In re Answers Corporation Shareholder Litigation

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EFiled: Jul 19 2012 1:58PM EDT Transaction ID 45437304 Case No. 6170-VCN COURT OF CHANCERY OF THE STATE OF DELAWARE JOHN W. NOBLE VICE CHANCELLOR 417 SOUTH STATE STREET DOVER, DELAWARE 19901 TELEPHONE: (302) 739-4397 FACSIMILE: (302) 739-6179 July 19, 2012 Jessica Zeldin, Esquire Rosenthal, Monhait & Goddess, P.A. 919 N. Market Street, Suite 1401 Wilmington, DE 19801 Kevin R. Shannon, Esquire Potter Anderson & Corroon LLP 1313 N. Market Street Wilmington, DE 19801 William M. Lafferty, Esquire Morris, Nichols, Arsht & Tunnell LLP 1201 N. Market Street Wilmington, DE 19801 Re: In re Answers Corporation Shareholder Litigation Consolidated C.A. No. 6170-VCN Date Submitted: July 18, 2012 Dear Counsel: The Defendants have moved, pursuant to Court of Chancery Rule 59(f), for reargument of denying, in part, their motions to In re Answers Corporation Shareholder Litigation Consolidated C.A. No. 6170-VCN July 19, 2012 Page 2 dismiss the Complaint.1 ns are denied. *** Rule 59(f), a motion for reargument may be granted if the moving s decision was predicated upon a 2 standard is a highly flexible one, permitting reargument if it can be shown that the court 3 *** Answers Defendants claim misapprehended the factual allegations of the . . . Complaint when the Court held that the pleading adequately alleged bad faith on the part of the four indisputably 1 The Memorandum Opinion is styled as In re Answers Corp. Shareholders Litigation, 2012 WL 1253072 (Del. Ch. Apr. 11, 2012). The relevant background facts are set forth in the Memorandum Opinion and will not be reprised here. In addition, defined terms from the Memorandum Opinion are used here for convenience. 2 Ravenswood Inv. Co., L.P. v. Winmill, 2011 WL 6224534, at *3 (Del. Ch. Nov. 30, 2011) (quoting Fisk Ventures, LLC v. Segal, 2008 WL 2721743, at *1 (Del. Ch. July 3, 2008)). 3 Servs., Inc., 2008 WL 2133417, at *1 (Del. Ch. May 21, 2008) (citing Blank v. Belzberg, 2003 WL 21788086, at *1 (Del. Ch. July 24, 2003)). In re Answers Corporation Shareholder Litigation Consolidated C.A. No. 6170-VCN July 19, 2012 Page 3 4 argument in support of that claim is The Answers the Complaint nowhere pleads that the disinterested directors ended the sales process quickly to help Rosenschein, Beasley, and Dyal achieve their self- 5 According to the Answers Defendants, disinterested directors can only act in bad faith when they are aware of a self-dealing action by a person owing a fiduciary duty and they act to further that self-dealing action.6 *** The Answers Defe interpretation of bad faith is unduly narrow. to [intentionally] place his own interests, preferences or appetites 4 ion for Reargument. See AFCV Hldgs., LLC, A-Team Acquisition Sub, Inc. and Summit Partners Joinder to the Mot. for Reargument filed by the Answers Defs. The Court did not, and does not, question that Sternlicht, Segall, Tebbe, and Kramer are independent and disinterested. 5 Mot. for Reargument ¶ 5. 6 See id. at ¶ 5 ( even suggest that the disinterested directors were aware of the purportedly self-interested motivations of Rosenschein, Beasley and Dyal desire to retain investment or that the disinterested directors acted as they did to further those or any other allegedly improper goals. Nor do plaintiffs allege such facts elsewhere in the Complaint. That In re Answers Corporation Shareholder Litigation Consolidated C.A. No. 6170-VCN July 19, 2012 Page 4 loth could certainly be an appropriate addition to that incomplete list if it constitutes a systematic or sustained shirking of duty.7 Moreover, Lyondell Chemical Co. v. Ryan8 leaves this interpretation of bad faith intact. In Lyondell, our Supreme Court determined that a claim that the Lyondell board had acted in bad faith failed on summary judgment when the board entered into a merger agreement at a price representing a significant premium to the premerger interest during the four months 9 10 and the board had The Supreme Court explained that, in the change of control context, whether disinterested directors act should have done to obtain the best sale price, . . . [instead the question is: Did] 7 In re Walt Disney Co. Deriv. Litig., 907 A.2d 693, 754 (Del. Ch. 2005), , 906 A.2d 27 (Del. 2006) (quoting Guttman v. Huang, 823 A.2d 492, 506 n.34 (Del. Ch. 2003)) (other citations omitted) (additions and omission in original). Litig. exercise oversight-such as an utter failure to attempt to assure a reasonable information and reporting system exists-will establish the lack of good faith that is a necessary condition to Stahl v. Apple Bancorp, Inc., are subjectively operating selflessly might be pursuing a purpose that a court will rule is 8 970 A.2d 235 (Del. 2009). Id. at 241. 