In re Dollar Thrifty S'holder Litig., Cons. C.A. No. 5458-VCS (Del. Ch. Sept. 8, 2010) (Vice Chancellor Strine)
In this memorandum opinion, Vice Chancellor Strine denied a shareholder plaintiffs’ motion to preliminarily enjoin a proposed merger between Hertz Global Holdings, Inc. (“Hertz”) and Dollar Thrifty Automotive Group, Inc. (“Dollar Thrifty” or the “company”) in advance of the Dollar Thrifty stockholder vote on the merger, finding that the record did not support plaintiffs’ claim that the Dollar Thrifty directors breached their so-called Revlon duties in executing the merger agreement with Hertz.
Dollar Thrifty underwent a stark turnaround during 2008 and 2009, recovering from the brink of bankruptcy following cost cutting efforts by its management. As a result, Dollar Thrifty’s stock price increased significantly. During this period, the company received acquisition overtures from Hertz and Avis and discussions ensued. However, these discussions did not lead to the execution of a definitive merger agreement. In the discussions, the Dollar Thrifty directors and senior management emphasized the need for deal certainty in light of the deal’s likely antitrust issues and its implications for employee morale. In late 2009, in response to an indication of interest from Hertz, the Dollar Thrifty board again authorized discussions with Hertz. This time, however, the board decided not to contact Avis due to questions about its financing capabilities, antitrust issues and concerns that a leak could negatively affect Dollar Thrifty’s business performance.
The negotiations with Hertz resulted in a merger agreement that provided for standard termination fees (including a reverse termination fee if Hertz failed to gain antitrust clearance) and matching rights for Hertz. The merger agreement also required Hertz to divest significant assets if necessary for antitrust approval. The Dollar Thrifty directors were permitted to entertain a higher offer if they determined such offer reflected a superior proposal as defined by the merger agreement. Following announcement of the deal, Avis expressed an interest in topping the Hertz deal. After some diligence and obtaining credit amendments, Avis offered a price of $5.50 more per share with a commitment to divest assets to obtain antitrust clearance. The Dollar Thrifty board determined, however, that the nominally higher Avis bid could not be considered a superior proposal under the merger agreement because of questions regarding its likelihood of consummation.
The shareholder plaintiffs alleged that the Dollar Thrifty directors breached their Revlon duties by failing to engage Avis prior to signing up a deal with Hertz, by failing to appropriately respond when Avis awkwardly expressed some potential interest just prior to signing the deal with Hertz, and by allowing the merger agreement to contain unreasonable deal protection devices, particularly a high termination fee, that were unwarranted in light of the relatively small one-day premium paid by Hertz.
The Court reiterated that fiduciary duties under Revlon do not require any specific roadmap, only that directors choose a reasonable route to obtain the best immediate value for the stockholders. In so doing, Vice Chancellor Strine noted that, although many of the actions that plaintiffs allege the board should have taken would have been reasonable, the appropriate question for analysis is merely whether the actions the board actually took were reasonable. In contrast to business judgment review where the Court must find that the business decision was rational, a Court applying the heightened scrutiny that Revlon requires must engage in a nuanced analysis of the board of directors’ personal interests to determine that the board acted reasonably and with a proper purpose. The analysis involves two prongs: “(a) a judicial determination regarding the adequacy of the decisionmaking process employed by the directors, including the information on which the directors based their decision; and (b) a judicial examination of the reasonableness of the directors’ action in light of the circumstances then existing.” A determination of reasonableness involves the Court finding that the board is well motivated and that the means the board chose were a reasonable way to achieve the stated goal.
Here, Vice Chancellor Strine found that the board, comprised of five independent directors and the company’s CEO, Scott Thompson, was properly motivated and evidenced no desire to sell the company only to Hertz. The Court rejected plaintiffs’ attack that Thompson was beholden to Goldman Sachs, one of Dollar Thrifty’s two financial advisors, in a manner that conflicted with his duties to Dollar Thrifty. In addition, the directors collectively owned material amounts of stock that aligned their interests with stockholders and had legitimate concerns that Dollar Thrifty’s current performance may be unsustainable over the longer term. The Court noted the factual distinctions between this case and Revlon, in that the board had engaged in the past in extensive and somewhat frustrating negotiations with the two major industry suitors and was willing to sell to the bidder that could offer deal certainty and the highest value, rather than preferring one bidder over another. Observing that Van Gorkom was essentially a Revlon case, Vice Chancellor Strine found that the board was fully informed and exercised properly motivated due care.
