In re Answers Corp. S'holder Litig., C.A. No. 6170-VCN (Del. Ch. Apr. 11, 2012) (Noble, V.C.)
In this memorandum opinion, the Court denied motions to dismiss claims for breach of the fiduciary duty of loyalty and aiding and abetting the conduct of the board of directors of Answers Corporation (“Answers”) in connection with its acquisition by AFCV Holdings, LLC (“AFCV”), a subsidiary of the private equity firm Summit Partners, L.P. (with AFCV, the “Buyout Group”). Emphasizing the procedural constraint requiring it to accept all well-pled allegations in a light most favorable to plaintiffs, and to disregard the record previously developed by the parties in connection with plaintiffs’ preliminary injunction motion, the Court held plaintiffs had sufficiently alleged that Answers’ chairman and CEO, Robert Rosenschein, and two directors appointed to the board by Answers’ largest shareholder, Redpoint Ventures (“Redpoint”), had improperly manipulated the merger process to ensure an end to the sales process prior to the release of an earnings report that suggested Answers’ earnings were on the rise and its stock price would increase. The Court held plaintiffs adequately alleged that the remaining, independent members of the board knowingly allowed the manipulation.
Answers’ common stock was thinly traded prior to the merger, such that individual shareholders could sell their shares on the market, but Redpoint, with its 30% stake, would be able to monetize its interest only if the company were sold. Looking to exit its investment, Redpoint arranged meetings between Answers’ CEO and potential acquirers beginning in early 2010. In March of that year, AFCV reached out to Redpoint about a possible acquisition of Answers. Months of preliminary negotiations between Answers and AFCV followed. During that time, merger activity in Answers’ business sector accelerated, and Redpoint informed Answers’ CEO that, if a sale did not occur, Redpoint would seek to replace the entire management team. Answers and AFCV entered into a mutual confidentiality agreement in July. That same week, one of Answers’ shareholders sold several hundred thousand shares, saturating the market and causing a drop in Answers’ stock price from $7.99 to $4.58 per share.
Negotiations between Answers and AFCV continued and, in September 2010, AFCV sent Answers a non-binding letter of intent stating its interest in acquiring Answers for between $7.50 and $8.25 per share. AFCV raised the offer to $9.00 per share in October. Answers then provided AFCV with non-public information about the company’s projections and strategic plans for 2010 and 2011, which indicated that Answers’ performance would improve in the last quarter of 2010 and through 2011. AFCV responded by increasing its offer to $10.00 per share, and then again to $10.25 per share. The parties agreed to move forward at the $10.25 price without an exclusivity agreement but with the understanding that Answers would reimburse AFCV’s expenses if Answers agreed to a sale to a different entity at a higher price.
Without an exclusivity agreement in place, the Buyout Group pushed the Answers board to perform only a quick two-week market check for alternative bidders. Answers’ financial advisor, UBS, informed the board that the Buyout Group’s request was not a “real” market check, particularly in light of its coincidence with the December holiday season, but the board gave its authorization. UBS contacted ten potential buyers, but no suitors emerged. By early 2011, Answers’ cash position was improving, and its stock price rose to $8.78 per share. Answers negotiated an increase in the offer to $10.50 per share and, in February, the board approved the merger. Plaintiffs moved to preliminarily enjoin the merger on the basis of a failed process, insufficient price, and inadequate disclosures. The Court denied the motion and, in April 2011, the merger was approved by a majority of Answers shareholders. Undeterred, plaintiffs pushed on with all but their disclosure claims, and defendants moved to dismiss the complaint for failure to state a claim.
Because Answers’ charter included a provision under 8 Del. C. § 102(b)(7) exculpating the board for any liability as a result of breaches of the duty of care, plaintiffs’ allegations had to support a claim for breach of the duty of loyalty or bad faith conduct in order to survive the motions to dismiss. Expressing doubt that plaintiffs could ever prove such conduct but, considering the alleged facts in the light most favorable to plaintiffs, the Court found plaintiffs’ allegations to suffice. In accordance with its duties under Revlon, the board was required to seek the highest value reasonably available once it pursued a sale of control of the company, even if to do so meant ultimately refraining from a sale if the greatest value could be achieved by remaining a standalone company. In this case, plaintiffs adequately alleged that Answers’ CEO was motivated to seek a transaction to avoid his termination by Redpoint, whose two directors sought a sale to achieve Redpoint’s desire for liquidity. As a result, plaintiffs alleged, the three directors improperly steered the merger process and rushed its timing to complete the transaction before Answers’ favorable prospects for 2011 could be realized. Plaintiffs adequately pled that the rest of the board was aware of these three directors’ motivations and nonetheless agreed to expedite the sales process, in bad faith and, thus, in breach of their own duties of loyalty.
With regard to plaintiffs’ claim that the Buyout Group aided and abetted a breach of the board’s fiduciary duty, the Court held plaintiffs had sufficiently pled that the Buyout Group was provided with non-public information regarding Answers’ projections and strategic plans for 2010 and 2011. The Buyout Group was thus aware that Answers’ financial performance was improving, and it pushed the board to agree to a quick market check in order to complete the sales process before the market price for Answers’ stock might rise above the offer price. Those allegations, if true, revealed knowing participation by the Buyout Group in the board’s breach of its fiduciary duty.