUSA’s expense.
  • Shareholders brought a derivative lawsuit against the directors for breach of fiduciary duty.
    • The shareholders argued that no board of directors exercising their business judgment in good faith could ever have approved of or stood idly by while Gupta did all the things he had done.
    • Gupta argued that under Delaware State law (Court of Chancery Rule 23.1), a shareholder must make a demand that a corporation’s board pursue potential litigation before initiating such litigation on the corporation’s behalf.
    • The shareholders argued that would be futile because the majority of directors were involved in the problem.
  • The Trial Court found that Rule 23.1 didn’t apply because it would be futile.
    • The Trial Court found that courts shouldn’t decide how much compensation/perks was too much. That was a business decision. However, the courts do have an obligation to ensure that business decisions, whatever their merit, were undertaken by a director without consideration of his self-interest or for the sake of some third party.
      • That’s the duty of loyalty.
    • The Court found that in order to get around Rule 23.1 you had to show that the majority of directors were either personally interested in the outcome of the litigation, or that they were dominated through a “close personal or familial relationship or through force of will.”
      • Note that allegations of a breach of fiduciary duty do not automatically excuse the requirements of Rule 23.1.
    • The Court looked to the facts of the case and found that 6 out of the 9 directors faced a sufficient likelihood of liability that their own self-interest would prevent them from considering objectively a demand from shareholders upon the board. Therefore Rule 23.1 is excused.