In a corporate battle involving three of the top four largest rental car companies, the Court of Chancery, in an 82-page opinion in the case of In Re Dollar Thrifty Shareholder Litigation, C.A. No. 5458 (Del. Ch., Sept. 8, 2010), read opinion here, denied a motion for a preliminary injunction filed by the plaintiffs who were stockholders of Dollar Thrifty, to enjoin the consummation of a merger between Hertz Global Holdings, Inc. and Dollar Thrifty Automotive Group, Inc.

Pursuant to a merger agreement, Hertz agreed to buy all the shares of Dollar Thrifty for $32.80 per share in cash (including a $200 million special dividend that will only be paid in the event of the merger) and 0.6366 shares of Hertz stock for each share of Dollar Thrifty stock (the deal was valued at $41 per share). Three months after the Hertz offer, Avis Budget Group made a bid to top the Hertz offer but the Dollar Thrifty Board chose to go forward with the Hertz offer. Since that time, Hertz and Avis have gone back and forth raising their offers to the point of the latest offer by Hertz, its "best and final" offer, for $50.25-a-share, or a total value of $1.45 billion. A vote on the merger was scheduled for September 16, 2010, but that vote was moved to September 30, 2010 to allow the stockholders to consider the bidding war that was taking place during that period.

This summary was prepared by Kevin F. Brady of Connolly Bove Lodge & Hutz LLP

Background – Merger Talks but a “Failure to Launch”

Since 2007, Dollar Thrifty has been engaged in merger talks with both Avis and Hertz on an “on again off again” basis. Also during this time, due primarily to the financial market turmoil, the price of Dollar Thrifty’s stock had been on a roller coaster ride going from over $60 a share in 2007 down to below $1 per share in late 2008 and then back to around $39 per share in the spring of 2010. While both Hertz and Avis made offers to purchase Dollar Thrifty during this period, for various reasons a deal was never closed. One common problem existed for each potential combination involving Dollar Thrifty and either Hertz or Avis, and that was the potential for antitrust problems which might prevent any deal from closing. In the spring 2010 merger discussions that Dollar Thrifty had with Hertz and Avis, Hertz addressed that concern by telling Dollar Thrifty that Hertz was prepared to use its “reasonable best efforts” to obtain regulatory clearance and that included divesting between $100 -150 million in assets to achieve regulatory approval. Avis would not give the same assurance.

Hertz Offer Results in Signed Merger Agreement

In the spring of 2010, talks between Hertz and Dollar Thrifty finally resulted in an offer from Hertz to purchase Dollar Thrifty for $41 per share plus a $200 million special dividend to be paid by Dollar Thrifty to its shareholders immediately before closing but only if the merger was consummated. The merger agreement provided for a $44.6 million termination and reverse termination fee, with an additional reimbursement of up to $5 million in expenses if the termination fee was paid, a no-shop clause, a fiduciary out, matching rights and a commitment that Hertz would divest up to $175 million in revenue of necessary to obtain antitrust approval.

Subsequent Avis Offer is Rejected

Within days, Avis stated that it would make a substantially higher bid and on July 28, 2010, Avis made an offer for $46.50 per share with a $200 million special dividend and a commitment to divest assets generating up to $325 million in revenue to obtain antitrust approval. The offer did not include a financing contingency, a termination fee or reverse termination fee or any matching rights. The Dollar Thrifty board responded that the Avis offer was not superior and in order for it to be considered superior the Avis deal must be reasonably expected to be consummated on a timely basis, and “that given the lack of a reverse termination fee and the antitrust concerns, the Board was unable to establish that Avis’s offer would meet this requirement.”

Dollar Thrifty Stockholders File Suit

On May 5, 2010, only two days after the May 3 letter from Avis stating its intent to make a superior offer and three months before Avis made its offer, stockholders from Dollar Thrifty filed suit alleging that the board breached its fiduciary duties by agreeing to the merger agreement with Hertz without a pre-signing market check and that Hertz aided and abetted that breach. In particular, the plaintiffs criticized the Dollar Thrifty board’s decision-making process with respect to a number of issues, including but not limited to the board’s decision to not seek other bids and especially the board’s failure to reach out to Avis before signing the merger agreement with Hertz, for failing to conduct a pre-signing auction and for including a termination fee and matching rights that had a quelling effect on any topping bidder.

At this point, the Dollar Thrifty board had already determined that Avis’s bid would be superior to Hertz’s if the board could be assured that Avis would actually close the deal. But Avis, unlike Hertz, refused to promise to pay any reverse termination fee in the event that antitrust approval for an Avis-Dollar Thrifty merger could not be attained.

