On February 3, 2014, Vice Chancellor John Noble of the Delaware Court of Chancery granted summary judgment in favor of defendants, dismissing a class action lawsuit arising out the acquisition of Answers Corporation (Answers) by AFCV Holdings, LLC (AFCV), a portfolio company of Summit Partners.1 Answers operates the Q&A website Answers.com. Wilson Sonsini Goodrich & Rosati represented AFCV and Summit Partners in the lawsuit.
The case began in February 2011 when AFCV announced that it intended to acquire the outstanding shares of Answers for $10.50 per share. The price represented a 34 percent premium to Answers' recent average trading price and was more than twice the trading price of Answers just six months earlier, but as with virtually every public company merger, lawsuits quickly followed the announcement.2 Following extensive expedited discovery, the defendants defeated a motion by the plaintiffs to enjoin the acquisition in April 2011, and the transaction closed.3
After the deal closed, plaintiffs amended their complaint to seek damages, alleging that although four of the seven Answers' directors were independent and disinterested, these directors nonetheless "agreed to manipulate the sales process" at the behest of three allegedly interested directors. In declining to dismiss the complaint under the liberal pleading standards of the Delaware Supreme Court's decision in Central Mortgage v. Morgan Stanley Mortgage Capital Holdings (2011), the court noted that "plaintiffs have not offered any particularly persuasive explanation as to why [the disinterested directors] agreed to manipulate the sales process, but, at this procedural stage, an explanation is not needed."4
Discovery ensued, and plaintiffs could find no evidentiary support for their allegations that the Answers directors acted disloyally or in bad faith when they approved the sale of Answers. There was also no evidence to support plaintiffs' claim that AFCV and Summit Partners aided and abetted any alleged breach of fiduciary duty by the Answers Board. Accordingly, the court granted summary judgment in favor of all defendants.
In granting summary judgment, Vice Chancellor Noble cited two recent Court of Chancery decisions for the proposition that "a plaintiff's inability to explain a Board's motivation to act in bad faith may also be relevant in analyzing bad faith claims." In those opinions—In re Morton's and Miramar Firefighters—complaints were dismissed at the pleading stage in part because of the lack of factual allegations explaining why otherwise independent and disinterested directors would engage in disloyal behavior during the sales process. Thus, in the case of In re Morton's, the court rejected plaintiffs' assertion that the company's independent directors improperly favored the wishes of an alleged controlling shareholder in pursuing a sale to a particular buyer in part because "the Complaint . . . fail[ed] to plead any rational motive for the directors to do anything other than attempt to maximize the sale value of" the company.5 Similarly, in Miramar Firefighters Pension Fund, Vice Chancellor Noble rejected plaintiff's claim that the independent and disinterested directors of AboveNet acquiesced in the CEO's desires to sell to a private equity buyer in order to maintain his position as CEO and that the directors relied upon flawed projections that failed to adequately value the company in question where the plaintiff "provide[d] no reason why the disinterested and independent AboveNet Directors . . . would engage in such a scheme."6 Finally, in the Answers' summary judgment decision itself, the Court held that evidence that the Answers Board may have pushed to close a deal with AFCV could not support the inference that the Answers directors did so in bad faith given the absence of improper motive: "Such considerations are within the purview of a disinterested Board in assessing whether to pursue the proverbial bird in the hand over the one in the bush; particularly here, because no allegations have been made concerning the Board's motives for favoring AFCV as a bidder or presenting some other motive for failing to maximize shareholder value."7
Although Delaware law recognizes the possibility that directors who are otherwise disinterested and independent may nonetheless act in bad faith, the Answers case illustrates that such a claim is extremely difficult to prove absent evidence of a motive to act disloyally. Indeed, the trend in more recent Court of Chancery decisions has been to dismiss such claims at the pleading stage. While the standard on a motion to dismiss articulated by the Delaware Supreme Court in Central Mortgage requires only that a plaintiff allege a "reasonably conceivable set of facts under which plaintiff would be entitled to relief," the reasoning of these courts has been that, absent allegations of improper motive, it is not "reasonably conceivable" that independent and disinterested directors would act in bad faith.