October 13, 2011

Delaware Court Upholds Sign-and-Consent M&A Deal

From Steven Haas of Hunton & Williams: On September 30th, in In re Openlane, Inc. S’holders Litig., the Delaware Court of Chancery upheld a “sign-and-consent” M&A structure. The sign-and-consent structure – where the merger agreement is signed by the company and a majority of the stockholders promptly (or even immediately) deliver written consents approving the merger – has been used in response to the Delaware Supreme Court’s 2003 decision in Omnicare. In Omnicare, the court held that the target’s board had breached its fiduciary duties by approving a merger agreement with a force-the-vote provision when a majority of the stockholders had already entered into voting agreements, thus rendering the merger a fait accompli.

The sign-and-consent structure first received approval in Delaware in a 2008 transcript ruling in the Optima case, where Vice Chancellor Lamb noted that “[n]othing in the DGCL requires any particular period of time between a board’s authorization of a merger agreement and the necessary stockholder vote.” (Read more from Cliff Neimeth on Optima.) There is no fait accompli in these situations as contemplated in Omnicare if there are no voting agreements in place that lock up the requisite stockholder approval. As the Openlane court explained, “[t]he Merger Agreement neither forced a transaction on the shareholders, nor deprived them of the right to receive alternative offers [before the shareholders approved the merger] …. This may simply be a matter of majority rule by shareholders who were under no obligation to act in any particular way” (emphasis added).

Openlane is interesting on a few other points. First, the sign-and-consent structure has been used frequently in private company M&A. Openlane, however, involved a public company (OTC), though it’s not the first public company to utilize the structure. It also is a rare example of a public company M&A transaction that involved an escrow agent and a stockholders’ representative. After the consents were delivered on the day after the merger agreement was signed, the company mailed an information statement to the non-consenting stockholders asking them to sign a Stockholder Acknowledgement to ratify the merger agreement, waive their appraisal rights, and consent to the appointment of the stockholders’ representative. The buyer had a waivable closing condition requiring that 75% of the stockholders had executed the written consent or Stockholder Acknowledgment. Here’s the company’s Information Statement and Stockholder Acknowledgment (Annex B).

Another interesting aspect of Openlane is that there was no fiduciary out for a superior proposal. Instead, either party could terminate the merger agreement if the requisite written consents were not delivered by the end of the first business day following the signing of the merger agreement. The two-way termination right prevented the board from having its hands tied: in the court’s words, it was “one short-lived defensive measure.” At the same time, the recognized that, “as a practical matter, approval by a majority of shares within the day after the signing of the Merger Agreement was a virtual certainty” since the directors and officers (and their affiliates) owned 68% of the company.

The court also indicated that while Omnicare can be read to require a fiduciary out, it does not follow that a Delaware court should enjoin a merger per se because there is no explicit out (see footnote 53 of opinion). In contrast, many sign-and-consent structures have included a target fiduciary out while giving the buyer (but not the target) the ability to terminate the agreement if the consents are not delivered within a short time period. Note that in reaching its conclusion, however, the Openlane court found that the board had fulfilled its Revlon duties.

Openlane takes another step toward burying the Omnicare decision, which involved a rare 3-2 split on the Delaware Supreme Court. For more on that, you can read Steven Davidoff’s piece about the Optima case.