Delaware Court of Chancery Dismisses Buyer Aiding and Abetting and Other Fiduciary Breach Claims

In In re Answers Corp. S'holders Litig., the Delaware Court of Chancery granted summary judgment in favor of a target's board of directors and the private equity buyer of the target, holding that the directors did not act in bad faith by conducting a limited market check and continuing the sale process in the face of improved financials, and the private equity buyer did not aid and abet a breach of fiduciary duty.

After the eventual private equity buyer made an unsolicited expression of interest to Answers Corporation's largest stockholder in early 2010, Answers Corporation and the buyer engaged in extensive negotiations led by Answers' CEO.  By late 2010, the parties were nearing agreement; however, Answers' 2010 fourth quarter results were more positive than expected, and the corporation's financial condition appeared to be improving.  The board continued to negotiate with the private equity buyer but obtained only a modest increase in price.  Although the board authorized Answers' financial advisor to conduct a market check, the market check was limited to 10 strategic buyers and lasted about two weeks during the 2010 holiday season.  In early 2011, the board met to discuss the transaction, focusing on the improvements in Answers' financial condition, the business risks facing the corporation, and the financial advisor's assessment that a topping bid was unlikely.  The seven member board then voted to approve the transaction.

As we detailed here previously, the Delaware Court of Chancery initially refused to dismiss plaintiffs' claims that (i) the board breached its fiduciary duties by rushing to sell Answers before its rising stock price exceeded the private equity buyer's offer, failing to act after the change in circumstances indicated that the offer price may have been too low and ignoring alternatives to the transaction; and (ii) the buyer aided and abetted such breach of fiduciary duties by pressuring the board to agree to the brief market check.  On a motion for summary judgment, however, the court found on the fuller record that the board did not breach its fiduciary duties, and the buyer did not aid and abet any such breach.  The court specifically held that:

• Board did not consciously disregard its fiduciary duties - The court found that the board engaged in extensive negotiations with the private equity buyer, and that the buyer increased its offer price in light of the improved financials.  Although the sales process could have been more robust, the board did not breach its fiduciary duties by conducting only a limited market check and had plausible business reasons for its response to the company's improving financial condition.
• Domination of the independent majority of the board by conflicted directors was necessary to support a breach of loyalty claim - In the prior Answers decision, the court had held that it was "reasonably conceivable" that three directors were interested because (i) two directors affiliated with a 30% stockholder (the "30% stockholder directors") may have been influenced by the stockholder's liquidity needs; and (ii) the CEO, who was also a director, believed he would retain his position only if a sale was accomplished.  The court now held, however, that whether these conflicts existed was unimportant because the 30% stockholder directors and the CEO did not dominate or control the otherwise independent directors who constituted a majority of the board.
• Private equity buyer did not aid or abet a breach of fiduciary duty - Plaintiffs contended that the private equity buyer aided and abetted a breach of fiduciary duty.  Plaintiffs alleged that the buyer received confidential information that it used to its benefit at the expense of the other stockholders and it desired to limit the length of any pre-signing market check.  Plaintiffs' assertions were based, in part, on an email in which the private equity buyer "pushed" for an expedited market check and because one of the 30% stockholder directors contacted the private equity buyer to negotiate a higher price.  The court found such evidence unconvincing, however, stating that:  "The evidence Plaintiffs cite demonstrate that even arm's length negotiators need to email one another to complete a deal and that sometimes they offer suggestions on how to expedite the deal which the opposing party may accept or reject."

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This memorandum is not intended to provide legal advice, and no legal or business decision should be based on its content. Questions concerning issues addressed in this memorandum should be directed to:

 Justin A. Shuler contributed to this memorandum.