In Re OPENLANE, Inc. S’holders Litig., C.A. No. 6849-VCN (Del. Ch. Sept. 30, 2011) (Noble, V.C.).
In this memorandum opinion, the Court of Chancery denied plaintiff’s motion to preliminarily enjoin the merger of OPENLANE, Inc. (“OPENLANE” or the “Company”) with and into a wholly-owned subsidiary of KAR Auction services, Inc. (“KAR”). In so holding, the Court rejected plaintiff’s claim that the board of directors of the Company (the “Board”) engaged in an inadequate sales process in breach of its fiduciary duties under Revlonto obtain the best value reasonably attainable for the stockholders. The Court found that while the Board did not employ the traditional tools utilized to maximize value in the sale of the Company, such as an auction, market check or go-shop provision, the Board possessed “impeccable knowledge” of the Company’s business thereby allowing the Court to conclude that the process was adequate and reasonable under the circumstances. Likewise, the Court found that the Board, who held or controlled beneficial ownership of approximately 60% of the Company’s voting stock, did not breach its fiduciary duties under Omnicare by (i) negotiating a merger agreement that contained a no-solicitation clause without a fiduciary out when coupled with a provision allowing the Board to terminate the merger agreement without payment of a termination fee if stockholder approval of the merger were not obtained within 24 hours of execution of the merger agreement and (ii) obtaining the approval of a majority of the Company’s stock by written consent within 24 hours of the execution of the merger agreement. The Court also rejected plaintiff’s claims that the Board breached its fiduciary duties by providing for an escrow in the merger agreement. In addition, plaintiff’s claims regarding the sufficiency of the disclosure regarding the sales process and the financial advisors’ analysis were also rejected.
In anticipation of a decline in the Company’s business, in April 2010 the Board engaged a financial advisor, Montgomery & Company LLC (“Montgomery”), to approach a limited number of potential strategic acquirers, including KAR and “Company A.” Having received only an indication of interest from Company A for $90 million, the Company terminated its engagement of Montgomery. Thereafter, in December 2010, the Board held a meeting to consider its strategic alternatives and Montgomery presented the Board with an informal presentation of its financial analysis that resulted in an implied enterprise value for OPENLANE ranging from $106.5 million to $256.4 million. Shortly thereafter, in January 2011, Company A made an offer to acquire OPENLANE for (i) $50 million cash, (ii) $50 million five year note, and (iii) 2.5 million shares of Company A stock valued by Company A at $40 per share. OPENLANE rejected the January offer and made a counter offer to Company A, which, in turn, was rejected.
In May 2011, OPENLANE received a written indication of interest (“IOI”) from KAR proposing an acquisition of all of OPENLANE’s outstanding capital stock for a purchase price between $200 million and $210 million plus working capital. In response thereto, the Board reengaged Montgomery to perform another limited market check to a number of strategic acquirers, including KAR, Company A and “Company B.” OPENLANE made a counteroffer to KAR with a purchase price of $230 million plus positive working capital, which KAR rejected. In June 2010, Company A declined to make another offer for OPENLANE but Company B made on offer for OPENLANE for an estimated purchase price of $200 million. After Company B was unresponsive to efforts to discuss a revised offer, OPENLANE and KAR executed the IOI.
On August 11, 2010, the Board unanimously approved the merger pursuant to which KAR would acquire OPENLANE for approximately $210 million or $8.30 per share. On August 15, 2011, the Company, KAR and Shareholder Representative Services LLC, as escrow agent (“SRS”), entered into the merger agreement, which contemplated that $26 million of the merger consideration would be held in escrow for at least 18 months to protect KAR from numerous contingencies relating to potential indemnification obligations and successful appraisal proceedings. In addition, the merger agreement contained a no solicitation provision that contained no fiduciary out. The next day, the Company received consents from the holders of a majority of its preferred and common stock sufficient to approve the merger agreement under Delaware law and the Company’s charter. The merger agreement also contained a condition, which was waivable by KAR, that holders of at least 75% of the Company’s stock deliver written consents approving the merger agreement. This condition was satisfied on September 12, 2011. On September 8, 2011, the Company filed a proxy statement pursuant to 8 Del. C. § 228 to request that holders that had not previously consented to the merger ratify the merger, waive appraisal rights and consent to certain golden parachute payments.
Plaintiff alleged that the Board breached its fiduciary duties by (i) failing to undertake an adequate sales process in violation of Revlon and (ii) filing a proxy statement that failed to disclose material information regarding the merger. Plaintiffs also asserted that the Company, KAR and SRS aided and abetted the foregoing breaches of fiduciary duty by the Board. Plaintiff contended that the Board lacked independence because it was improperly motivated to approve the merger because the directors stood to benefit personally from the acceleration of certain stock options. While the Court made clear that the only director whose options accelerated were those of the Company’s CEO, the Court found that fact alone did not suffice to demonstrate the disinterestedness of the Board, noting that accelerations re routine aspects of merger agreements. The Court also found equaling unavailing plaintiff’s contention that the sale process was tainted because the Company’s CEO agreed to serve as the CEO and president of the surviving corporation, noting that the CEO’s continued employment was known to the Board throughout the negotiations and no facts were demonstrated to show that the CEO dominated the Board. The Court also stated that CEO’s agreement to serve as CEO and president of the surviving corporation added potential value to the acquirer and did not affect the independence of the Board as a whole.
