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E-MailTheodore Mirvis is a partner in the Litigation Department at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton firm memorandum by Mr. Mirvis, William Savitt, and Ryan A. McLeod. This post is part of the Delaware law series, which is co-sponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.
The Delaware Court of Chancery has refused to enjoin an all-cash merger transaction negotiated by an actively engaged and independent board of directors, despite the fact that the sales process did not include customary features such as a fairness opinion or a fiduciary out, and the transaction was effectively locked up within a day by the execution of written consents by a majority of the stockholders. In re OPENLANE, Inc. S’holders Litig., C.A. No. 6849-VCN (Del. Ch. Sept. 30, 2011).
OPENLANE is a thinly-traded company with a highly concentrated shareholder base: 68.5 percent of its stock is held by a sixteen-person group of management and directors. Anticipating adverse market conditions in its principal business, the board negotiated with three potential strategic buyers in the first part of 2011, but did not undertake a broad auction or contact any possible financial buyers. In September, the board signed an agreement with the top bidder. Although no voting agreement was entered into as part of the merger, a majority of the company’s shareholders executed written consents approving the merger the very next day.
Shareholder litigation ensued. The plaintiffs attacked the board’s decision to contact only three potential buyers, the lack of a fairness opinion, the lack of a post-signing market check, and the lack of any provision in the merger agreement permitting the directors to back out of the deal if their fiduciary duties so required.
Rejecting those challenges, Vice Chancellor Noble reaffirmed Delaware’s longstanding refusal to impose a mandatory checklist of merger features. The Vice Chancellor cautioned that where “a board fails to employ any traditional value maximization tool, such as an auction, a broad market check, or a go-shop provision, that board must possess an impeccable knowledge of the company’s business for the Court to determine that it acted reasonably.” But, emphasizing the board’s hands-on expertise and detailed involvement with the transaction process, the Court held that “this is one of those few boards” capable of satisfying that test.
As to the claim that the deal was impermissibly locked up via the stockholder consents, the Vice Chancellor distinguished the Omnicare precedent (see our memorandum of April 10, 2003) on the grounds that the votes were not strictly “locked up” pursuant to a voting agreement. Rather, the preliminary record suggested only that “after the Board approved the Merger Agreement, the holders of a majority of shares quickly provided consents.” Accordingly, the court reasoned, the merger agreement “neither forced a transaction on the shareholders, nor deprived them of the right to receive alternative offers.” Vice Chancellor Noble thus held that a fiduciary out is not a per se requirement of Delaware law and refused to undertake the “perilous endeavor” of “[e]njoining a merger when no superior offer has emerged.”
Vice Chancellor Noble’s decision indicates that Omnicare does not bar stockholders from locking up a deal through written consents immediately after the execution of a merger agreement, and it confirms that the Delaware courts will respect the reasonable decisions of a non-conflicted, informed board—even if they depart from customary practice.
