In a recent decision, In Re OPENLANE, Inc.1, the Delaware Court of Chancery reiterated the permissibility of a "sign and consent" structure for obtaining shareholder approval of a merger. In its decision, the Court denied a motion by certain shareholders of OPENLANE seeking to enjoin its acquisition pursuant to a merger agreement utilizing this structure.
The "sign and consent" structure gained popularity following the Delaware Supreme Court's controversial Omnicare2 decision in 2003. In Omnicare, the Delaware Supreme Court ruled that it was a violation of a target company board's fiduciary duties to approve a merger agreement that effectively "locked up" a transaction prior to approval by the company's shareholders. Specifically, the Court objected to the three-pronged approach in the Omnicare transaction in which:
- the merger agreement provided that the target company was required to hold a shareholders' meeting to consider the transaction regardless of whether the target board changed its recommendation in favor of the transaction, commonly referred to as a "force the vote" provision;
- the merger agreement did not provide the target board with a fiduciary termination right that would allow the board to terminate the existing agreement to accept a superior proposal during the period prior to the target shareholders' approval of the transaction; and
- two shareholders of the target company holding a majority of the voting power entered into voting agreements with the acquirer pursuant to which they irrevocably agreed to vote in favor of the merger at the shareholders' meeting (which agreements did not terminate upon a change in recommendation by the target board).
The Court concluded that such a structure constituted a coercive and preclusive defensive device which rendered the merger a "fait accompli."
In response, in those situations in which voting control of the target is held by a controlling shareholder or a small group of shareholders, the "sign and consent" structure evolved as a means to obtain, or come close to, the deal certainty that was believed to be available prior to Omnicare.
In such a structure, the merger agreement contemplates that the controlling shareholders will deliver written consents promptly after the merger agreement is executed and that the acquirer will have the right to terminate the agreement if such consents are not delivered (often providing for a very limited time period of 24 to 48 hours for such delivery). Depending on the circumstances and the concerns of the acquirer and target, the structure may also include a variety of other termination rights and termination fees – as well as the opportunity for creative use of a combination of some, but not all, of the protective provisions found in the Omnicare transaction.
In OPENLANE, Vice Chancellor Noble upheld a "sign and consent" structure in which the merger agreement provided that the board of either the acquirer or the target could terminate the merger agreement if shareholder consents approving the transaction were not delivered within 24 hours following the execution of the agreement. Plaintiffs alleged that this structure was coercive and preclusive given that members of the board (or institutions that such members represented) and executive officers controlled over 60% of the shareholder vote.
Vice Chancellor Noble disagreed with the plaintiffs and held that this structure, unlike the agreement in Omnicare, did not render the merger a fait accompli. He noted that the controlling shareholders had not entered into voting agreements but had instead "quickly provided consents." Thus, shareholder approval was not a certainty. Moreover, while the merger agreement included a non-solicitation clause, he also noted that the target's board could terminate the agreement if shareholder consents were not obtained within the twenty-four-hour period. (In this instance, the target's termination right was not coupled with the obligation to pay any termination fee.) As a result, the merger agreement "neither forced a transaction on the shareholders, nor deprived them of the right to receive alternative offers."
The OPENLANE decision reiterates the view, expressed by Vice Chancellor Lamb in 2008 in Optima Int'l of Miami Inc. v. WCI Steel, Inc.3, that the Delaware General Corporation Law does not require any particular length of time between the execution of a merger agreement and the delivery of shareholder written consents approving the transaction. As such, the ruling supports the practice of structuring merger agreements to contemplate the delivery of target shareholder written consents approving the transaction, and thus "locking up" the transaction, within a very short period of time after execution of the merger agreement.