In In re Answers Corporation Shareholders Litigation(1) the Delaware Court of Chancery granted summary judgment in favour of the director defendants facing claims arising out of the sale of Answers Corporation in a 2011 going-private transaction. In its ruling, the court found no evidence that the directors had acted in bad faith, or that the independent board members were controlled by the chief executive officer (CEO) or the nominees of the company's controlling stockholder, generally reaffirming the latitude that Delaware courts will grant to an informed, independent board of directors.

Before the sale, Answers was a public company, with venture capital firm Redpoint Ventures as its largest shareholder. Redpoint held the right to nominate two directors of the company's seven-member board. Former shareholders of Answers alleged that its directors breached their duty of loyalty and failed to act in good faith in approving the merger, even though a majority of the board consisted of disinterested directors who had approved the transaction. Specifically, the plaintiffs alleged that:

  • the two Redpoint-affiliated directors and Answers' CEO, who was also a director, were conflicted and controlled the negotiation process; and
  • the entire board, including the four disinterested directors, had acted in bad faith in selling the company.

Vice Chancellor Noble granted the defendants' motion for summary judgment. Regarding the first allegation, the court noted that the plaintiffs had failed to explain or demonstrate any evidence of control, or to provide a persuasive theory as to why the independent directors would have decided to abdicate their fiduciary duties. The court noted that "mere invocation of the phrase 'dominated and controlled' cannot alone create such an issue of disputed fact". On the allegation of bad faith, the court noted that despite the plaintiffs' attempts to identify a variety of ways in which they believed the sale process could have been better conducted, there was no evidence that the board had consciously disregarded or failed to attempt to comply with its fiduciary duties.

For further information on this topic please contact Marko S Zatylny at Ropes & Gray LLP's Boston office by telephone (+1 617 951 7000), fax (+1 617 951 7050) or email (marko.zatylny@ropesgray.com). Alternatively, contact Emily Nagleat Ropes & Gray's Chicago office by telephone (+1 312 845 1200), fax (+1 312 845 5500) or email (emily.nagle@ropesgray.com). The Ropes & Gray website can be accessed at www.ropesgray.com.

Endnotes

(1) In re Answers Corporations Shareholders Litigation, CA No 6170-VCN, 2014 Del Ch LEXIS 17 (Del Ch February 3 2014).