In December 2008 GTT&C, representing two individual shareholders, filed a shareholder derivative action against 11 current and former directors and officers of InfoSpace, Inc.  The action challenges over $50 milllion in cash payments and restricted stock grants to the defendant officers and directors. The InfoSpace Board of Directors authorized those payments in the spring and fall of 2007, in connection with special cash dividends paid to InfoSpace shareholders.  Under the “Compensation Program,” the InfoSpace board awarded themselves and certain executive officers so-called “make whole” payments, which were cash payments purportedly intended to compensate the directors and officers for the decline in the value of their InfoSpace stock options caused by the payment of each special dividend.  Under the Compensation Program the directors and officers also received “tax gross-up” payments; that is, InfoSpace paid the directors’ and officers’ income taxes on the make-whole payments.  These benefits were conferred without requiring the recipient directors and officers to exercise their options—a special perquisite that was not available to non-employee holders of InfoSpace options.  No shareholder or non-employee option holder received “make whole” or “tax gross up” payments.  The shareholder derivative lawsuit challenges those payments—which included some $33.7 million paid to former InfoSpace CEO James F. Voelker—on grounds that they were approved in violation of the defendant directors’ fiduciary duties to InfoSpace and the governing shareholder-approved plans, and were unfair to the corporation and its shareholders.

InfoSpace and the individual defendant directors filed motions to dismiss the derivative lawsuit.  On July 1, 2009 King County Superior Court Judge Barbara Mack denied InfoSpace’s motion in its entirety.  Judge Mack ruled that the plaintiff shareholders’ allegations gave rise to a reasonable doubt that a majority of the InfoSpace board in office at the time of the filing of the derivative lawsuit were disinterested in the outcome.  Accordingly, Judge Mack ruled that a demand on that board to bring the subject claims would have been futile and was excused.

Judge Mack denied the bulk of the individuals’ motion to dismiss.  She ruled that the shareholder plaintiffs had adequately alleged that a majority of the InfoSpace board in office at the time the Compensation Program was approved had a disabling personal interest in the payments they would receive under that program.  Judge Mack granted the motion to dismiss as to the four defendants who had been only officers and not directors of InfoSpace, on the grounds that no allegations were made that these non-director officers had been involved in establishing the Compensation Program.

The court’s rulings allow the derivative claims to proceed against current InfoSpace directors James F. Voelker, John E. Cunningham IV, Jules Haimovitz, Richard D. Hearney, Lewis M. Taffer, George M. Tronsrue III, and former director Vanessa D. Wittman.  If the plaintiffs’ claims ultimately succeed and the Compensation Program is deemed to have been improper, the defendants will be liable to return to the InfoSpace treasury the more than $50 million in cash that was paid, plus the value of restricted stock that was granted, pursuant to the Compensation Program.

The shareholder plaintiffs are represented by GTT&C partners Jeffrey I. Tilden, Franklin D. Cordell, and Mark A. Wilner, along with co-counsel William C. Smart and Ian S. Birk of Keller Rohrback L.L.P., and David M. Simmonds.  Click here for a PDF of the plaintiffs’ First Amended Complaint, and here for a PDF of the Order of July 1, 2009, on InfoSpace’s and the individual defendants’ motions to dismiss.