In In Re Answers Corp. Consolidated Shareholders Litigation, C.A. No. 6170-VCN (April 11, 2012), the Court addressed the defendants’ motions to dismiss a shareholders’ class action arising out of the merger of Answers Corporation with an acquisition subsidiary of AFCV Holdings, LLC, an affiliate of Summit Partners, L.P. (collectively, the “Buyout Group”). Plaintiffs alleged that Answers’ Board of Directors breached their fiduciary duties in connection with the Merger, and that the Buyout Group aided and abetted that breach.
Issue: Did fiduciary duty claims survive the merger?
Short Answer: The Court denied the Board of Directors’ motion to dismiss the breach of fiduciary duty claims and the Court denied the Buyout Group’s motion to dismiss the aiding and abetting claim.
Defendant Rosenschein founded Answers in 1998 and was the Chairman of the Board. Defendants Beasley and Dyal were members of Answers’ Board and were partners of Redpoint which was a 30% shareholder in Answers (Redpoint appointed Beasley and Dyal to the Answers’ Board). Redpoint was anxious to liquidate its interest and in March 2010, Beasley and Dyal arranged for Rosenschein to meet with potential acquirers. Redpoint found out that AFCV and Summit wanted to discuss a possible acquisition of Answers, so Beasley and Dyal agreed to meet with AFCV’s CEO. The negotiations dragged on and in June 2010, Redpoint informed the Board that if Answers could not be sold in the near future, then Answers’ entire management team, including Rosenschein, would be replaced.
In September, AFCV indicated that it was interested in acquiring Answers for between $7.50 and $8.25 per share. OnOctober 19, 2010, AFCV raised its offer to $9.00 per share. On October 28, Answers provided AFCV with non-public information about the Company’s projections and strategic plans for 2010 and 2011 which suggested that Answers’ performance would improve in the last quarter of 2010 and through 2011. On November 4, AFCV raised its offer to $10.00 per share and proposed that Answers enter into an exclusivity agreement with AFCV. While Answers refused to enter into an exclusivity agreement, the parties continued to negotiate. On November 8, AFCV raised its offer to $10.25 per share and reiterated an interest in exclusivity. Several days later, the two sides agreed on $10.25 per share without an exclusivity agreement, but on the condition that Answers would reimburse AFCV’s expenses if Answers agreed to a sale to a different entity at a higher price.
The Buyout Group then pressed the Board to do an extremely quick “two-week” market check and even though UBS (Answers’ financial advisor) expressed concern about the short time period, the Board agreed to it. UBScontacted ten companies and none expressed any interest in pursuing a change of control transaction with Answers. The Board rejected any more exhaustive searches so as not to jeopardize the Buyout Group’s bid. By late January 2011, Answers’ cash position was improving, and the Company’s stock price had moved up significantly. Rosenschein called AFCV’s CEO to see if he could get AFCV to raise its bid and on February 1, 2011, AFCV increased its offer to $10.50 per share. The Board met on February 2, 2011, and in the same meeting the Board (i) received an opinion from UBS that $10.50 per share was a fair price for Answers; (ii) approved the merger; and (iii) entered into a merger agreement with AFCV. The Board did not perform any analysis regarding alternatives to the merger.
Plaintiffs File Suit and Move for Preliminary Injunction
Answers scheduled a shareholder vote on the merger for April 12, 2011, and on February 7, 2011, the plaintiffs moved to enjoin preliminarily the merger. On April 8, 2011, after the Court had held oral argument on the motion for a preliminary injunction, the Board received an offer from Brad D. Greenspan to acquire a controlling interest in Answers for $13.50 per share. On April 11, the Court denied the motion for a preliminary injunction, but noted that its decision did “not consider the consequences, if any, of the [Greenspan] offer.” Also on April 11, the Board rejected the Greenspan offer as an inferior offer because of questions about financing. The Board, however, did continue the shareholders’ meeting. On April 13, the Greenspan offer was increased to $14.00 per share, but the Court denied the plaintiffs’ request for a longer continuance explaining that “[t]he Greenspan offer is widely-known – although likely not uniformly known – by Answers’ stockholders; ultimately, whether they know of it or not is not material as a matter of law to their informed decision as participants in the stockholders’ meeting.” On April 14, 2011, the Merger was approved by a majority of the Answers shares entitled to vote.
Plaintiffs alleged that, among other things: (i) the Board “breached … [its] fiduciary duties of care, loyalty and good faith” by conducting a “fatally flawed” sales process, i.e., (a) locking-up the merger with unreasonable deal protection measures; (b) using the merger to extract certain benefits for itself; and (c) issuing materially misleading proxy materials in connection with the merger (this claim was later abandoned by the plaintiffs); and (ii) the Buyout Group aided and abetted the Board’s breaches of its duties. The plaintiffs sought to rescind the merger or, in the alternative, recover rescissory damages.