With respect to plaintiffs’ claim that the board’s failure to engage Avis was unreasonable, the Court disagreed. It concluded that the decision not to initiate an auction process with Avis was reasonable because the board was not firmly committed to selling at that time, the board had substantial and legitimate concerns regarding Avis’s ability to obtain financing or clear antitrust hurdles, and the board had recent experience where Avis was reluctant to even make a firm bid at a much lower price. The board also considered and reasonably concluded that there was substantial risk that Hertz would withdraw from the process if Dollar Thrifty pursued Avis because Hertz had requested exclusivity and had previously withdrawn from prior negotiations. Although reasonable directors could have pursued a bidding contest, the board chose this particular path following reasonable deliberation, and, importantly, obtained a deal structure that allowed a later higher bid after securing a firm deal with Hertz.
With respect to plaintiffs’ claim that the Dollar Thrifty directors acted unreasonably in failing to appropriately respond to a meeting request from the CEO of Avis, again the Court disagreed. It found factually that prior to the signing of the merger agreement, Avis’s CEO attempted to arrange a call with Thompson through a banker. Thompson and Avis’s CEO later spoke and agreed to meet for dinner, but Avis’s CEO did not indicate an interest in a deal. The dinner was cancelled after announcement of the Hertz deal. The Court found that there was nothing in the record showing that Avis had expressed interest in a deal.
Finally, the Court rejected plaintiffs’ claims that the decision to enter into the merger agreement was unreasonable because the price was insufficient to justify the deal protections. Vice Chancellor Strine rejected the challenge to the price based on the low market premium, noting that both the Dollar Thrifty stock price and Hertz offers consistently increased during the protracted negotiations. The Court refused to accept an unsound discounted cash flow analysis offered by plaintiffs that included the synergy value from the merger and recognized the real risks to continuing to press for a higher price given that Hertz’s last offer was contingent on reaching agreement in five days and Hertz’s history of walking away. In analyzing the extent of the premium, the Court also observed that the Dollar Thrifty stock price had increased significantly during the negotiations with no fundamental changes to Dollar Thrifty’s future outlook, and 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 it includes a relatively small market premium.
The Court rejected plaintiffs’ claims that the termination fee was preclusive or coercive, in part because plaintiffs’ calculation of the termination fee failed to include in the total transaction value a $200 million special dividend that would be paid to stockholders. As adjusted, the Court found that the termination fee of 3.5%, although “a relatively robust fee,” was an insubstantial barrier to a topping bid. In this determination the Court also relied on the fact that Dollar Thrifty acquiesced to this fee only as part of a package where Hertz increased the price and agreed to divest significantly more assets to satisfy antitrust issues, obtaining value in both price and deal certainty in exchange for such a termination fee. This termination fee would only be payable if the Hertz deal was rejected and Dollar Thrifty accepted an alternative transaction within a year. The Court found that the record showed that the board considered whether the deal protections in the merger agreement would have a chilling effect and obtained a lenient no-shop that would accommodate a serious bidder in a post-signing market check. In this regard, the board arguably achieved its goal as Avis ultimately made a bid that was not conditioned on invalidation of the termination fee. Therefore, Vice Chancellor Strine found that the deal protections were not preclusive. The Court also found that the deal was not coercive because the merger agreement allowed the stockholders to consider a floor price with the option to reject the deal if a higher bidder emerged or if they determined that it was more advantageous to continue as an independent enterprise. The Court also expressed skepticism regarding Avis’s seriousness in bidding for Dollar Thrifty, noting that Avis could easily revise its bid to provide the deal certainty that the board valued. Vice Chancellor Strine observed that plaintiffs’ arguments ignored the economic reality regarding deal certainty, implicitly approving of the board’s decision to weigh deal certainty in evaluating its options.
Consequently, the Court denied plaintiffs’ request for an injunction preventing consummation of the merger with Hertz, finding that plaintiffs had failed to show a likelihood of success on the merits and that, even if they had, it would be difficult to find that the balance of harms was in favor of granting the injunction where the stockholders had yet to vote and the substantial uncertainty an injunction would interject into the transaction and Dollar Thrifty’s ongoing business.