Timing the Delivery of Stockholder Consents and the Future of Fiduciary Out Clauses

Toni Camacho and John Hempill, Morrison & Foerster LLP


Original Title: In Re Openlane, Inc. Shareholders Litigation: Timing the Delivery of Stockholder Consents and the Future of Fiduciary Out Clauses

On September 30, 2011, Vice Chancellor Noble issued an opinion in In Re Openlane, Inc. Shareholders Litigation.

[1] The Openlane decision clarifies that the holding in Omnicare v. NCS Healthcare, 818 A.2d 914 (Del. 2003), which invalidated a merger agreement that fully locked up a proposed merger vote through, among other devices, voting agreements, does not necessarily extend to the situation where stockholder written consents are executed and delivered shortly after a merger agreement is signed. Openlane also delineates what actions and circumstances are sufficient to meet the board's fiduciary duties when a merger agreement does not contain the "fiduciary out" seemingly imposed by Omnicare. As a result of the Openlane decision, it may become standard practice to deliver stockholder consents contemporaneously with, or immediately after, the signing of the merger agreement where, for example, the board members are also the majority stockholders. It is less clear whether Openlane generally establishes that a merger agreement without a fiduciary out clause can avoid being enjoined outside of the very specific circumstances of that case.

Timeline of Events [2]

Openlane was a Delaware corporation that had common stock traded on the OTC pink sheets. More than 90% of Openlane's revenue was derived from selling "off lease" vehicles. The eight members of the board, individually and with affiliates, owned 68.46% of the common stock in the aggregate. The company's chief executive officer ("CEO") and two individuals affiliated with private equity investors in the company were on the board, while the remaining members were all directly invested in the company.

In April 2010, Openlane's management retained Montgomery and Company LLC ("Montgomery") to solicit acquisition inquiries. They anticipated that Openlane's core business would be experiencing a decline because fewer cars would be coming "off lease" for the coming 2011‑2012 fiscal year. Montgomery estimated the company's value at $106.5 million to $256.4 million.

After communicating with two potential acquirers, Openlane received a written indication of interest from KAR Auction Services Inc. ("KAR") that proposed an acquisition purchase price for all of the issued and outstanding capital stock of $200 million to $210 million plus positive working capital. On June 24, KAR and Openlane signed an indication of interest letter that included a 30-day exclusivity period. On August 11, 2011, the Openlane board unanimously approved the merger and the next day Openlane received consents from a majority of the company's preferred and common stockholders. Two important provisions of the merger agreement were: (i) majority stockholder consent had to be obtained within 24-hours of execution without which either side could back out of the deal and (ii) a "standard" fiduciary out provision was not included.

Openlane submitted its proxy statement to the Securities and Exchange Commission on September 8, 2011. On September 9, 2011, William Treadway initiated the action against Openlane alleging the board breached its fiduciary duties by failing to undertake an adequate process to sell Openlane. The basis of the lawsuit was that: (i) the use of the 24-hour written consent was in violation of Omnicare and (ii) the agreement failed to include a fiduciary out provision required by Omnicare.

Timing of Stockholder Consents

The Court first took up the issue of whether the timing of a stockholder consent to a merger agreement matters. The Court focused on the specific language Omnicare, in which the Delaware Supreme Court held that voting agreements secured as part of a merger agreement that guaranteed the stockholders' approval if put to a vote amounted to a preclusive and coercive device. The Court noted that the Omnicare voting agreements contained a lock-up provision and a "force the vote" provision that made the merger an impermissible "fait accompli." [3]

The Openlane merger agreement, the Court found, did not result in the merger being a fait accompli, even though the agreement had a no solicitation clause and stockholder consents were required to be executed within 24-hours. To distinguish Omnicare, the Court noted that in the event Openlane failed to receive the required stockholder consents within 24-hours after the merger agreement was executed, either the Openlane board or KAR could have terminated the deal without penalty of a termination fee (unlike Omnicare where only the acquirer had this right of termination). Furthermore, the Court found that the merger agreement in Openlane was not coercive because Openlane's stockholders could not have a vote "forced" upon them, whereas in Omnicare the acquirer was given an irrevocable proxy. [4] Even though in Openlane stockholder consent was practically assured because the board members, directly and indirectly, in the aggregate owned the majority of the stock, the provision itself was not coercive or preclusive.

Ever since the Omnicare decision was handed down, practitioners have struggled to find the right period of time after a merger agreement has been signed by which delivery of stockholder consents could be required. The Openlane merger agreement had a 24-hour requirement, but the language of the decision certainly can be read to imply that consents can be delivered immediately after signing, if not contemporaneously therewith - the Court did not impose a bright line test. Of course, there still exists the possibility that there will be future litigation regarding this matter. For example, a party could argue that when the parties in a deal agree to "have the consents on the table" when a merger agreement is executed, that this is closer to the Omnicare prohibition than the merger agreement provision in Openlane.

