In an April 11, 2011 memorandum opinion, the Court of Chancery denied a shareholder plaintiffs’ application to preliminarily enjoin the sale of Answers Corporation to AFCV Holdings, LLC and the related shareholder meeting scheduled to hold a vote upon the transaction. In denying plaintiffs’ application, the Court rejected alleged disclosure violations as immaterial and found plaintiffs’ claims challenging the sales process and fairness of the transaction price contradicted by the record and unlikely to succeed.
Answers, which operates the Answers.com website and its related platforms, was first approached by AFCV in March 2010. Months of exploratory discussions followed during which AFCV, a portfolio company of the private equity firm Summit Partners L.P., submitted several bids, starting with an indication of interest at $7.50 – $8.25 per share of Answers stock. The offers were rejected until AFCV raised its bid in October 2010 to $10.25 per share on the condition of exclusivity. Answers declined exclusivity, but the parties continued negotiations upon Answers’ agreement to reimburse AFCV’s expenses if Answers were to enter into a transaction with a different entity at a higher price. With the assistance of its financial advisor, UBS, Answers then privately shopped the company, soliciting competing bids from ten entities that the board and UBS had identified as potential buyers. Three of the entities entered into confidentiality agreements; ultimately none made offers. Following further negotiations, AFCV raised its offer again and, on February 2, 2011, the Answers board approved an agreement to sell the company to AFCV at $10.50 per share. On February 7, Answers filed its proxy statement and scheduled a shareholders’ meeting to vote upon the proposed transaction for April 12, 2011.
In challenging the company’s sales process and price, plaintiffs asserted, among other things, that efforts to market the company were inadequate. Assessing the fullness of the process under the familiar Revlon standard, the Court found that the record supported a contrary conclusion. The Court noted that the Answers board and UBS had solicited interest from potential buyers they had determined were “most likely to be able to pay a comparable or higher price,” and that the board reasonably decided “to solicit the market discretely so as not to disrupt the business . . . if no transaction took place.” Plaintiffs also claimed that the board’s reliance upon UBS’s opinion that the transaction was fair from a financial point of view was unreasonable because, among other reasons, UBS had failed to perform a discounted cash flow analysis. Answers maintained that a discounted cash flow analysis was not practicable given the unique characteristics of its business. In particular, Answers’ revenue depended significantly upon earnings derived from Google Adsense, which places ads on Answer.com’s website. In the first three quarters of 2010, Answers earned approximately 75% of its revenue through this source. Because the algorithms Google employs to place ads on websites periodically change, and are outside of Answers’ control, the company could not reliably predict its future cash flows, thus rendering long-term financial projections impracticable. Accepting that the unique characteristics of Answers’ business made any discounted cash flow analysis unreliable, the Court found that UBS had “sensibly crafted” its analysis within the limited universe of information available, and held that the board’s reliance on UBS’s opinion was reasonable.
In rejecting plaintiffs’ numerous disclosure claims, which sought the addition of various detail regarding the company’s revenue and projected EBITDA, the Court found each alleged omission either an immaterial component of information already disclosed in the proxy or a level of detail that would only tend to confuse shareholders without contributing materially to their decision regarding the transaction. In light of its analysis, the Court determined plaintiffs had failed to demonstrate a likelihood of success on the merits of either their disclosure claims or process-related claims and thus denied the motion for a preliminary injunction.
In a turn of events the weekend prior to the April 12 shareholders meeting, Answers received a competing offer to acquire the company for $13.50 per share. In the board’s estimation, however, the offer suffered numerous deficiencies, including the absence of any financing commitments, uncertainty regarding the timing it would take to consummate, and its eleventh-hour submission, without explanation, prior to the shareholder vote. The board deemed the offer not credible and rejected it as reasonably unlikely to result in a transaction superior to the proposed sale to AFCV. In announcing its rejection of the offer on the Monday following its receipt, the board also stated its intention to commence the meeting as scheduled the following day but to immediately adjourn the meeting for two days, to allow time for the market and shareholders to absorb the recent events. Plaintiffs immediately pressed the Court to consider these developments in rendering its decision on the preliminary injunction motion, arguing that the offer and the board’s rejection of it amounted to a material event for purposes of the shareholder vote. Plaintiffs also requested that the Court enjoin re-commencement of the meeting for a period of at least 10 days.
In a letter decision issued two days after its April 11 opinion refusing to grant a preliminary injunction, the Court declined plaintiffs’ request. The Court held that, in light of the offer’s various deficiencies, the board’s rejection of it could not be seriously questioned and that, because it was so deficient, the offer could not “fairly be considered material” to the shareholders’ decision relating to proposed sale to AFCV and, therefore, did not warrant further delay of the shareholders’ vote on the transaction.
The full opinion is available here.