In re OPENLANE, Inc. Shareholders Litigation: Court of Chancery Denies Injunction Motion Where Merger Agreement Lacks Fiduciary Out
October 31, 2011
In In re OPENLANE, Inc. Shareholders Litigation, C.A. No. 6849-VCN (Del. Ch. Sept. 30, 2011), the Court of Chancery denied a motion to enjoin preliminarily the merger between OPENLANE, Inc. and KAR Auction Services, Inc. (through its wholly-owned subsidiary, ADESA, Inc.) (“KAR”), even though the merger agreement did not include a fiduciary-out and the transaction was effectively locked-up within 24 hours after signing by written consents from the holders of a majority of its stock.
After engaging in a lengthy process to locate potential acquirors, OPENLANE ultimately entered into a merger agreement with KAR on August 11, 2011. The terms of the merger agreement required OPENLANE to obtain stockholder approval of the merger quickly but gave the Board the right to terminate the agreement without paying a termination fee if approval was not received within 24 hours. OPENLANE ultimately received consents from the holders of a majority of its stock within 24 hours of the execution of the merger agreement.
Shortly after OPENLANE filed its proxy statement with the SEC on September 8, 2011, plaintiff, an OPENLANE stockholder, filed a complaint and motion for preliminary injunction asserting, inter alia, that the board breached its fiduciary duties by failing to engage in an adequate process to sell the company. In a challenge to the deal protection measures, plaintiff focused on the Merger Agreement’s no-solicitation covenant (which did not contain a fiduciary out) and the fact that the directors and executive officers of OPENLANE together held more than 68% of OPENLANE’s outstanding stock and thus had the combined voting power to approve the merger. Plaintiff alleged that these were improper defensive devices similar to those employed in the transaction in Omnicare, Inc. v. NCS Healthcare, Inc., 818 A.2d 914 (Del. 2003).
The Court, however, upheld the OPENLANE merger under the Supreme Court’s ruling in Omnicare. In Omnicare, the 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” and made the merger an “impermissible fait accompli.” Unlike the transaction in Omnicare, the Court of Chancery found that the OPENLANE 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 and the record merely suggested that the board approved the merger and the holders of a majority of shares quickly consented. Additionally, the provision allowing the board to terminate the Merger 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.
While the Court acknowledged that Omnicare could be read to say that there must be a fiduciary out in every merger agreement, the Court found that when a board enters into a merger agreement that does not contain such a provision, “it is not at all clear that the Court should automatically enjoin the merger when no superior offer has emerged.” Omnicare put hostile bidders on notice that Delaware courts may not enforce a merger agreement that does not contain a fiduciary out if they present the board with a superior offer. The Court noted that enjoining a merger when no superior offer has emerged “is a perilous endeavor because there is always the possibility that the existing deal will vanish, denying stockholders the opportunity to accept any transaction.”
In addition, the Court found that the board made a reasonable effort to maximize stockholder value under Revlon despite the fact that the board did not obtain a fairness opinion and did not contact any financial buyers about a potential transaction. Thus, the Court reaffirmed 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.” The Court further noted that if a board does not utilize a “traditional value maximization tool, such as an auction, a broad market check, or a go-shop provision” the board must possess an “impeccable knowledge of the company’s business.” Because OPENLANE was actually managed by, as opposed to under the direction of, its board, the Court found that the OPENLANE board was one of the few boards with an “impeccable knowledge” of its company’s business.