Tuesday, September 11, 2007

Pretty Please

The summer wasn't bad, thank you. We got some rest and managed to avoid most of the season’s global warming hot spots.

Unlike us, the Delaware Court of Chancery worked hard over the past few months. One of its summer projects was this decision in the InfoUSA Inc. litigation, commenced by spoilsport shareholders displeased by Chairman/CEO Vinod Gupta’s dedication to the proposition that the company’s money is there for his enjoyment.

The court's opinion dealt with a concept known as “demand futility.” Demand futility has nothing whatsoever to do with your attempts to convince the person manning the DMV window to renew your driver's license. It refers to the fact that, in order for shareholders to start a lawsuit in the form of a “derivative action” (an important tool for activists) they must persuade a judge it would be futile to demand that the directors sue themselves instead.

Believe it or not, establishing futility can be quite difficult. Shareholders generally don't have a right to discovery at this stage, yet must come up with detailed and specific allegations that a majority of the directors are biased (because, say, Mr. Gupta has been giving them free office space) or that the board has behaved so badly it might not be protected by the very forgiving standards of the “business judgment” rule. (Yes, that one is on the Proxyland oxymoron list.)

In this case the plaintiffs succeeded. The Honorable William B. Chandler III, after making gallant efforts to excuse the board’s behavior, admitted the company's directors might have motivation to discourage a lawsuit. Among other things, they'd approved a 10-K that said the company had paid a Gupta-owned entity for “usage of aircraft,” despite being informed by the audit committee chair that Mr. Gupta had spent much of the dough on personal residences and a yacht. (The boat's all-female crew merited a fascinating footnote in the opinion, as did the company’s interactions with a certain former President.)

Very very gradually, the esteemed Delaware courts are starting to accept that when shareholders ask, “hey, is it OK if we sue you?” some boards will say “no” for less than noble reasons.

But at least shareholders receive an answer. That’s more than you get at the DMV, where after failing for days to make eye contact with anyone, you become convinced you do not exist and therefore have no need for a driver’s license, so you slink away and donate your car to charity. Perhaps we'll solve global warming after all.