Document: In re Answers Corp. S’holder Litig., C.A. No. 6170-VCN (Del. Ch. Apr. 11, 2012)
The Delaware Court of Chancery declined to dismiss a complaint alleging that the directors of Answers Corporation (“Answers”) breached their fiduciary duties under Revlon in connection with the acquisition of Answers by an affiliate of the private equity firm Summit Partners L.P. (“Summit”), on the basis that a majority of the members of Answers’ board were either interested in the merger or had acted in bad faith in approving the merger. Prior to the merger, Answers’ President and CEO, Robert Rosenschein, held one board seat, and Redpoint Ventures (“Redpoint”), Answers’ largest stockholder, controlled two seats. The remaining five seats on the board were held by unaffiliated directors.
Plaintiffs alleged that Answers’ board approved the merger at an inadequate price and using an inadequate process to accommodate Redpoint’s desire for liquidity. Answers’ stock was thinly traded which made it difficult for Redpoint to sell its 30% interest absent a sale of the entire company. According to the plaintiffs, Redpoint threated to replace Answers’ entire management team, including Rosenschein, if Answers was not sold quickly. Redpoint facilitated a meeting with Summit in March 2010, and Answers focused its sales efforts almost solely on Summit, with the exception of a two-week market check period that coincided with the December holidays. Plaintiffs argued that the market check was wholly inadequate because, inter alia, Answers’ financial and operating performance had steadily been improving since the time of Summit’s initial bid, but those results had not yet been disclosed publicly. In other words, the market and potential bidders did not have a complete picture of the company’s financial position.
The Court found that the plaintiffs had stated a claim for breach of the duty of loyalty as applied in a transaction implicating Revlon. Specifically, the complaint alleged that: (1) Rosenschein was interested in the merger because he would lose his job if a sale were not consummated; (2) the Redpoint directors were interested in the merger because the merger furthered their employer’s need for liquidity; and (3) the remaining members of the board approved the sales process in bad faith because they knew that Summit’s offer undervalued the company.