In re Dollar Thrifty Shareholder Litigation and Forgo v. Health Grades, Inc.: Value Maximization Under Revlon
October 28, 2010
In In re Dollar Thrifty Shareholder Litigation, Cons. C.A. No. 5458-VCS (Del. Ch. Sept. 8, 2010), Dollar Thrifty Automotive Group, Inc. (“Dollar Thrifty”) stockholders sought to enjoin a merger between Dollar Thrifty and Hertz Global Holdings, Inc. (“Hertz”), arguing, among other things, that the Dollar Thrifty board breached its fiduciary duty to take reasonable steps to maximize value for its stockholders under Revlon. In April 2010, Hertz entered into a merger agreement (the “Agreement”) to acquire Dollar Thrifty for a price of $41 per share, which included a $200 million special cash dividend to be paid by Dollar Thrifty only if the merger was consummated. The merger price represented a 5.5% premium over Dollar Thrifty’s market price, and the Agreement contained a no-shop provision with a fiduciary out, matching rights and a termination fee. The merger was conditioned on, among other things, the receipt of antitrust approval, and required both parties to use their reasonable best efforts to obtain such approval. Accordingly, the Agreement also contained a reverse termination fee payable by Hertz in the event (among others) that such approval was not obtained. After execution of the Agreement, Avis Budget Group, Inc. (“Avis”) made an offer to acquire Dollar Thrifty at a price of $46.50 per share. After examining the reasonableness of the board’s process, and the board’s determination that Avis’s offer lacked deal certainty, the Court of Chancery denied plaintiffs’ motion for a preliminary injunction.
From 2007 through 2009, Dollar Thrifty had engaged in unsuccessful negotiations with both Hertz and Avis. In late 2009, Dollar Thrifty renewed negotiations with Hertz, and after months of bargaining, Dollar Thrifty and Hertz executed the Agreement on April 25, 2010. On May 3, 2010, Avis’s CEO sent Dollar Thrifty’s CEO and chairman a letter announcing Avis’s intention to make a substantially higher offer to acquire Dollar Thrifty. The board concluded that Avis’s proposal could reasonably be expected to result in a superior proposal and agreed to execute a confidentiality agreement with Avis. Three months later, Avis made an offer to acquire Dollar Thrifty for a price of $46.50 per share, which included the same $200 million special cash dividend as the Hertz deal. Avis’s offer, however, did not contain matching rights, a termination fee or a reverse termination fee. On August 3, 2010, Dollar Thrifty’s CEO communicated to Avis that the board could not declare Avis’s offer superior due to the lack of a reverse termination fee and antitrust approval concerns.
Plaintiffs’ central argument was that, by failing to take affirmative steps to draw Avis into a bidding contest with Hertz before executing the Agreement, the Dollar Thrifty directors breached their fiduciary duty to take a reasonable approach to immediate value maximization, as required by Revlon. Plaintiffs also challenged the deal protection measures contained in the Agreement.
The Court concluded that the Dollar Thrifty directors were properly motivated. The Court determined that there was no evidence in the record that Dollar Thrifty’s CEO harbored any entrenchment motivation or any particular desire to sell Dollar Thrifty to Hertz. The Court also found no evidence in the record that the board preferred to do a deal with Hertz at some lower value if a better deal was actually attainable from Avis. Thus, the Court concluded that there was no basis to question the board’s loyalty. The Court also noted that the board was closely engaged at all relevant times in making decisions regarding how to handle negotiations with Hertz and whether to try to bring Avis into the process.
The Court next addressed the alleged flaws in the board’s decision-making process. Plaintiffs challenged the board’s decision not to seek out other bidders, including Avis, or conduct a pre-signing market check. The Court held that the board’s decision to negotiate only with Hertz was reasonable, rejecting the claim that a board is required to conduct a pre-signing market check. The Court also found that the board had reasonable grounds for not reaching out to Avis before executing the Agreement, including the board’s substantial and legitimate concerns regarding Avis’s ability to obtain financing and clear antitrust hurdles.
Plaintiffs also challenged the board’s decision to enter into the Agreement with Hertz and the terms of the Agreement. The Court rejected plaintiffs’ argument that the board’s decision to enter into the Agreement was unreasonable because the 5.5% market premium that Dollar Thrifty’s stockholders would obtain was insufficient, finding that the Dollar Thrifty board reasonably focused on the “company’s fundamental value” rather than a spot market price in considering the sale of the company. The Court held that a well-motivated board is not obligated to refuse an offer that it reasonably believes appropriately meets or exceeds the fundamental value of the company merely because the market premium is comparatively low. The Court also determined that the deal protection measures were neither preclusive nor coercive. As for the termination fee, the Court concluded that the termination fee constituted approximately 3.5% of the value of the $1.275 billion deal (taking into account the special cash dividend and the amounts payable in respect of share-equivalents), and approximately 3.9% of the value when the additional $5 million in expenses was taken into account. This amount constituted approximately $1.60 per share and was therefore a relatively insubstantial barrier, as the Avis bid demonstrated, to any serious topping bid. The Court also concluded that the “relatively lenient no-shop provision” and the matching rights would not deter a bidder interested in making a materially higher bid.
Finally, the Court held that plaintiffs failed to demonstrate a likelihood of success on the merits. The record depicted a well-motivated and diligent board that responded with openness, rather than resistance, to Avis, who had twice before failed to reach an agreement with Dollar Thrifty. Although Avis’s bid was superior in theory, the Court noted that value is not value if it is not ultimately paid. The Court held that the Dollar Thrifty board bargained hard with Hertz and extracted the best deal available for its stockholders. The reverse termination fee and significant divestitures to obtain regulatory approval provided deal certainty, which, at the time, Avis was unwilling to match. The balance of harms also tilted against an injunction because the Dollar Thrifty stockholders would have the ability to vote against the transaction—which they subsequently did—if they believed that Dollar Thrifty was better off as a stand-alone entity or if they believed that Avis would offer a superior transaction.
The Court of Chancery recently addressed another Revlon claim in the single-bidder context. In Forgo v. Health Grades, Inc., C.A. No. 5716-VCS (Del. Ch. Sept. 3, 2010) (Transcript), plaintiffs sought to enjoin the all-cash tender offer by Vestar Capital Partners V, L.P. for all the outstanding shares of Health Grades, Inc. Just as in Dollar Thrifty, the Court of Chancery denied plaintiffs’ motion in part on the ground that the stockholders of Health Grades should be permitted to decide for themselves whether to accept the tender offer price. In doing so, however, the Court questioned the board’s process and expressed concern over the informational basis for the board’s decision to deal exclusively with Vestar. The Court also remarked that Health Grades’ chairman and CEO, who had agreed to tender his significant block of stock on the same terms as other stockholders, potentially had interests that diverged from those of the other stockholders, including the possibility of continued employment or post-closing equity participation. The Court noted the availability of the statutory appraisal remedy and post-closing monetary relief and declined to issue a preliminary injunction; however, the Court remarked that, had it been necessary to determine whether the plaintiffs had shown a likelihood of success on the merits of their claims, the Court might well have held that the plaintiffs had done so.