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In re Answers Corporation Shareholders Litigation

Court of Chancery of Delaware

February 3, 2014

IN RE ANSWERS CORPORATION SHAREHOLDERS LITIGATION

Submitted: October 16, 2013

Jessica Zeldin, Esquire of Rosenthal, Monhait & Goddess, P.A., Wilmington, Delaware, and Arthur N. Abbey, Esquire and Karin E. Fisch, Esquire of Abbey Spanier LLP, New York, New York, Attorneys for Plaintiffs.

Kevin R. Shannon, Esquire, Berton W. Ashman, Jr., Esquire, and Andrew E. Cunningham, Esquire of Potter Anderson & Corroon LLP, Wilmington, Delaware, and Jonathan M. Wagner, Esquire, Adina C. Levine, Esquire, and Susan Jacquemot, Esquire of Kramer Levin Naftalis & Frankel LLP, New York, New York, Attorneys for Defendants Answers Corporation, Robert S. Rosenschein, Mark A. Tebbe, Yehuda Sternlicht, Mark B. Segall, Lawrence S. Kramer, W. Allen Beasley, and R. Thomas Dyal.

William M. Lafferty, Esquire and D. McKinley Measley, Esquire of Morris, Nichols, Arsht & Tunnell LLP, Wilmington, Delaware, and David J. Berger, Esquire, Steven Guggenheim, Esquire, Diane M. Walters, Esquire, and Luke A. Liss, Esquire of Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California, Attorneys for Defendants AFCV Holdings, LLC, A-Team Acquisition Sub, Inc., and Summit Partners L.P.

MEMORANDUM OPINION

NOBLE, VICE CHANCELLOR

I. INTRODUCTION

Defendants are the former directors of a corporation that operated an Internet questions and answers site, the corporation, and the buyout group which acquired it by merger. Shareholder plaintiffs' surviving claims challenging the transaction allege 1) that the CEO director and the two director nominees of the corporation's primary venture capital investor were conflicted and controlled the board, and 2) that the four remaining directors on the seven-person board breached their duty of loyalty and acted in bad faith. Finally, plaintiffs assert that the buyout group aided and abetted the directors' breach of fiduciary duty. Defendants have moved for summary judgment, and for the reasons that follow, their motions for summary judgment are granted.

II. BACKGROUND

Before the merger from which this litigation arises, Answers Corporation ("Answers" or the "Company") was a publicly-traded Delaware corporation with its principal place of business in New York. Answers operated Answers.com, a leading question and answer ("Q&A") Web site which supported six languages.[1]The site utilized wiki-based technologies to provide community-generated social knowledge, which allowed its answers to be improved and updated over time.[2]The site was, however, dependent on Google for its traffic and for its advertising revenues. Approximately 90% of the site's traffic came from search engines, principally Google's. Approximately 75% of its revenue came from Google's AdSense.[3] The Company had no control over the algorithms routing traffic to the Company's site or over the algorithms placing ads on the site.[4]

Answers' seven-person board (the "Board") was comprised of Defendants Robert Rosenschein, Allen Beasley, Thomas Dyal, Mark Tebbe, Lawrence Kramer, Mark Segall, and Yehuda Sternlicht (the "Director Defendants"). Rosenschein founded Answers in 1998 and was its Chairman, President, and Chief Executive Officer ("CEO"). The venture capital firm Redpoint Ventures ("Redpoint") was the Company's largest shareholder and owned approximately 30% of it. Beasley and Dyal are partners of Redpoint and served as its nominees to the Board. Segall was the chairman of the Company's Financing Committee; Beasley and Sternlicht were the committee's other members.[5] It is uncontested that four directors of the seven-member board, Tebbe, Kramer, Segall, and Sternlicht, were disinterested directors.[6]

AFCV Holdings, LLC ("AFCV") is a portfolio company of private equity firm Summit Partners, L.P. ("Summit") and has a focus on social media and online information resources. Answers merged with A-Team Acquisition Sub, Inc. ("A-Team" and, collectively with AFCV and Summit, the "Buyout Group"), a wholly-owned subsidiary of AFCV. The Director Defendants, along with the Company and the Buyout Group, are referred to, collectively, as the "Defendants." Plaintiffs were shareholders of the Company.