Court’s Revlon Analysis – Reasonableness of the Process

The Court began its Revlon analysis with a simple statement about what the standard of review involved and did not involve. Under Revlon, when the Dollar Thrifty board decided to engage in a transaction that involved the sale of the company in a change of control transaction the question became whether the board acted reasonably in undertaking a sound process to get the best deal available. More importantly for the facts in this case, the standard was not, as the Court noted, whether another choice, that the Board chose not to pursue, was a better deal. As the Court noted:

Revlon does not require that a board, in determining the value-maximizing transaction, follow any specific plan or roadmap in meeting its duty to take reasonable steps to secure — i.e., actually attain — the best immediate value. Instead, Revlon commands that directors, consistent with their traditional fiduciary duties, act reasonably, “by undertaking a sound process to get the best deal available.” Indeed, the question posed by a board’s action (or inaction) in a sales context is “whether the directors made a reasonable decision, not a perfect decision.” Thus, although the level of judicial scrutiny under Revlon is more exacting than the deferential rationality standard applicable to run-of-the-mill decisions governed by the business judgment rule, at bottom Revlon is a test of reasonableness; directors are generally free to select the path to value maximization, so long as they choose a reasonable route to get there. Specifically, this form of enhanced judicial scrutiny involves two “key features”:

(a) A judicial determination regarding the adequacy of the decision-making 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. The directors have the burden of proving that they were adequately informed and acted reasonably.
(citations omitted)

The Court noted at the outset that “the strategy of value maximization that the plaintiffs now advocate was one that a properly motivated board could have reasonably chosen to adopt” but that is not the question under Revlon. Instead, the Court had to determine if “the alternative approach that the Dollar Thrifty board adopted was itself a reasonable choice that a loyal and careful board could adopt in the circumstances.”

Following the Supreme Court’s Unocal and Revlon decisions, the Court “has leeway to examine the reasonableness of the board’s actions under a standard that is more stringent that business judgment review and yet less severe than the entire fairness standard.” As a result, the Court was required to look at the motivations of the board and take “a nuanced and realistic look at the possibility that personal interests short of pure self-dealing have influenced the board to block a bid or steer a deal to one bidder rather than another.”

If “the record reveals no basis to question the board’s good faith desire to attain a proper end, the court will be more likely to defer to the board’s judgment about the means to get there.”

The Court found that the six person Dollar Thrifty board (five of whom were independent directors) was not only properly motivated and willing to talk to anyone who wanted to make serious offer but as stockholders, the directors were highly motivated to get a deal at the highest price. The Court found no evidence that “the Board preferred to do a deal with Hertz at some lower value if a better deal was actually attainable from Avis or another source.” In response to the plaintiffs’ claims that the board failed to stimulate an immediate auction, it failed to do a pre-signing market check and in particular the board failed to engage Avis in any discussions before it signed the merger agreement, the Court sided with the Dollar Thrifty board noting that:

“[t]he Board was genuinely concerned with upsetting their employees and causing a diminution in productivity by going through a public sales process. The Board was not committed to selling in early 2010, and believed that the company had attained a position of relative strength and stability. Thus, the fear with having a process spill out into public was that the company could again come up without a buyer, risk the market viewing it as damaged, and suffer a decline in productivity and a loss of key employees distracted by and anxious over a possible sale. Adding to this fear was Hertz’s prior history. Hertz had been given two clear looks at the company and each time had walked away without making a serious binding offer. In deciding how to proceed, the Board also received advice about Avis and considered its own experience with Avis. In 2007, Avis made an overture at $44 per share, and then dropped that price off a cliff, ultimately resulting in a breakdown of negotiations. And in 2008, Avis had a clear chance to buy Dollar Thrifty at a much more attractive price in the $15-20 range, but walked away from the opportunity without making a firm bid and without addressing legitimate antitrust concerns. Before proceeding to deal just with Hertz in early 2010, the Board explicitly considered the utility of reaching out to Avis. The Board received advice that Avis was not well positioned to make a cash bid for Dollar Thrifty because it was heavily leveraged already and subject to severe covenants that could only be amended with creditor approval. Given the state of financing markets in early 2010, the Board’s advisors believed Avis could not make a bid not conditioned on financing, and was perhaps not financially strong enough to make a bid at all.

With respect to the plaintiffs’ claims regarding deal protections, the Court noted that after the Dollar Thrifty board rejected the Avis bid, it informed Avis what was wrong with their offer and as the Court stated “[a]t this point, the only thing apparently standing between Avis and a deal with Dollar Thrifty [was] its willingness to address Dollar Thrifty’s concern over closing certainty by offering to pay a reverse termination fee that compensates Dollar Thrifty for the risk of non-consummation.” The deal protections in the merger agreement did not prevent Avis from presenting a competing bid, and the termination fee represented a very small percentage cost (3.5% of a $1.275 billion deal value) to Avis of its topping bid. As a result, the Court found that the deal protections were neither coercive nor preclusive in that the termination fee did not constitute a material impediment for any topping bidder who wished to make a materially superior offer to the one from Hertz.” Moreover, it is important to note that in the bid that Avis made after the Hertz merger agreement was signed, Avis refused to offer to pay any reverse termination fee if it failed to secure the antitrust approval.

In the end, the Court noted that while reasonable minds might have taken a different approach, the Dollar Thrifty board engaged in a reasoned consideration of the relevant factors and selected a reasonable course of action.


SUPPLEMENT: Professor Bainbridge takes issue with some parts of the opinion here. The Wilson Sonsini firm provides a summary on Sept. 15 of the decision here.