A Delaware Chancery Court judge has refused to dismiss a complaint filed against infoUSA Inc. by two of its shareholders that accuses the data marketing company of misusing corporate assets.

The complaint combines two separate lawsuits filed by investment firm Cardinal Capital Management in February 2006 and hedge fund Dolphin Ltd. Partnership LP in October 2006. The complaint alleges that infoUSA founder, chairman and CEO Vinod Gupta squandered millions of dollars in corporate funds on so-called related-party transactions for private jets, a yacht, a stadium skybox, luxury cars and transactions for the personal benefit of his family and friends.

The 78-page opinion by Chancellor William Chandler states that the complaint from Dolphin and Cardinal raise a "reasonable inference” that a majority of the company’s board of directors were “dominated” by Gupta and that “their discretion has been sterilized.”

Regarding the related-party transactions, Chandler writes that "it is reasonable to infer at this stage that the transactions in the amended consolidated complaint had no business purpose and were unfair to the corporation.” The ruling allows Dolphin and Cardinal to pursue charges that an ill-fated attempt by Gupta to take infoUSA private in 2005 was a sham and to seek reimbursement costs related to the transaction.

It's important to remember that Chandler’s ruling contains no findings of fact and that the plaintiffs' claims need to be further substantiated in court. Though portions of the complaint were dismissed by Chandler, including those that questioned a consulting contract between infoUSA and former President Bill Clinton, many of the serious ones surrounding the alleged improper payments and possible board conflicts of interest survived.

In a research note issued on Wednesday, Weeden & Co. analyst Kevin Starke wrote that the decision “would ratchet up pressure on management to either settle or consider taking the company private, to avoid the scrutiny that the case is likely to generate.” —David Shabelman

See May 2007 story in The Deal magazine
See August 2005 story in TheDeal.com

Tags: software, acquisition, m&a, mergers