In re Answers Corporation involves an allegation that the board of a publicly-traded Delaware corporation, Answers Corporation (the “Company”), breached its fiduciary duties in negotiating and approving a sale of the Company. The plaintiffs alleged that the three conflicted directors controlled the Board, that the four remaining directors breached their duty of loyalty and acted in bad faith, and that the buyer of the Company (“AFCV”) aided and abetted the directors’ breach of fiduciary duty.
In March 2010, the Company received an unsolicited expression of interest from AFCV concerning a possible transaction. Shortly thereafter, the Board discussed the possibility of exploring strategic alternatives, including the recent expression of interest, ultimately deciding to explore potential transactions and engage a financial advisor to assist in the process. As part of this process, the Board’s financial advisor continued discussions with AFCV regarding a potential transaction, in addition to conducting a market check where it approached ten other potential buyers. Despite discussions with at least seven other possible buyers, no potential buyer other than AFCV made an offer. During this time, the Board rejected multiple requests for exclusivity from AFCV in order to preserve the Board’s opportunity to negotiate with other potential purchasers. The Board also rejected several offers from AFCV, deeming them to be inadequate, and pressured AFCV to increase the price offered until the transaction was finally approved. The Board’s financial advisor discussed with the Board the relative merits of pursuing various sales processes, advising the Board that additional bidders were unlikely to come forward, and ultimately provided a fairness opinion with respect to the final price offered by AFCV. During the final stages of negotiation with AFCV, after several quarters of declining revenues, the Company received quarterly results reflecting significant improvements in performance and record revenues. Despite the improved results, the Board was concerned about the future stability and performance of the Company, primarily due to its significant reliance on Google-directed traffic (which was entirely dependent on Google algorithms, subject to change at any time in Google’s discretion) and increasing competitive pressures, and ultimately approved the sale of the Company to AFCV.
The plaintiffs argued that certain of the directors were conflicted and controlled the process, and that the board breached its fiduciary duties by acting in bad faith to sell the company through purposefully engaging in a limited market check, exerting willful blindness to ignore alternatives to the transaction, and failing to respond appropriately to markedly improved quarterly results that became available during the final stages of negotiation with AFCV.
The defendants filed for summary judgment. The Court noted that, because a disinterested Board majority approved the transaction, the plaintiffs must rely on claims that the Board acted in bad faith or that it was controlled by an interested party. Citing Lyondell Chem. Co. v. Ryan, 970 A.2d 235 (Del. 2009), the Court noted that bad faith in the context of a change of control transaction may be found where a “fiduciary intentionally fails to act in the face of a known duty to act, demonstrating a conscious disregard for his duties” and that “there is a vast difference between an inadequate or flawed effort to carry out fiduciary duties and a conscious disregard for those duties.” The Delaware Supreme Court, in Lyondell, held that directors’ decisions must be reasonable, not perfect, and that the inquiry in this context should be based upon “whether [the] directors utterly failed to attempt to obtain the best sale price.” The Court, in this instance, determined that there was no genuine issue of material fact because the Board’s process was consistent with a board’s attempt to comply with its fiduciary duties to obtain the best price it could. The Court noted that each of the disinterested directors believed that AFCV’s offer was the best available offer for the shareholders of the Company, the Board’s diligence and its engagement with its financial advisor were clear efforts to comply with the Board’s fiduciary duties, and that the Board’s concern about the Company’s dependence on Google and other competitive forces was sincere. Given those factors, the Court determined that the Board had plausible business concerns about the stability and future success of the Company and the Board was entitled to make a determination that selling the Company was in the best interest of the shareholders without judicial second-guessing of its decision. The Court also found no evidence to support claims that the Board’s three allegedly conflicted directors controlled the Board. Additionally, because the defendants presented evidence of arm’s length negotiations and no underlying breach of fiduciary duty was present, and the plaintiffs provided insufficient evidence to support its aiding and abetting allegations, the claim against AFCV was also dismissed.