In re Answers: Court of Chancery Reaffirms Latitude Granted to a Board with a Majority of Independent and Disinterested Directors in Conducting a Sales Process
June 12, 2014
In In re Answers Corporation Shareholders Litigation, C.A. No. 6170-VCN, 2014 WL 463163 (Del. Ch. Feb. 3, 2014), the Court of Chancery, by Vice Chancellor Noble, granted summary judgment in favor of defendants in an action brought by stockholder plaintiffs challenging the merger by which Answers Corporation (“Answers”) was acquired by AFCV Holdings, LLC (“AFCV”), a portfolio company of private equity firm Summit Partners, L.P. (together with AFCV, the “Buyout Group”), for $10.50 per share (the “Merger”). In so ruling, the Court found that there was no evidence that the board of directors of Answers (the “Board”), which was made up of a majority of independent and disinterested directors, acted in bad faith or was controlled by the alleged conflicted directors on the Board, and thus reaffirmed the Court’s deference to boards composed of a majority of independent and disinterested directors in conducting a sales process.
Answers was a public corporation that operated the website answers.com, a leading question and answer website that was dependent, in large part, on Google for its traffic and advertising revenue. Prior to the merger, Answer’s largest stockholder was the venture capital firm Redpoint Venture (“Redpoint”), which had the right to designate two directors to the Board (the “Redpoint-Designated Directors”). It was undisputed that four of the seven directors — those other than Answers’ chief executive officer and founder, Robert Rosenschein, and the two Redpoint-Designated Directors—were independent. In early 2010, Redpoint received an unsolicited expression of interest from AFCV concerning a potential acquisition of Answers. Shortly thereafter, the Board decided to engage a financial advisor to assist it in considering the proposed transaction with AFCV and exploring other strategic alternatives for Answers. Over the next approximately nine months, the Board considered various strategic alternatives for Answers, considered other unsolicited expressions of interest, and negotiated with AFCV regarding a potential acquisition.
By December 2010, after months of negotiations with AFCV and the Board’s repeated rejections of AFCV’s requests for exclusivity, the Board succeeded in obtaining a price increase from the originally proposed range of $7.50 to $8.25 per share to $10.25 per share. Around this time, the Board authorized its financial advisor to conduct a market check of ten other possible strategic buyers, which did not result in any other offers. By the end of 2010, the financial performance of Answers appeared to improve. The Board was aware, however, that Answers’ dependence on Google and the possibility that Google might begin a competing business could affect Answers’ financial performance in the future. Regardless, the Board used the improved financial performance to obtain another increase in price from $10.25 to $10.50 per share. Thus, following receipt of a fairness opinion as well as advice from its financial advisor that another bidder was unlikely to emerge, the Board approved the Merger.
Following announcement of the merger agreement, plaintiffs unsuccessfully sought a preliminary injunction to prevent the stockholder vote on the Merger. In earlier post-closing litigation, the Court held that plaintiffs’ breach of fiduciary duty of loyalty claims against the Board were sufficient to survive a motion to dismiss. In addressing defendants’ motion for summary judgment, the Court noted that, because the Merger was approved by a board composed of a majority of disinterested and independent directors, and because Answers’ certificate of incorporation contained an exculpatory provision, plaintiffs “must rely on claims that the Board acted in bad faith or that it was controlled by an interested party to survive” summary judgment. Accordingly, plaintiffs alleged that Rosenschein and the Redpoint-Designated Directors were conflicted and controlled the negotiation process with AFCV and that the Board acted in bad faith by agreeing to sell Answers before its stock price exceeded AFCV’s offer by (i) purposefully engaging in a limited shopping process, (ii) failing to act in the interests of Answers’ public stockholders by accepting an offer price that was too low, and (iii) intentionally ignoring alternatives to the Merger.
The Court rejected plaintiffs’ claims of bad faith in the sale process. The Court held that defendants had established that the Board, among other things, considered a variety of transactions, rejected AFCV’s requests for exclusivity, rejected several of AFCV’s offers as inadequate, performed a market check through Answers’ financial advisor, attempted to increase the price obtained until the deal was approved, and received advice from its financial advisor that additional bidders were unlikely to come forward. In response to plaintiffs’ objections to the two-week duration of the market check and the Board’s decision to pursue only ten strategic acquirers, the Court found that “even this limited market check does not constitute a complete abandonment of fiduciary duty” and is sufficient to defeat a bad faith claim. In addition, plaintiffs contended that the Board did not respond to changed circumstances and gain an adequate increased price after Answers achieved better-than-expected fourth-quarter results. The Court found, however, that the Board had plausible business concerns about the stability and future success of Answers, including its dependence on Google, and that AFCV did in fact increase its offer price after being provided with the fourth-quarter results.
In addressing plaintiffs’ claims that Rosenschein and/or the Redpoint-Designated Directors controlled the Board, the Court found that the record demonstrated that there was no evidence that Rosenschein and/or the Redpoint-Designated Directors applied pressure to the other members of the Board in connection with the transaction. The Court further found that the Board’s decision to sell the Company was supported by various reasons cognizable under the business judgment rule (such as concern over future competition from Google and an uncertain future revenue stream). As a result, the Court concluded that the Board did not act in bad faith and that Rosenschein and the Redpoint-Designated Directors did not control the Board, and therefore granted summary judgment in favor of defendants.