A market check before an agreement and the ability to accept superior offers that emerge after signing help show that a board has attempted to maximize shareholder value.

April 01, 2011

This article offers a brief overview of the responsibilities of the board of directors with regard to merger and acquisition (“M&A”) activity for a company.  Specifically, this article will provides a case study involving the recent transaction activity involving Dollar Thrifty Automotive Group, Inc. (“Dollar Thrifty”).

History of M&A Activity Involving Dollar Thrifty[1]

Overview of Dollar Thrifty

Dollar Thrifty was incorporated and completed its initial public offering in 1997.  Today, Dollar Thrifty is the fourth-largest rental car company in the U.S. market.  Enterprise Holdings, Inc., Avis Budget Group, Inc. (“Avis”), Hertz Global Holdings, Inc. (“Hertz”), and Dollar Thrifty make up approximately 90% of the industry’s total revenue.

History of Merger Negotiations

Dating back to April 2007, Dollar Thrifty and Hertz had periodically discussed the potential for a business combination.  In addition, Avis had also expressed interest in Dollar Thrifty over the last several years.  In fact, Avis submitted a non-binding indication of interest to Dollar thrifty in October 2007 that detailed a possible combination at a price of $44 per share.  However, Dollar Thrifty rejected Avis’ offer because of concerns over the ability to close the deal in a timely manner due to antitrust issues.  Throughout the remainder of 2007 and 2008, Dollar Thrifty continued negotiations with both Hertz and Avis, but no transaction was consummated.  Then, in December 2009, Dollar Thrifty and Hertz resumed serious negotiations, which ultimately resulted in a merger agreement (discussed below) in which Hertz would buy all of the outstanding shares of Dollar Thrifty.

Hertz’s original offer for Dollar Thrifty in December 2009 was for $30 per share, which represented a premium to the current trading price.  However, once the serious negotiations with Hertz began, Dollar Thrifty experienced a significant run up in its stock price.  With no fundamental changes in Dollar Thrifty’s business outlook, except for the possibility of an M&A transaction, Dollar Thrifty’s stock price increased from $26.97 in December 2009 to $38.85 in April 2010.  This increase forced Hertz to continue to increase its bid, which was ultimately raised to $41 per share in April 2010.  The $41 per-share offer represented a premium of 5.5% over the stock price the day before the announcement, but it was a premium of 52% over the stock price on December 22, 2009 (the day Hertz made its $30 per-share offer).

The Merger Agreement

On April 25, 2010, the board of directors of Dollar Thrifty (the “Board”) executed a merger agreement (the “Merger Agreement”) under which Hertz would acquire Dollar Thrifty for a price of $41 per share (to be paid 80% in cash and 20% in stock).  Included in the consideration was a $200 million special cash dividend to be paid by Dollar Thrifty to its shareholders prior to closing.  Other significant terms that were included in the Merger Agreement consisted of a termination fee of $44.6 million, payable by the terminating party, and a commitment from Hertz to make divestitures if necessary to obtain antitrust approval.

In conjunction with its responsibility in the execution of the Merger Agreement, the Board became subject to certain obligations to its shareholders.  Generally known by the name of the leading Delaware case, Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., a board is required to secure the best price reasonably available to the shareholders.  While the specific terms of the Revlon doctrine are beyond the scope of this article, in general, the sale of a company in a change of control transaction triggers a board’s Revlon duties.

Dollar Thrifty Shareholder Litigation[2]

On May 5, 2010, a class action complaint (the “Complaint”) was filed against the Board by Dollar Thrifty’s shareholders, alleging that the Board had failed to take the appropriate steps before entering into the Merger Agreement (i.e., the Board breached its fiduciary duty to take a reasonable approach to maximize value as required under Revlon).  The plaintiffs sought to enjoin the Board from completing the proposed transaction outlined in the Merger Agreement.

The alleged flaws in the Board’s decision-making process included: a) the Board’s decision not to seek other bidders; b) the Board’s failure to reach out to Avis before finalizing a deal with Hertz; and c) the Board’s decision to enter into the Merger Agreement with Hertz, as well as the actual terms of the Merger Agreement.

The Board’s Decision Not to Seek Other Bidders or Reach out to Avis

As outlined in the Complaint, the plaintiffs questioned the Board’s decision not to undertake an immediate auction process in order to seek out additional interested buyers.  In response to this claim, the Board outlined various deliberate reasons for its actions, including, but not limited to: a) concern with upsetting employees and causing a diminution in productivity, a risk of losing key employees, and distractions by going through a public sale process; b) fears that the market would view the company as damaged; c) risk that Hertz would refuse to engage further if the Board attempted to stimulate a pre-signing auction; d) Avis was not well positioned to make a cash bid due to significant leverage, covenant restrictions, and creditor approval; and e) the Board was advised that a deal with Avis may be subject to greater regulatory (antitrust) risk. 

In the court’s decision, each of these reasons was deemed a viable explanation as to why the Board favored the deal that was proposed by Hertz.  The court’s ruling in this case provides evidence that specific attributes (including qualitative attributes) of a buyer may rightly play a critical role in a board’s decision-making process (i.e., a deal with higher consideration may not be a more favorable deal, and the board may be justified in rejecting a deal given certain conditions).

The Board’s Decision to Enter into the Merger Agreement with Hertz

In connection with a contemplated sale of a company, a board typically requests a “fairness opinion” from a financial advisor prior to voting in favor of the sale.  A sell side fairness opinion is an opinion as to whether the consideration to be received in a proposed transaction is fair, from a financial point of view, to the company’s shareholders. 