A. AFCV Indicates its Interest in Answers and Other Events in 2010

In March 2010, Redpoint received an unsolicited expression of interest from AFCV concerning a possible business combination with Answers.[7] Answers, through Beasley and Dyal, responded to the expression of interest by setting up an initial meeting with AFCV's CEO, David Karandish.[8] The Board discussed the possibility of exploring strategic alternatives at a meeting on March 17, 2010, including the recent expression of interest from AFCV.[9] The Board decided it was in the best interest of the Company and its stockholders to explore these possibilities and to engage a financial advisor to assist in evaluating the Company's options.[10] Segall, as an independent director and chairman of the Financing Committee, was selected to evaluate potential financial advisors to recommend to the Board.[11]

Between March and September of 2010, representatives of Answers continued to meet with AFCV and engaged in early discussions related to a possible combination.[12] Beasley and Dyal met with AFCV representatives on June 25, acting in their capacity as representatives of AFCV. he vast [13] However, the vast majority of communications between the Buyout Group and Answers at this time were conducted by Rosenschein.[14]

Answers also received expressions of interest from other entities around the time that AFCV expressed its interest.[15] The Company's Proxy reports that the Board considered alternative strategies on several occasions.[16] Also throughout that time the Board considered financial advisors and was informed about conversations with AFCV.[17]

Plaintiffs assert that Rosenschein sought a deal out of his fear of being fired as CEO. They make much of what appears to be an internal Redpoint document, dated June 2010, which evaluates its investment in Answers. The document indicates that the Company's status was "[b]elow expectations" and that Redpoint was considering options with its investment including "either tak[ing] advantage of inbound M&A interest or replac[ing the] team."[18] Despite Plaintiffs' assertions to the contrary, no evidence in the record demonstrates that Rosenschein or other directors of Answers were aware of Redpoint's assessments at this time or until discovery in this litigation.[19] Finally, although Rosenschein and other managers discussed future employment with AFCV prior to the signing of the merger agreement, Rosenschein stated that he was a representative of the shareholders until the deal was completed.[20] AFCV also indicated that it would not make any firm commitments about future employment for any of the Company's employees.[21]

In June, upon the recommendation of the Board's Financing Committee and after reviewing the terms of engagement of the financial advisors under consideration, the Board decided to engage UBS as the Company's financial advisor.[22] Negotiations between Answers and UBS were not completed until September 17, 2010.

On July 14, 2010, Answers and AFCV entered into a Mutual Confidentiality Agreement. On August 9, 2010, Answers issued its second quarter earnings release which reported a second consecutive quarterly drop in revenues, after which its stock price fell from $7.99 to $4.58 within a week.[23] Rosenschein's testimony suggests that the stock price decline was based on a single shareholder which dumped several hundred thousand shares in two days and not upon market fundamentals.[24] Answers also began providing information concerning the business with AFCV at this time. On August 31, 2010, Karandish informed Rosenschein that he had received the green light from Summit's investment committee to pursue a transaction with Answers.[25]

B. Answers and AFCV Negotiate a Sale Price

On September 2, 2010, Karandish called Rosenschein to discuss delivering a letter of intent for a purchase of Answers by AFCV and explained that AFCV was considering a price of $8.00 per share. On September 7, 2010, Karandish sent Rosenschein a non-binding letter of intent for an acquisition within a range of $7.50 to $8.25 per share.[26] The Board concluded at its next meeting on

September 15, 2010, that a price in that range was inadequate.[27] Following further discussions between the financial advisors of Answers and AFCV, AFCV raised its offer to $9.00 per share on October 19, 2010. Rosenschein discussed "AFCV's willingness to increase its price" with certain Answers board members.[28] They decided that it was in the best interests of the Company and its stockholders to continue discussions and to exchange additional information with AFCV.[29]

