In a recent decision, In re Openlane, the Delaware Chancery Court validated the so-called "sign-and-consent" approval structure in a merger transaction. A sign-and-consent structure typically requires that an acquisition target's stockholders provide written consent approving a merger agreement shortly following the signing of the merger agreement. This structure is designed to address the buyer's interest in mitigating deal certainty risk and has been regularly used, particularly in private company acquisitions, as a result of the Delaware Supreme Court's prohibition against fully locked-up merger transactions.

Omnicare, Optima and the "Sign-and-Consent" Structure

In its 2003 decision, Omnicare, Inc. v. NCS Healthcare, Inc., the Delaware Supreme Court articulated its prohibition against fully locked-up merger transactions. The target (NCS Healthcare) and acquirer (Genesis Health Ventures) had agreed to a set of deal protections that:

  • Included stockholder voting agreements guaranteeing approval of the merger agreement if put to a stockholder vote;
  • Included a "force the vote" provision requiring the NCS Healthcare board to submit the approval of the merger agreement to a stockholder vote; and
  • Omitted a "fiduciary-out" termination right for the NCS Healthcare board.

These deal protections effectively locked-up the transaction—guaranteeing stockholder approval the moment the merger agreement and voting agreements were signed. As a result, the structure failed the court's enhanced scrutiny review because it rendered the merger a "fait accompli" by virtue of its aggregate preclusive and coercive effect.

In the wake of Omnicare, sign-and-consent approval structures were increasingly used to provide a measure of deal certainty that could withstand judicial scrutiny. The Delaware Chancery Court first provided guidance on the viability of a sign-and-consent approval structure in its 2008 bench ruling Optima International of Miami, Inc. v. WCI Steel, Inc.

In Optima, the merger agreement at issue required the target's stockholders to provide written consents approving the merger agreement within 24 hours of the target board's approval of the merger agreement. Distinguishing the structure from Omnicare, Vice Chancellor Lamb reasoned that "[n]othing in the [Delaware corporate statute] requires any particular period of time between a board's authorization of a merger agreement and the necessary shareholder vote."

In re Openlane

As a result of a projected future decline in its business, Openlane, Inc.'s board initiated a sale process that ultimately resulted in a merger agreement between Openlane and an affiliate of KAR Auction Services, Inc. The merger agreement included a sign-and-consent approval structure and a non-solicitation restriction on Openlane without a fiduciary-out exception. Although no stockholder voting agreements were executed, Openlane agreed to use its reasonable best efforts to obtain, as soon as reasonably practicable after the signing of the merger agreement, the written consent of a sufficient number of its stockholders to approve the merger agreement. If Openlane was unable to obtain stockholder consent within one business day, either party would have the right to terminate the agreement. Though publicly traded on the OTC Pink Sheets, over 60% of Openlane's outstanding stock was held by Openlane's executive officers and members of its board of directors or affiliated private equity funds. Stockholder approval was obtained the day after the merger agreement was signed.

An Openlane stockholder brought a class action on behalf of himself and other stockholders to enjoin the merger. Among other claims, the plaintiff stockholder argued that Openlane's board breached its fiduciary duties by approving a merger agreement with preclusive and coercive deal protection elements—specifically, a "no-solicitation clause and the lockup of the shareholder vote through the combined voting power of Openlane's directors and executive officers . . . in the absence of a fiduciary out provision."

In rejecting the plaintiff stockholder's request to enjoin the merger agreement, Vice Chancellor Noble held that, unlike Omnicare, the merger was not a fait accompli.

Specifically, Vice Chancellor Noble concluded that the inclusion of a non-solicitation clause without a fiduciary-out "was of little moment because within [twenty-four hours of entering into the merger agreement] . . . the Board would be able to back out if consents were not obtained or the deal could be concluded if consents were obtained." The court held that "it would appear reasonable for a board to protect a transaction that it viewed as obtaining the best reasonable price with at least one short-lived defensive measure." Moreover, the plaintiff stockholder's argument that the combined voting power of Openlane's directors and executive officers effectively locked-up the deal failed because the directors and officers consenting to the merger agreement acted with "the same incentives as most shareholders would have" and were under no contractual obligation to do so. As a result, "the merger agreement neither forced a transaction on the shareholders, nor deprived them of the right to receive alternative offers."

The court also provided guidance on the necessity of fiduciary-out clauses in merger agreements. Though noting that "Omnicare may be read to require a fiduciary-out in every merger agreement," the absence of a fiduciary-out alone (i.e., when no superior proposal has emerged) provides an insufficient basis for enjoining a merger agreement. To do so, the court noted, "is a perilous endeavor because there is always the possibility that the existing deal will vanish, denying shareholders the opportunity to accept any transaction."

The Openlane ruling confirms the basic holding of Optima—that no specific period of time is required between board authorization of a merger agreement and stockholder approval of the transaction—and further validates the use of the sign-and-consent approval structures as an important deal protection.

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