In re InfoUSA and the Unreasonably High Burden in Challenging Director Independence

We have been writing about InfoUSA. The primary materials for the case, including the opinion, can be found at the DU Corporate Governance web site. For a paper that goes into this topic in greater detail, Disloyalty without Limits: "Independent Directors" and the Elimination of the Duty of Loyalty, go here.

In particular, we have been discussing the judicial analysis employed in determining whether plaintiffs have alleged reasonable doubt about the independence of directors. Although finding that plaintiffs had alleged that a number of directors were not independent, the court mentioned a variety of interconnected business relationships but summarily dismissed all of them as inadequate to suggest a lack of independence. These included:

• Fairfield, the former chairman of businessCreditUSA.com, a wholly-owned subsidiary of the company, who also served on a foundation board with the CEO (along with other former InfoUSA directors);
• Haddix, a co-founder and former CEO of CSG Systems. He participated in an investor group that executed a leveraged buyout of CSG, with infoUSA investing $500,000 in a CSG acquisition fund;
• Reznicek who serves as the non-executive chairman of CSG Systems (a company founded by Haddix, another director, and in which InfoUSA had invested);
• Kahn, the former Chairman and CEO of One source Information Services, a company acquired by InfoUSA in 2004; and
• Stryker, the former chairman and CEO of Naviant, Inc, a firm with which infoUSA signed a $12 million licensing agreement in 2001.

Other allegations suggested that a number of directors used corporate aircraft to take personal trips or accompanied the CEO on vacations.

None of these allegations were deemed insufficient to warrant discovery. With respect to Reznicek, the failure to "outline the materiality of his relationship" with the CEO was fatal; in the case of Fairfield and Kahn, the complaint failed to "suggest that the current or prior business relationships" with the CEO called their independence into question.

The allegations were generally examined in isolation, despite the fact that plaintiffs generally alleged several grounds for a loss of independence for each director. Moreover, while they may not have established an absence of independence, they did show a web of interlocking business activities among some of the directors, InfoUSA, and the CEO. It would seem possible that with discovery, a disqualifying relationship might be uncovered. Thus, by terminating the case and preventing discovery, the court did not ensure an independent board.