Fairness opinions, together with presentations by management and the board’s advisors, as well as the board’s own knowledge of the company, its industry, and its prospects, provide the key foundation for directors’ exercise of due care in their informed, diligent review of a proposed sale.  A board’s active oversight of a sale process and its instructions to management and its advisors throughout the process should focus on ensuring that the directors obtain the best deal reasonably available for shareholders.

In this case, the Board took this step by obtaining two separate fairness opinions from its independent financial advisors.  On April 25, 2010, at a meeting held by the Board to evaluate the proposed merger, the Board’s advisors delivered their respective fairness opinions to the effect that, as of such date, the total consideration to be received pursuant to the Merger Agreement was fair from a financial point of view to Dollar Thrifty’s shareholders.

In assessing whether the Board was justified in its decision and fulfilled its Revlon duties when it entered into the Merger Agreement, the court reviewed various analyses performed with respect to the valuation of Dollar Thrifty.  Both of the Board’s advisors and an expert hired by the plaintiffs performed Discounted Cash Flow (“DCF”) analyses in order to determine the value of Dollar Thrifty and assess the reasonableness of the consideration offered in the Merger Agreement.  The upper end of the range of value implied by the DCF analyses performed by the Board’s advisors was approximately $43 per share.  In contrast, the range of value implied by the DCF analysis performed by the plaintiffs’ expert was $44.25 per share to $57.93 per share.

Upon review of the experts’ analyses, the court discredited the analysis of the plaintiffs’ expert and concluded that it was not a sound DCF valuation for this purpose.  Specifically, the court noted that the framework of the DCF analysis utilized to arrive at the range of values established by the plaintiffs’ expert included synergies related to the proposed merger.  That is, the analysis did not correspond to a stand-alone value of Dollar Thrifty, which is what is required when preparing a fairness opinion.  When the impact of the synergies from the proposed merger were removed, the plaintiffs admitted that the analysis prepared by their expert was “not fundamentally different” than that of the Board’s advisors.  Based thereon, the court concluded that the offer by Hertz was not unfair to the shareholders of Dollar Thrifty.

Other Considerations

Although not heavily contested in this case, the independence of the directors is also an important consideration in evaluating a board’s decision related to a contemplated transaction.  The Dollar Thrifty Board consists of five independent directors and one non-independent director (the company’s chief executive officer).  To the extent the directors lack independence, it is important that the directors are not influenced by any particular desire to sell and are not improperly motivated.

In the Dollar Thrifty case, it was clear that the entire Board had a motivation to seek the highest price.  The Board owned material amounts of stock, and thus would personally gain from a deal at a higher price.  Moreover, they had a personal incentive as shareholders to think about the trade-off between selling in connection with the Merger Agreement and the risks of not doing so.

Decision of the Court and Transaction Conclusion

On September 8, 2010, as presented in the memorandum opinion of Vice Chancellor Strine, the plaintiffs’ motion for preliminary injunction was denied by the court.  The court found that the Dollar Thrifty Board acted with due care and endeavored to obtain the best deal for the shareholders.  In fact, the court stated, “When directors who are well motivated, have displayed no entrenchment motivation over several years, and who diligently involve themselves in the deal process choose a course of action, this court should be reluctant to second-guess their actions as unreasonable.”

Despite the unsuccessful shareholder litigation against the Hertz deal that the Board originally supported, the proposed transaction pursuant to the Merger Agreement did not ultimately close.  During the lengthy shareholder litigation, Avis made an indication that it would make a “substantially higher offer” in response to the announcement of the Merger Agreement.  On July 28, 2010, Avis made an unsolicited proposal to acquire Dollar Thrifty for $46.50 per share.  Avis’s offer, however, did not originally contain matching rights, a termination fee, or a reverse termination fee.  Although the Board recognized that the Avis offer gave shareholders the potential opportunity to receive a higher price for their shares, the Board was not convinced that the proposed transaction could be completed in a timely manner or that it would adequately protect shareholders in the event Avis was unable to obtain the required regulatory approvals.

As outlined in further detail in Table 1.1, Dollar Thrifty continued negotiations with both Avis and Hertz throughout 2010, and Avis ultimately included comparable termination fees and other relevant terms in its offer.  As of the end of 2010, a transaction was pending whereby Avis would acquire Dollar Thrifty for $55.97 per share (based on the closing price for Avis stock as of December 31, 2010).  The companies were still seeking regulatory approval, and expected a ruling from the Federal Trade Commission in the first quarter of 2011.

Jesse Ultz Chart

Conclusion

A company’s board of directors plays an important role in the M&A process, and as evidenced in the Dollar Thrifty case, directors may be subject to significant scrutiny in connection with a sale of a company.  For this reason, it is critical that boards of directors engage reputable professional advisors, including qualified financial experts, in order to help protect them from liability.

With the assistance of its professional advisors, a board should always endeavor to adopt a process that maximizes shareholder value.  Under Delaware law, there is no single blueprint for the sale process of a company, and the course will vary depending on the company’s situation.  However, in general, a thorough market check before signing an agreement, as well as the ability to accept superior offers that emerge after signing, help to establish that the board has attempted to maximize value for shareholders.  A good process will also help to mitigate litigation risk.  In this case involving the board of directors of Dollar Thrifty, it is evident by the court’s decision that a methodical process was executed.  


  1. Dollar Thrifty Shareholder Litigation, 2010 WL 3503471 (Del.Ch.).
  2. Ibid.

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