The Failure to Have a Fiduciary Out Provision in a Merger Agreement is Not Necessarily Fatal

Omnicare seemingly added a hotly negotiated requirement for merger agreements: a fiduciary out for the target company's board. The Court in Openlane, however, worked to find that such a provision was not necessary in the case before it, while at the same time not openly subverting the superior court's decision in Omnicare. The Court noted some interesting distinguishing facts. Openlane was a corporation "managed by" and not "under the direction of" the board of directors, and was well informed because of the experience of its members. [5] Two board members were in the private equity industry and were likely to know of the availability of financial bidders, and the remaining board members (the CEO and investors) were informed by hands-on experience with Openlane's business. [6] The Court stated, "small companies do not get a pass just for being small. Where, however, a small company is managed by a board with an impeccable knowledge of the company's business, the Court may consider the size of the company in determining what is reasonable and appropriate." [7] Finally, and perhaps most importantly, no superior offer existed or ever emerged for Openlane.

As a result of the specific facts before them, the Court concluded: "when a board enters into a merger agreement that fails to contain a fiduciary out it is not at all clear that the Court should automatically enjoin the merger when no superior offer has emerged." [8] One additional issue that the Court noted is that the 24-hour termination clause included in the merger agreement functioned as a type of fiduciary out, albeit with a short fuse.

Two other considerations may have influenced the Court's decision. On one hand, issuing an injunction would have deprived stockholders of all value from an actual deal because a viable superior offer had not presented itself. On the other hand, the Court noted that the lack of publicity and irrevocable consents made the offer appear as a 'done deal' and thus the board's own actions may have stifled the market's response. The Court did not expand on this analysis but held that the board's interests and stockholder interests were aligned and that the obtained consents were the will of the stockholders.

Regardless of the circumstances, boards will always be bound by their fiduciary duties to stockholders. Dr. Eric Talley, a leading scholar in the area of corporate governance, had the following to add to the discussion of Openlane: "The absence of a 'Fiduciary out' in this deal is not that important - and never really should have been in my mind as a legal matter … Boards already have the implied ability and obligation to backtrack on decisions that they deem to be in breach of their fiduciary duties and thus outside their actual and apparent authority." [9]

Scrutiny of board decisions will continue to be based on the information available to the board at the time the decision was made, and the process by which the board accumulated and acted on that information. The Openlane decision merely echoes precedent in this regard. The Court held that the Openlane board was informed and acted reasonably under the circumstances given the board members' knowledge, position, and the availability of bidders in the market. The Court found that the board's actions were reasonable because they needed to act quickly to preserve stockholder value before the anticipated decline in business. Given the Court's focus on the specific facts of the Openlane case, however, only time will tell whether M&A practitioners, given similar but not identical facts, will feel comfortable advising a target of an acquisition that a fiduciary out provision is not necessary or can be replaced by a "fiduciary out lite," such as a mutual termination provision with no penalty.

In any case, Openlane is an important precedent for establishing: (i) a requirement for stockholder consents delivered shortly after, and perhaps contemporaneously with, the signing of a merger agreement, ifconstructed properly, can be upheld and (ii) merger agreements without fiduciary outs will not automatically be enjoined by the Delaware courts.

[1] C.A. No. 6849-VCN (Del.Ch. Sept. 30, 2011).

[2] C.A. No. 6849-VCN (Del.Ch. Sept. 30, 2011).

[3] Omnicare at 936. and (citation omitted). "The record reflects that any stockholder vote would have been robbed of its effectiveness by the impermissible coercion that predetermined the outcome of the merger…"

[4] Id.

[5] Id. at 21

[6] Id. at 22

[7] Id. at 24

[8] Id. at 34 (see footnote 53).

[9] Eric Talley interview.

John R. Hempill, Partner,

John Hempill acts as general outside counsel for a number of privately and publicly held companies in a variety of industries. He has extensive experience in private and public finance, ranging from representing private emerging growth companies, venture capital funds and strategic investors in seed rounds and later stage private financings, to representing public companies and investment banks in public offerings, as well as 144A and PIPEs financings.

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Toni Camacho, Associate,

Toni Camacho is an associate in the Corporate Group in the New York office of Morrison & Foerster.

Ms. Camacho received her J.D. from the University of California Berkeley School of Law, where she was a Dean's Fellowship Recipient, as well as her certificate in business law from the Berkeley Center for Law, Business, and the Economy.

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Morrison & Foerster LLP

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Material in this work is for general educational purposes only, and should not be construed as legal advice or legal opinion on any specific facts or circumstances, and reflects personal views of the authors and not necessarily those of their firm or any of its clients. For legal advice, please consult your personal lawyer or other appropriate professional. Reproduced with permission from the authors. This work reflects the law at the time of writing.