10 Id. 9 In re Answers Corporation Shareholder Litigation Consolidated C.A. No. 6170-VCN July 19, 2012 Page 5 11 On the facts of Lyondell, the Supreme Court answered that question in the negative, but the Court recognized that disinterested directors do act in bad faith in breach of their duty of tely responsibilities . fail[] to undertake their 12 Under Revlon v. MacAndrews & Forbes Holdings, Inc.,13 when Sternlicht, Segall, Tebbe, and Kramer agreed to undertake a change of control transaction, they were required to engage in a process that was aimed at obtaining for shareholders the highest value reasonably available for their shares, regardless of where that value came from. Complaint alleges that Sternlicht, Segall, Tebbe, and Kramer agreed to manipulate the sales process to enable the Board to enter quickly into the Merger Agreement public shareholders appreciated the Compan s favorable 11 Id. at 244 (citing Stone v. Ritter, 911 A.2d 362, 369 (Del. 2006)). Id. at 243-44. See also In re Walt Disney Co. Deriv. Litig. failure to act in good faith may be shown, for instance, where the fiduciary intentionally acts with a purpose other than that of advancing the best interests of the corporation, where the fiduciary acts with the intent to violate applicable positive law, or where the fiduciary intentionally fails to act in the face of a known duty to act, demonstrating a conscious disregard Disney, 907 A.2d at 755). 13 506 A.2d 173 (Del. 1986). 12 In re Answers Corporation Shareholder Litigation Consolidated C.A. No. 6170-VCN July 19, 2012 Page 6 14 The Court also set forth Complaint . . . alleges that UBS told the Board that time is not a friend to this deal with continued out performance and a looming q4 earnings call, and that, in 15 Those are allegations that Sternlicht, Segall, Tebbe, and Kramer completely failed even to seek the highest value reasonably available . They allegedly agreed to undertake a process that was aimed at consummating the Merger regardless of the actual value that the market would provide to The Answers Defendants correctly explain in making a business decision the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the co 16 To rebut that presumption on a motion to dismiss, the Plaintiffs must plead facts which suggest that Sternlicht, Segall, Tebbe, and 14 Mem. Op., 2012 WL 1253072, at *8. Id. at *3 (citation and internal quotations omitted). 16 Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984). 15 In re Answers Corporation Shareholder Litigation Consolidated C.A. No. 6170-VCN July 19, 2012 Page 7 17 welfare or [that] is known to That is difficult to do, but the Plaintiffs have done it. This case is not typical. The facts alleged in the Complaint show that the Board was considering a deal with AFCV at a certain price when the Board learned those earnings were made public, the market would likely value Answers at a not a friend to this deal with continued out performance and a looming q4 18 So what did the Board do? It sped up the sales process so that the deal with AFCV would be accomplished before the market price for Answers stock could rise above . Those are unique facts. Most cases do not had told the board that, with a failure to act 17 McGowan v. Ferro, 859 A.2d 1012, 1031 (Del. Ch. 2004). Litig. [B]ecause the plaintiffs concede that eight of the eleven Lear directors were independent, the plaintiffs must plead facts supporting an inference that the Lear board, despite having no financial motive to injure Lear or its stockholders, acted in bad faith to approve the Revised Merger Agreement. Such a claim cannot rest on facts that simply support the notion that the directors made an unreasonable or even grossly unreasonable judgment. Rather, it must rest on facts that support a fair inference that the directors consciously . 18 Compl. ¶ 58. In re Answers Corporation Shareholder Litigation Consolidated C.A. No. 6170-VCN July 19, 2012 Page 8 quickly, the market will learn the company is worth more than the deal price and the deal will be scuttled. This is not a case in which plaintiffs have made a bare -pled facts of the Complaint suggest that the Board was purposefully trying to do something other than obtain of the Company.19 going to go up, and that the Board failed to recognize that fact. The Complaint alleges that Sternlicht, Segall, Tebbe, and Kramer purposefully entered into a transaction so that another option, offering Specifically, the Complaint alleges that Sternlicht, Segall, Tebbe, and Kramer expected, based on information because they had that expectation they agreed to speed up the sales process and quickly entered 19 The well-pled facts of the Complaint also suggest that the Board accelerated the sales process so that, before announcement of the Merger, An -exculpated breach of fiduciary duty. In re Answers Corporation Shareholder Litigation Consolidated C.A. No. 6170-VCN July 19, 2012 Page 9 into the Merger Agreement. That is an allegation that those directors ext, to 20 In the Revlon alleges that Sternlicht, Segall, Tebbe, and Kramer were trying to do something else they were allegedly trying to get the Merger done at all costs and there are facts in the Complaint that support that allegation.21 The Court has already recognized particularly persuasive explanation as to why Sternlicht, Segall, Tebbe, and Kramer agreed to manipulate the sales process. 22 Moreover, the Court questioned an explanation will emerge because disinterested and independent 20 Lyondell, 970 A.2d at 243-44. If the facts are as alleged in the Complaint, then this case does (arguably) should have done to Id. at 244. To the contrary, this will Id. (citing Stone, 911 A.2d at 369). 