On April 11, 2012, Delaware Vice Chancellor Nobel denied motions to dismiss complaints that challenged a merger which is alleged to have been intentionally entered into before positive earnings were released so that stockholders would view the merger terms more favorably than if they were aware of the positive earnings report.
The facts presented in the case indicated that the company's entire management team was threatened to be replaced by the majority shareholder if the company was not sold in the "near future." In response to this threat, the board of directors began taking bids for a sale of the company, and eventually closed a deal before anticipated positive earnings could be released. The positive earnings likely would have driven up the share price and made the deal agreed to by the board seem less desirable to shareholders. A stockholder class action suit was brought in the Delaware Court of Chancery and the plaintiff's motions to dismiss the claims were denied.
The claims that were denied dismissal were as follows:
- Breach of duty of loyalty by directors. The court found that the plaintiffs may be able to prove a breach of duty of loyalty as a result of the manipulation of the sales process to benefit a particular bidder and the personal interests of the directors in the transaction.
- Merger partner group aiding and abetting. The court found that the plaintiffs may be able to prove that the merger partner aided and abetted the board of directors in the breach of its duties by first proving a breach of duty of loyalty by the directors and then showing that the merger partner assisted the board in its actions.
Although the motions to dismiss were denied, the Vice Chancellor indicated that he believed the participation in the rushed process was sufficient to allege bad faith, but he acknowledged that recovery under the claims would be difficult.
In re Answers Corp. S'holders Litig., C.A. No. 6170-VCN (Del. Ch. Apr. 11, 2012)