The plaintiff also asserted that the sales process undertaken by the Board violated Revlon because the Board contacted only three potential buyers, failed to perform an adequate market check, failed to receive a fairness opinion, and relied on scant financial information. In analyzing whether the Board satisfied its Revlon duties to secure the best value reasonably attainable, the Court applied enhanced scrutiny requiring (i) a judicial determination regarding the adequacy of the decision making process employed by the Board, and (ii) a judicial examination of the reasonableness of the Board’s actions in light of the circumstances. The Court found that “although the Board’s decision-making process was not a model to be followed,” plaintiff failed to establish a reasonable likelihood that at trial the Board would not be able to demonstrate that its actions were adequate under the first prong of the enhanced scrutiny analysis. The Court found that the Board performed a targeted market check over a one-year period and pursued transactions with two legitimate strategic buyers, ultimately choosing the superior transaction. While it was uncontested that the Board never received a fairness opinion, the Court noted that “the Board did receive some financial information from Montgomery” and found that the Company was “one of those seemingly few corporations that is actually ‘managed by’ as opposed to ‘under the direction of its board of directors.” Moreover, the Court found the fact that the Board failed to pursue any financial buyers to be “understandable in light of the Board’s impeccable knowledge” regarding the Company’s business, giving considerable weight to the fact that two directors were affiliated with private equity firms and were likely to know whether the Company would be of interest to a financial buyer. Turning to the reasonableness of the Board’s actions in failing to conduct an extensive market check or obtain a fairness opinion, the Court noted that OPENLANE was a small public company and while that fact does not alter the Board’s core fiduciary duties, “[w]here, however, a small company is managed by a board with impeccable knowledge of the company’s business, the Court may consider the size of the company in determining what is reasonable and appropriate.” In addition, the Court found the fact that the Board and the current officers of the Company held over 68% of the Company’s outstanding capital stock to be a “circumstance” of the merger suggesting that the Board would be motivated to get the best price reasonably available.
The Court concluded that the use of an escrow to protect KAR from numerous contingencies, which may have incentivized KAR to pay a higher merger price, did not violate any mandatory standard and was within the Board’s decision-making authority.
In determining whether the defensive devices included in the merger agreement were impermissible under Delaware law, the Court employed the two-part test articulated under Unocal which requires that the Board demonstrate that (i) it had reasonable grounds for believing a danger to corporate policy and effectiveness existed and (ii) its defensive response was reasonable in relation to the threat posed. With respect to the first part of the Unocal test, the Court found that the OPENLANE Board was faced with the “threat” that there were few suitors for the Company’s declining business and delay might prevent the Company from consummating a comparable transaction. With respect to the second part of the Unocal test, the Court found that unlike in Omnicare, where shareholder voting agreements were coupled with a merger agreement that lacked a fiduciary out permitting the board to terminate the merger agreement for a superior proposal, the OPENLANE merger was not a fait accompli. Rather, the Court found that the no-solicitation clause in the OPENLANE merger agreement appeared reasonable because the Board could terminate the merger agreement if the Company’s stockholders did not consent to the merger within 24 hours after the merger agreement was executed without having to pay any termination fee. Thus, the sole defensive device, the no-solicitation clause, was of little import because the Board could back out if consents were not obtained. The Court rejected plaintiff’s assertion that the combined voting power of OPENLANE’s directors and officers constituted a “lockup” of the shareholder vote and therefore was a defensive device. Rather, the Court found that the record suggested that there was no voting agreement and that nothing in the DGCL prevents the stockholders from submitting their consent to the merger soon after approval by the Board.
The Court found that the plaintiff failed to prove a reasonable probability of success for its disclosure claims regarding material omissions in the proxy statements pertaining to financial analyses used by the Board and the Board’s decision-making process with respect to a fair merger price. At the onset, the Court noted that because the requisite stockholder consent for the merger had already been received through written consent, the proxy statement need only disclose sufficient information to allow the stockholders to make an informed decision regarding whether to waive appraisal rights and take other actions pursuant to the stockholder acknowledgment. The Court stated that it did not matter, for disclosure purposes, whether the Board relied on an analysis provided by Barclays as part of a sales pitch, noting that such self-marketing materials are not expected to be thorough and impartial and that analysis itself disclaimed any guarantee of accuracy. The Court found the Board’s analysis, without consideration of the Barclays analysis, was sufficiently robust and therefore knowledge regarding whether the Board relied upon such analysis was not material. The Court also found the plaintiff’s assertion that the Board did not adequately disclose Montgomery’s role to be unavailing. The proxy statements explained the methodologies employed by Montgomery and the Court found that the level of detail allegedly omitted would likely inundate the reader and dilute the impact of the disclosures. Regarding fair price, the Court concluded that the omission of the CEO’s statement that $10 per share would be a “good outcome” was not material because the statement was an indication of a fair price, not the only fair price. Similarly, the Court held that the Board’s counteroffer to Company A was not material, as it was also not a reliable indicator of the Board’s view of the only fair price.
The plaintiff also failed to demonstrate that denying injunctive relief would set forth a cognizable risk of irreparable injury, especially in the absence of any competing offers. The plaintiff failed to demonstrate that balancing the equities tilted toward enjoining the transaction, even though factors such as the lack of a fairness opinion or a broad pre-signing solicitation raised concerns. The Court stated that although the process could have been enhanced, judicial interference should not occur because no potential acquirers came forward after the announcement of the merger and because the Board members were knowledgeable and had the same value maximization incentive as all stockholders held.