Judge Approves Settlement in InfoGroup Shareholder Lawsuit

By | November 10, 2008

A Delaware judge has approved a settlement in a shareholder lawsuit brought against database provider InfoGroup Inc. over abusive personal spending by founder Vinod Gupta.

The settlement approved by Chancellor William Chandler III calls for Gupta to reimburse $9 million to the Omaha, Neb.-based company over five years. Gupta also agreed to step down as chief executive officer and receive a $10 million severance package. He already had been forced out as chairman of the board.

“He no longer has day-to-day control and he is no longer in a position to continue the abusive practices,” said plaintiffs attorney Elizabeth McGeever.

The settlement includes a host of other corporate governance changes, including the resignations of three directors and the establishment of an internal watchdog to prevent further abuses.

“I have no problem concluding that it is a fair and reasonable settlement that is in the best interest of the company,” said Chandler.

Chandler said he would have preferred that Gupta not receive the $10 million severance and that the $9 million reimbursement be accelerated rather than spread out over five years. He nevertheless deferred to the business judgment of members of a special litigation committee that was established by InfoGroup and negotiated the settlement with the plaintiffs.

At the same time, the judge issued an implicit warning that Delaware courts, which sometimes are criticized as too management-friendly in rulings that set governance standards for corporations around the country, will show little tolerance for behavior such as Gupta’s.

“Judges are human beings, and you cannot escape the fact they exercise a certain amount of just human common sense,” Chandler said after Bruce Baird, a lawyer representing the special litigation committee, suggested that the case would not have been a slam dunk for the plaintiffs had it gone to trial.

“People would have been making substantial points, substantial defenses,” Baird said.

But Chandler said that when a judge is presented with evidence of “ethically dubious” behavior by an executive, such as using a company “like a personal piggy bank,” defense attorneys will have a hard time proving that something was not “horribly amiss.”

“Especially in this day and age, I think we’ve reached that point where that common sense visceral reaction is going to be difficult to overcome,” said Chandler, who at one point referred to “the stupefying excesses that were involved here by this CEO.”

The special litigation committee confirmed many of the findings by the plaintiffs, who alleged that the company had paid Gupta millions of dollars for personal expenses including jet travel, vacation homes, a yacht, and a collection of luxury automobiles that, as Chandler wrote last year, “would leave James Bond green with envy.”

“The company was paying millions of dollars a year for luxury toys for Mr. Gupta,” said McGeever, who characterized the settlement as “a grand slam.”

“I’s a major accomplishment for this company, which has been the victim of a larger-than-life CEO, Mr. Gupta, for quite a few number of years,” she told Chandler.

McGeever said that in ending Gupta’s lavish spending and selling off assets such as the yacht, the interests in the jets, and real estate, the company will reap tens of millions of dollars in savings.

Gupta remains a 40 percent shareholder in InfoGroup, which is the subject of a Securities and Exchange Commission investigation. But the settlement prohibits him from trying to wage a proxy contest before 2010 or trying to undo the corporate reforms being put in place before 2013. Attorneys suggested that the findings of the SEC investigation could lead to further restrictions of any attempts by Gupta to regain control of the company.

While initial settlement negotiations ended with Gupta remaining as CEO, Baird said the special litigation committee subsequently was led to remove him from that post.

“Mr. Gupta became impossible to deal with, and the special litigation committee determined they could not live with him still running the company,” Baird said.

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