Founded in 1983, Ancestory.com is the world’s largest family history website that provides access to more than ten billion records and thirty eight million family trees.[i] Recently, the London based private equity firm Permira Advisers LLP agreed to purchase the company at a valuation of $32 a share.[ii] The $32 amount represents a premium of 10% based on the company’s price at the time the deal was announced. [iii] However, many shareholders are unsatisfied and upset.[iv] In fact, many shareholders have filed suit against the company.[v] Principally, these suits allege that the Board of Directors of Ancestry.com breached their fiduciary duties to stockholders by failing to obtain a higher price by adequately shopping the company and that the decision to consummate the sale was not in the best interest of shareholders, rather that of the Board of Directors.[vi]
Attorneys representing pension funds and shareholders that own equity in Ancestry.com allege that Spectrum Equity Investors, one of Ancestry.com’s largest shareholders, wrongfully influenced company directors to accept the Permira backed $32 a share offer.[vii] Moreover, attorneys representing the pension fund contend that there was a separate offer to purchase the company for $35 per share.[viii] Consequently, those suing Ancestry.com believe there were and still are more financially advantageous options that would better serve the interests of those who own a piece of the publicly traded company.[ix] In fact, multiple analysts have valued the stock in excess of $32 per share.[x] One particular analyst from a reputable investment-banking firm valued the price point at $45 per share.[xi] Additionally, the company has been financially successful.[xii] The total revenue for the second quarter of 2012 was $119.1 million, which was an increase of 18% compared to the earnings in the prior year’s second quarter.[xiii] Given these financial results, the board of directors' decision to sell Ancestry.com may seem inept in pursuit of acting in the best interests of shareholders.
A company’s Board of Directors has a special relationship of trust, fiduciary obligations, that it owes its shareholders. “Three broad duties stem from the fiduciary status of corporate directors; namely, the duties of obedience, loyalty, and due care.”[xiv] The duty of obedience obligates a director to avoid taking actions that are not within the scope of the powers of a corporation as defined by its charter or the laws of the state of incorporation.[xv] The duty of loyalty obligates a director to act in good faith and not allow personal interests to supersede the interests of the shareholders.[xvi] The duty of due care obligates a director to be diligent and prudent in managing the corporation's affairs.[xvii] Perhaps it is coincidental or unworthy of note that the CEO and CFO will continue to maintain a majority of their equity stake in the company post acquisition and that Spectrum, owner of 30% of all outstanding shares, will remain a significant investor.[xviii] Or perhaps given the company’s financial strength, the Board of Directors violated their duty of loyalty and care in failing to obtain a better deal than $32 per share. Perhaps the Permira deal resulted in a more favorable ownership stake benefiting the Board of Directors and Spectrum investment group versus all shareholders.
On it’s face, the scenario plainly brings into question the ability of the government to protect the interests of investors from the harms of a self-serving board of directors/corporate leaders. However, the resolution of the Ancestry.com scenario also fits more broadly into the larger discussion of Social Security and the nation’s growing debacle of how to ensure that America’s elderly remain financially stable versus destitute. In particular, pension fund participants whose plan invests in Ancestry.com and other corporations can be severely impacted by inadequate valuation and selling of a company’s shares. Pension funds (401k plans, Defined Benefit Plans, etc.) are the cornerstone of many Americans’ retirement reserves. Thus, even the slightest reduction of an individual’s return on their investment can directly affect their ability to maintain their way of life once they are retired. In fact, many pension plans rely on the profits derived from their investments to pay off the benefits a company owes to its retired employees.[xix] A reduction in the expected return of an investment, such as Ancestry.com, could significantly stifle a company to the brink of bankruptcy.[xx] If this were to happen, not only would employees feel the pinch but potentially so too could all Americans. Many corporations that are unable to cover its unfunded benefits liabilities owed its retirees can be “bailed out” via the government Pension Benefit Guaranty Corporation (PBGC).[xxi] Unfortunately, the government must foot the bill for any unfunded pension plans it rescues from failed companies.[xxii] In 2010, The PBGC had a total of $102.5 billion in obligations and $79.5 billion in assets.[xxiii] Even though the debt to asset ratio is clearly unbalanced, the government must find a way to provide the rescue retirement benefits. Simply put, the money has to come from somewhere. Sadly, the likely source of money would come from either an increase in the federal budget or an increase in taxes. These options arguably represent horrible choices for a country already in economic despair.
Just as parents dutifully discourage children from having imaginary friends, the Ancestory.com scenario beckons the court to do so as well. The fiduciary implications need to be heavily considered with the utmost scrutiny in light of its broader implications. More than serving as symbolic rhetoric, analysis of whether the Board of Directors have breached their legal fiduciary duties is monumental. The protections of fiduciary duties personify the government’s promise to protect investors along with all of their hopes and dreams that come attached to their hard earned money.
[xiv]Gearhart Indus., Inc. v. Smith Int'l, Inc., 741 F.2d 707, 719 (5th Cir. 1984).