21 ance and a This is not a question of due care; it is the sum of allegations that conceivably could lead to the conclusion that the four directors knowingly were not acting in the best interests of Answers and its shareholders. 22 Mem. Op., 2012 WL 1253072, at *8 n.48. In re Answers Corporation Shareholder Litigation Consolidated C.A. No. 6170-VCN July 19, 2012 Page 10 23 Perhaps the explanation will be that the disinterested and independent directors were not actually independent and they kowtowed to the whims of Rosenschein, Beasley, and Dyal, or perhaps the explanation will be that the allegations in the Complaint are incorrect and the disinterested and independent directors did not stock would rise (or stay) 24 If, however, the facts are as alleged in the Complaint, and Sternlicht, Segall, Tebbe, and Kramer simply chose to ru price reasonably available for their stock, then those directors may be liable for acting in bad faith in breach of their fiduciary duty of loyalty. Directors can act in bad faith in breach their duty of loyalty even if there is no whiff of self-dealing from their actions. As the Court has already pointed out, that does not happen often, but when a complaint pleads non-conclusory facts that it has happened, then that complaint has stated a claim sufficient to survive a motion to dismiss. On that basis, the 23 ment are denied in their entirety. Id. The independent directors might also be able to show that they did not act in bad faith by ock would be short-lived, and thus, that from the Merger than they would have been with Answers stock. 24 In re Answers Corporation Shareholder Litigation Consolidated C.A. No. 6170-VCN July 19, 2012 Page 11 *** In the interest of completeness, however, the Court will briefly address the two other arguments that the Answers Defendants make in support of their motions. The Answers Defendants directors consciously manipulated the sales process to benefit Rosenschein, Beasley and Dyal . . . is at odds with the theory of liability advanced in the 25 This argument about inconsistent pleading is premised on an unduly circumscribed reading of the Complaint. Namely, that the consciously manipulated the sales process to benefit 26 As explained above, the theory alleged in the Complaint is simply that Sternlicht, Segall, Tebbe, and Kramer completely failed to seek the highest value reasonably available, not that they acted to benefit anyone.27 Thus, to the extent the Complaint may be read to allege that Sternlicht, Segall, Tebbe, and Kramer abdicated their duties by failing 25 Mot. for Reargument ¶ 6. Id. (emphasis added). 27 Perhaps more accurately, the Complaint may be read to allege that the four directors expedited 26 an inevitable truth: namely, that the market would give a highe the Buyout Group. In re Answers Corporation Shareholder Litigation Consolidated C.A. No. 6170-VCN July 19, 2012 Page 12 to keep sufficiently informed, , even without necessarily stating a viable cause of action, are consistent with a complete failure to attempt to comply with the requirements of Revlon. Moreover, a complaint is not required to be consistent. A party may plead claims in the alternative.28 The Answers Defendants also argue that [t]he Court read the Complaint to allege that the directors a term that is nowhere used in the Complaint Opinion is the dire than a more lengthy search for alternative purchasers. As a matter of law, that business judgment is insufficient to establish that the directors consciously disregarded their duties.29 The Answers Defendants are incorrect about what the Court termed The manipulation discussed in the Memorandum Opinion was that Sternlicht, Segall, Tebbe, and Kramer agreed to expedite the sales process so that the Board would enter into the Merger Agreement before the market price for 28 See alternately or hypothetically, either in 1 count or defense or in separate counts or defenses. When 2 or more statements are made in the alternative and 1 of them if made independently would be sufficient, the pleading is not made insufficient by the insufficiency of 1 or more of the alternative statements. A party may also state as many separate claims or defenses as the party 29 Mot. for Reargument ¶ 7. In re Answers Corporation Shareholder Litigation Consolidated C.A. No. 6170-VCN July 19, 2012 Page 13 Answers s offer price 30 The Answers Defendants may be correct that expediting a sales process through a quick purported market check is not manipulation, but expediting a sales process through a quick purported market check for the purpose of entering into a transaction quickly so that an expected option offering shareholders more value will not emerge is manipulation. *** As determined in the Memorandum Opinion, the Complaint adequately alleges that Sternlicht, Segall, Tebbe, and Kramer acted in bad faith in breach of their duty of loyalty by knowingly and completely failing to attempt to obtain the s for reargument are denied. IT IS SO ORDERED. Very truly yours, /s/ John W. Noble JWN/cap cc: Register in Chancery-K 30 Mem. Op., 2012 WL 1253072, at *8 (emphasis added).