On February 3, 2014, the Delaware Court of Chancery granted defendants’ summary judgment motion in the matter of In re Answers Corporation Shareholders Litigation. This case related to the acquisition of Answers Corporation by AFCV Holdings, LLC. The plaintiffs alleged that (i) three of the Board members of Answers (comprised of the company’s CEO and two outside directors designated by a venture capital investor) were conflicted and in control of the negotiation process with the buyer; and (ii) the Board breached its fiduciary duties by acting in bad faith as a result of “purposely engaging in a limited shopping process”, “utterly failing to act in the interest of the Company’s public shareholders after circumstances had changed to indicate the offer price was too low” and “exerting willful blindness to ignore alternatives to the transaction”. Alternatively, the defendants argued that they had met their burden under the summary judgment standard because there was “no genuine issue of material fact”.
The Chancery Court concluded that there is “no genuine issue of material fact concerning the Board’s compliance with its fiduciary duties” and that it was “undisputed that four of the seven directors, a majority of the Board, are disinterested.” In such circumstances, to survive a summary judgment motion, the plaintiffs were required to prove either that (i) the four independent Board members were controlled by interested parties; or (ii) the Board acted in bad faith. In examining whether the Board acted in bad faith, the Court reviewed significant evidence related to the transaction provided by the defendants to dispute such a claim, including that the company received and reviewed multiple offers (each of which the Board considered), only AFCV actually made a formal offer to the company, the Board rejected AFCV’s request for exclusivity in several instances to keep other options available to the company, the Board rejected several initial offers by AFCV in order to increase the price, the company’s financial advisor performed a market check and the Board appropriately reviewed and considered competitive threats in the marketplace. As a result of the process and this evidence, the Court concluded that the Board did not act in bad faith.
The Chancery Court then reviewed whether either the CEO director or the directors designated by the outside venture capital investor controlled the Board and improperly influenced the Board. The Court concluded that the plaintiffs had not presented sufficient evidence to suggest that the four disinterested Board members somehow abdicated their fiduciary duties to favor the CEO and no evidence was presented to show the CEO’s attempt to impose his personal goals upon or otherwise influence the Board. Similarly, the Court concluded that the venture capital investor directors had not controlled the other Board members, referencing such facts as the minutes from Board meetings showing that the entire Board discussed and deliberated the company’s options without undue influence from any Board members. As a result, the Court granted the defendant’s motion for summary judgment.
This case serves as an important reminder that transactions of this nature should be approved by an independent and disinterested majority of the Board. So long as such disinterested Boards do not act in bad faith, the Delaware courts are likely to rule in favor of defendant board members.
For more information on this topic, please feel free to contact Mary Beth.