September 14, 2010

Delaware Chancery Refuses to Second-Guess Board Strategy in Merger Transaction

Here is news from William Savitt and Ryan McLeod of Wachtell Lipton:

The Delaware Court of Chancery last week refused to block a proposed merger in a decision highlighting the importance of careful process in structuring a corporate sale. In re Dollar Thrifty S’holder Litig., C.A. No. 5458-VCS (Del. Ch. Sept. 8, 2010).

From 2007 through 2009, Dollar Thrifty had engaged in unsuccessful negotiations with both Hertz and Avis. Following a turnaround effort led by a new CEO, the Dollar Thrifty board decided to re-engage with Hertz, and, after months of bargaining, Dollar Thrifty agreed to be acquired for $41 per share. This consideration represented a 5.5% premium over Dollar Thrifty’s market price, but the merger agreement also included a robust reverse termination fee and bound Hertz to make substantial divestitures if necessary to secure antitrust approval. Following the announcement, Avis objected that had not been invited to bid and made an offer at a higher dollar value–$46.50–but its offer lacked the deal certainty of the Hertz contract.

Avis did not did sue, but shareholder plaintiffs did, attacking the market premium as insufficient and seeking an order requiring Dollar Thrifty to open discussions with Avis. Beginning with the premise that “when the record reveals no basis to question the board’s good faith desire to attain the proper end, the court will be more likely to defer to the board’s judgment about the means to get there,” the Court of Chancery denied the injunction.

The Court first held that the board’s decision to negotiate only with Hertz was proper, squarely rejecting the claim that a board is required to conduct a pre-signing auction. Vice Chancellor Strine instead credited the board’s well-informed determination that Avis lacked the resources to finance a deal, that a potential deal with Avis was subject to greater antitrust risk, and that Hertz might have withdrawn from the process if it faced “pre-signing competition.”

The Court also refused to accept the argument that a 5.5% market premium is insufficient. Drawing deep into economic theory, the Vice Chancellor held that the board reasonably focused on the “company’s fundamental value” rather than a spot market price in considering a sale of control. Delaware “law does not require a well-motivated board to simply sell the company whenever a high market premium is available (such as selling at a distress sale) or to eschew selling when a sales price is attractive in the board’s view, but the market premium is comparatively low.” Finally, the Court upheld the merger agreement’s 3.9% termination fee, noting that it was neither preclusive nor coercive, as evidenced by the fact that Avis had made a topping bid in excess of the fee and that the shareholders of Dollar Thrifty remained free to reject the Hertz deal without penalty. Indeed, Vice Chancellor Strine lauded the features of this merger agreement, noting that “the deal protections actually encourage an interloper to dig deep and to put on the table a clearly better offer rather than to emerge with pennies more.”

The Dollar Thrifty decision represents another marker in a long line of cases endorsing the primacy of corporate directors’ strategic decisions. The courts remain ready to respect a sales process, even a limited one, that is structured in good faith by an independent and well-informed board.