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The Open Lane acquisition structure: Shareholders’ window for best value

The rights of shareholders are defined by state law, incorporating documents-and sometimes the rules of securities exchanges.  Therefore, the rights of shareholders of businesses incorporated in California may have different rights than shareholders of businesses incorporated in other states.

Many public companies are incorporated in Delaware and as a result the rights of these shareholders are defined by Delaware law.  Shareholders often have the right to approve a major change in the corporation, such as an acquisition or merger, and the board of directors has a duty to shareholders to obtain the highest value during such a transaction.  Despite these seemingly congruent goals, shareholders and the board commonly butt heads on these significant business decisions.  Recently, Starbucks used a particular acquisition structure to lock up a deal with a target beverage company while ostensibly creating the possibility that a better value may come in for shareholders of the target company.

But, how could Starbucks lock up the deal and provide an opportunity for shareholders of the target to vote in favor of a better deal at the same time?  The answer lies with a corporate acquisition structure referred to as the "Open Lane" structure invented to satisfy a Delaware corporate law ruling on shareholder rights and acquisition agreements.

The board's duty to shareholders during acquisition and the Open Lane structure

Traditionally, an acquisition agreement allows the board of the target company to end the deal if the deal is not approved by the shareholders or if a better offer is provided by a competitor.  The option allows the board of the target company to satisfy its duty to obtain the highest price reasonably available for shareholders.  To fully preserve that duty, the Delaware Supreme Court in 2003 ruled during its Omnicare decision that a target company's board cannot fully lock up a deal.  The result of that decision has been a series of acquisitions that straddle the option of getting shareholders the best deal possible while providing the board stability to close business deals.  An Open Lane acquisition structure accomplishes this goal by providing a reasonable time period in which other offers may be heard, providing a market check to attain the highest possible offer and the chance to allow shareholders the right to exercise their right to terminate the agreement if a better bid emerges.  If no better offer manifests during the time period the initial deal closes, terminating the shareholders' right to reject the agreement.  The use of an Open Lane acquisition is even more profound when used for the acquisition of a company with public shareholders who represent a non-controlling minority.

Starbucks's particular use of the Open Lane acquisition structure

In November, Starbucks used the Open Lane structure in its acquisition of Teavana, a publicly traded company.  However, Starbucks's acquisition agreement with Teavana was an aggressive form of the Open Lane structure.  Under the terms of the Starbucks offer, the coffee giant could terminate the deal if Teavana had not received shareholder consent by 6 a.m. the day after the deal was signed.  On the day of the signing, the acquisition agreement was approved by four controlling shareholders who held 74 percent of Teavana-one of which was chief executive of the company and chairman of the board.  As soon as consent was given, the target, Teavana, lost the right to terminate the agreement.  A consequence of the short time period was that no public shareholder voted on the deal and the possibility that another offer would come in during the short offer window was slim at best.  However, Teavana reached out to other potential suitors before the Starbucks announcement and no firm was interested.

Starbucks's use of the Open Lane structure in its acquisition of Teavana was unique because it was so aggressive.  When other companies used the tactic the window of time for a better bid to manifest approached a month.  For example and according to the New York Times, the bid for Schiff Nutrition by Bayer and Genesee & Wyoming's acquisition of RailAmerica provided for periods of up to 30 days.

The Omnicare decision has been the target of heavy criticism because many practitioners wonder what could be better than a sure deal ready for approval.  It's not clear whether Starbucks' use of the Open Lane structure satisfies the board's duty to get the best deal possible.  To avoid the entire issue, many dealmakers may simply create a deal structure that legally avoids a shareholder vote.

If you own a business and have intentions to acquire another business or sell a part of your business, contact an experienced transactional attorney who can guide you through the process to best meet your goals.

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