On October 28, Rosenschein, Karandish, and other representatives of their companies met, and Answers provided AFCV with an updated management presentation and additional diligence materials and information, including projections and the strategic plan for the remainder of fiscal year 2010 and for 2011.[30] Thereafter, on November 4, 2010, AFCV raised its offer to $10.00 per share and also sent the Company an exclusivity agreement which would prevent it from discussing the possibility of a strategic transaction with other parties for a period of time.[31] The Financing Committee apparently considered this offer on November 5. It concluded that the $10.00 offer was a positive development, but would not agree to exclusivity with AFCV, and directed UBS to communicate its conclusions to AFCV's financial advisor.[32]

Additional negotiations culminated in an offer from AFCV's financial advisor to UBS on November 8, 2010 for $10.25. AFCV again sought to condition the offer upon exclusivity.[33] After learning of AFCV's offer, Segall wrote the Company's lead financial advisor at UBS, Janine Shelffo, and Beasley: "Disappointing response. That suggests they will accept exclusivity at $10.50 if they are playing in quarters now. . . Feels at least $0.50 low to me (if not $1.50!)."[34]

The Financing Committee directed management and UBS to continue to negotiate with AFCV, although without exclusivity, because it believed it was in the best interest of Answers to retain its ability to consider other offers. AFCV agreed to continue negotiations if Answers would reimburse it for expenses if Answers engaged in another transaction at a higher price. During a special meeting on November 15 to consider AFCV's updated non-binding letter of intent and its expense reimbursement agreement, the Board determined it would be in the Company's best interest to allow AFCV to proceed with due diligence and for management to cooperate with it.[35] However, the Board made no final decision about whether to pursue the AFCV transaction or another transaction.[36]

C. Answers Evaluates Interest from Other Possible Acquirers

Although Answers had received unsolicited interest from some potential acquirers from January 2010 to November 2010, the Board formally authorized UBS to approach ten other potential strategic buyers during its December 8 meeting.[37] UBS may have taken certain steps related to the market check slightly before this time. For example, it appears to have developed a list of potential bidders as of September 2010[38] and the minutes of the December 8 Board meeting and accompanying materials indicate that UBS initiated the market check in November.[39]

Plaintiffs focus on two emails sent just before the December 8 Board meeting in which Shelffo relayed negotiation information to Rosenschein, Beasley, Dyal, and Segall.[40] Shelffo, in both emails, describes AFCV "push[ing] the idea" that Answers conduct a quick market check in the two weeks preceding Christmas to satisfy the Board's fiduciary duties and then sign up a deal.[41] In the first of these emails, dated December 6, Shelffo wrote "I told [AFCV's banker] the board was not comfortable with that approach satisfying their fiduciary duty and that our UBS recommendation to complete a real market check would be to do something in the new year."[42]

At a special meeting of the Board on December 23, 2010, Shelffo reported the responses of the ten strategic acquirers that UBS contacted. Two companies had not responded, one was "probably not interested" due to a pending going-public transaction, and four indicated they were not interested in pursuing a transaction.[43] Board meeting minutes report that three companies expressed some interest in a transaction and that management had already presented information to those companies.[44] Shelffo assessed the interest of these parties in an acquisition, noted that UBS was waiting for additional information, and stated that UBS would be more able to gauge their interest once it received additional feedback.[45] In response to questions, Shelffo also discussed the advisability of soliciting interest from a wider range of potential acquirers. She commented that UBS was prepared to do so, but the Board should also balance the speculative benefits of running a more thorough search against the risks of delay which could jeopardize the AFCV transaction.[46]

Board members, during depositions, explained that the Board never told UBS to stop its market check[47] and that the check continued until the date the parties signed the merger agreement.[48] The Court cannot divine from the record the means by which the three interested acquirers indicated their lack of interest in Answers and when, if at all, such information was conveyed to the Board. However, the minutes from the Board's February 2, 2011[49] meeting confirm that the market check was limited to the strategic buyers discussed and that all ...


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