Litigation: Delaware Court of Chancery approves of merger agreement without “fiduciary out”

Court concludes company made reasonable efforts for shareholders in controversial case.

In 2003, in the case of Omnicare, Inc. v. NCS Healthcare, Inc., 818 A.2d 914 (Del. 2003), the Delaware Supreme Court held that stockholder voting agreements “negotiated as part of a merger agreement, which guaranteed shareholder approval of the merger if put to a vote, coupled with a merger agreement that both lacked a fiduciary out and contained a Section 251(c) provision requiring the board to submit the merger to a shareholder vote, constituted a coercive and preclusive defensive device,” because it made the merger an “impermissible fait accompli.” The Omnicare decision was issued by a divided Supreme Court (3-2), rare in Delaware, and the case has been controversial ever since.

The principal reasons for the controversy were that the Omnicare board of directors did not have any conflicts of interest and they shopped the company prior to entering into a merger agreement. The lack of identifiable breaches of the duties of loyalty and care, coupled with Delaware’s tradition of permitting stockholders to vote their stock in their interest provided they are not harming the minority in a self-interested transaction, left many practitioners with the belief that the case was wrongly decided. The makeup of the Delaware Supreme Court has changed since 2003 and then-Justice Myron T. Steele, who was part of the Omnicare dissent, is now chief justice. Yet, because practitioners counsel clients to avoid Omnicare situations, the Delaware Supreme Court has not had occasion to revisit the issue and perhaps reverse its prior holding.

One way practitioners endeavored to avoid Omnicare is to have controlling stockholders approve and close transactions immediately with written consents so the deal does not have to be subjected to a stockholder meeting and vote. It was never entirely clear that this avoids the concerns addressed in Omnicare, but in a recent opinion issued by the Delaware Court of Chancery on Sept. 30, 2011, in In re OPENLANE, Inc. Shareholders Litigation, the court denied a motion by a plaintiff-stockholder of OPENLANE Inc. to enjoin the merger of OPENLANE with KAR Auction Services Inc., despite the fact that the merger agreement at issue did not include a “fiduciary out” and the transaction was locked up within 24 hours after signing via written consents from the holders of a majority of OPENLANE’s stock.

After engaging in a robust search for potential buyers, OPENLANE and KAR entered into a merger agreement on Aug. 11, 2011. This required OPENLANE to obtain stockholder approval of the merger quickly and gave KAR’s board of directors the right to terminate the agreement without paying a termination fee if approval was not received within 24 hours. OPENLANE ultimately received consent from the holders of a majority of its stock within 24 hours of the execution of the merger agreement.

The plaintiff alleged that OPENLANE’s board of directors breached its fiduciary duties by failing to engage in an adequate process to sell the company and also challenged the deal protection measures in the merger agreement, relying on Omnicare. As noted, the merger agreement’s no-solicitation covenant did not contain a fiduciary out and OPENLANE’s directors and executive officers held more than 68 percent of the company’s outstanding stock, giving them more than sufficient voting power to approve the merger. The plaintiff alleged that these were improper defensive devices similar to those in Omnicare because they made the deal a fait accompli

Regarding the plaintiff’s argument, the Court of Chancery held that the OPENLANE-KAR merger agreement was permissible and did not implicate Omnicare. Distinguishing Omnicare, the court found that the OPENLANE-KAR merger was not a fait accompli, regardless of the fact that the combined voting power of the directors and executive officers was sufficient to approve the merger. The court held that there was no stockholder voting agreement executed at the same time as the merger agreement. According to the court, the only thing to be concluded from the facts was that the board approved the merger and the holders of a majority of shares quickly consented. The court also observed that the provision in the merger agreement allowing the board to terminate the agreement without paying a termination fee if stockholder approval was not received within 24 hours caused the no-solicitation clause to be “of little moment” because the board was able to back out of the agreement if the consents were not obtained. 

Importantly, the court acknowledged that Omnicare could be read to require a fiduciary out in every merger agreement. The court explained further, however, that when a board enters into a merger agreement that does not contain a fiduciary out, “it is not at all clear that the court should automatically enjoin the merger when no superior offer has emerged,” noting that such a decision “is a perilous endeavor because there is always the possibility that the existing deal will vanish, denying stockholders the opportunity to accept any transaction.”

Also noteworthy is the court’s conclusion that the board made a reasonable effort to maximize stockholders, and therefore satisfied its obligations under Revlon, even though the board did not obtain a fairness opinion and did not reach out to any financial buyers. That conclusion is a reaffirmation of Delaware precedent that “[t]here is no single path that a board must follow in order to maximize stockholder value, but directors must follow a path of reasonableness which leads toward that end.”

However, the particular facts of the case made that finding possible and it should not be read as approving of such a process as a matter of course. Indeed, the court noted that if directors do not employ a “traditional value maximization tool, such as an auction, a broad market check, or a go-shop provision,” the board must possess “impeccable knowledge of the company’s business.” Fortunately for OPENLANE’s board, it actually managed the day-to-day operations of the company, making it one of those rare boards that had the type of “impeccable knowledge” to which the court could defer to on a preliminary record. 

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John Reed

John Reed is a partner the Delaware office of DLA Piper, where he concentrates his practice on corporate litigation and counseling. He can be contacted...

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