Defendants Move to Dismiss
The Board moved to dismiss the complaint for three reasons: (i) it fails to state a claim for any breach of fiduciary duty and that any “duty of care claim is legally deficient because Answers’ charter contains an exculpatory provision pursuant to 8 Del. C. § 102(b)(7), and plaintiffs have not . . . [pled] bad faith as would be necessary to overcome that provision”; (ii) “any duty of loyalty claim fails because a majority of the Board was disinterested”; and (iii) to the extent the plaintiffs were pursuing disclosure claims, those claims “are moot because the Merger that is the subject of the disclosures has already closed.” The Buyout Group also moved to dismiss the Complaint, arguing that the Complaint fails to state a claim for aiding and abetting because, among other reasons, the plaintiffs have failed to allege that the Buyout Group knowingly participated in any alleged breach.
In opposing the Board’s motion to dismiss, the plaintiffs argued that three conflicted Board members (Rosenschein, Beasley, and Dyal) co-opted the sales process, and that the remainder of the Board members abdicated their fiduciary duties, allowing the three conflicted Board members to run a sales process that was not aimed at getting the best price reasonably available for their shares. The plaintiffs argued that Rosenschein knew he would lose his job if Answers did not engage in a change of control transaction, and, therefore, he wanted to see Answers sold in order to save his job (which he ultimately lost after the merger). Beasley and Dyal wanted Redpoint to monetize its holdings in Answers, and because Answers was a thinly traded company, the only way Redpoint could make that happen was if Answers engaged in a change of control transaction. Therefore, Rosenschein, Beasley, and Dyal started to search for someone who would buy Answers and when the one entity that seemed interested was AFCV, Rosenschein, Beasley, and Dyal started negotiating with AFCV. During the negotiation period, Answers’ stock had always traded below $10.25 per share and so the AFCV offer of $10.50 included a slight premium. However, when the market price for Answers’ stock was increasing in 2011, there was concern that the deal would fall through so Rosenschein, Beasley, and Dyal urged the Board to complete the sales process quickly before Answers’ stock price rose above $10.25 per share.
In opposing the Buyout Group’s motion to dismiss, the plaintiffs argued, among other things that the Buyout Group knew that Answers’ operating and financial performance was increasing in December 2010, and, therefore, the Buyout Group insisted that the Board do a quick market check in order to complete the sales process before the market price for Answers’ stock rose above $10.50. Moreover, even if the Board is exculpated from monetary liability for breaches of the duty of care, the plaintiffs argued that the Buyout Group can be held monetarily liable for aiding and abetting the Board’s breach of its duty of care even if the Board itself cannot be held monetarily liable for that breach.
To prove that the board breached its duty of loyalty, the plaintiffs had to show that a majority of the board either was interested in the sales process or acted in bad faith in conducting the sales process. The Court found that the complaint adequately alleged that Rosenschein, Beasley, and Dyal were financially interested in the Merger, and that the remainder of the Board consciously failed to seek the highest value reasonably available for Answers’ shareholders. Rosenschein allegedly knew that he would lose his job as Answers’ President and CEO if he did not sell the Company, and thus, it was in Rosenschein’s self-interest to have Answers engage in a change of control transaction. The Court also found that the plaintiffs had adequately alleged that Beasley and Dyal pushed the Board to enter quickly into the merger agreement before Answers’ stock price rose above AFCV’s offer price. With respect to the rest of the Board members, the Court found that the complaint adequately alleged that they acted in bad faith by showing that they knew that Rosenschein, Beasley, and Dyal wanted to end the sales process quickly so that the Board would enter into the merger agreement before the market price for Answers’ stock rose above AFCV’s offer price and that they agreed to expedite the sales process.
To state a claim that the Buyout Group aided and abetted a breach of the Board’s fiduciary duty, the Plaintiffs must plead: “’(1) the existence of a fiduciary relationship, (2) a breach of the fiduciary’s duty, . . . (3) knowing participation in that breach by the . . . [Buyout Group]’, and (4) damages proximately caused by the breach.” Here, the Court found that the plaintiffs were able to present a claim for aiding and abetting because they alleged that (1) the Buyout Group received confidential information showing that the market price for Answers’ stock would likely be rising, and (2) the Buyout Group used that information to push the Board to end the sales process quickly to assure the Merger Agreement would be executed before Answers’ shareholders learned of the Company’s favorable prospects.
Two aspects of this decision stand out as unusual. First, because the Court was dealing with a motion to dismiss, the Court was required to accept all well-pleaded factual allegations in the complaint as true. However, as the Court noted in footnote 53, by the motion to dismiss stage, the plaintiff had already moved for a preliminary injunction and the parties had taken discovery which was presented to the Court in the briefs filed in conjunction with the preliminary injunction motion. The Court, however, had to ignore that discovery for purposes of the motion to dismiss. Second, while the Court is generally limited to considering the allegations in the complaint in deciding a motion to dismiss, and the Court found that the allegations in the complaint sufficiently presented the argument that the Board intentionally manipulated the sales process in violation of its duty of loyalty, the Court referenced in footnote 48 evidence presented by plaintiffs’ counsel at the motion to dismiss hearing that was apparently outside the complaint.