Note on Optima International of Miami, Inc. v. WCI Steel, Inc., C.A. No. 3833-VCL (Del. Ch.

June 27, 2008) (TRANSCRIPT). On June 27, 2008, the Delaware Court of Chancery declined to enjoin a merger approved by the target board and adopted later that same day by its majority stockholders acting by written consent. Pursuant to the merger agreement, the acquiring company, had the right to terminate the agreement if stockholder approval was not obtained within 24 hours following signing. In ruling that the boards action in obtaining nearly immediate stockholder approval did not impermissibly lock up the deal in violation of Omnicare, Vice Chancellor Lamb stated from the bench that its really not my place to note this, but Omnicare is of questionable continued vitality. 1 In Optima, the target, WCI, was a troubled steel company owned by 28 stockholders, two of whom controlled a majority of the outstanding voting power. Severe liquidity problems had put WCI under great pressure either to complete a sale transaction or to face the prospect of a bankruptcy liquidation. Accordingly, WCI retained financial advisors to investigate the possibility of a sale of the company. The bankers initially solicited 22 potential buyers, but eventually the number of bidders had been reduced to two: Severstal and Optima. WCIs sale process was complicated by a collective bargaining agreement with the United Steelworkers Union that gave the Union a veto right over any change-of-control transaction. As deal process continued, the WCI board remained highly aware of the need to secure Union approval. Moreover, in seeking an advantage in the bidding process, each of Severstal and Optima approached the Union to solicit its exclusive support for its bid. The Union ultimately decided to support Severstal. As a result, Severstal submitted the only bid ($101 million). The WCI board contacted Optima to offer to help it try to strike a deal with the Union and to persuade it to make a competing offer. In response, Optima submitted a bid of $150 million, subject to the Unions approval, which never materialized. Instead, upon being informed by the WCI board of Optimas bid, Severstal subsequently increased its bid to $136 million. In response, Optima sent a letter directly to WCI stockholders, offering to buy their shares and suggesting that it might be willing to pay a substantial premium.2 The next day, the WCI board let Severstal know that it would be willing to bless a transaction with Severstal if Severstal agreed either (1) not to require immediate stockholder consent, but allow for a 20-day period prior to a stockholders meeting, following the signing of a merger agreement or (2) to raise its bid. Severstal rejected the first alternative but raised its bid to $140 million, conditioned on the boards acting immediately to approve the deal and to obtain stockholder authorization. The board accepted Severstals sweetened offer later in the day on May 16, a merger agreement was signed and immediately thereafter the two majority stockholders signed written consents, thereby providing the requisite stockholder approval of the transaction. In the words of counsel for Optima: For 4 million bucks the board traded whatever

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Transcript at 127. A likely violation of their standstill agreement.

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window of a fiduciary out they would have had, and they totally locked up. The deal was done.3 Optima and shareholder plaintiffs sued to enjoin the Severstal transaction. Optima argued, under Omnicare, that the WCI boards commitment in the merger agreement to obtain stockholder approval within 24 hours, coupled with the fact that the two shareholders who owned majority voting power and were in fact ready to approve the transaction, amounted to an impermissible lockup.4 Optima also argued that the WCI board breached its fiduciary duties, citing Topps, by refusing to release Optima from its standstill agreement in order to allow Optima to pursue a transaction to acquire a position in WCI held by a hedge fund and, citing Revlon, by pursuing the Severstal transaction rather than negotiating further with Optima which had submitted the highest offer then on the table. First, as to Optimas Omnicare argument, the Chancery Court held: [A] stockholder vote is not like the lockup in Omnicare. [T]he stockholder vote here was part of an executed contract that the board recommended after deciding it was better for stockholders to take Severstal's lower-but-more-certain bid than Optima's higher-butmore-risky bid. In this context, the board's discussion reflects an awareness that the company had severe liquidity problems. Moreover, it was completely unclear that Optima would be able to consummate any transaction. Therefore, the stockholder vote, although quickly taken, was simply the next step in the transaction as contemplated by the statute. Nothing in the DGCL requires any particular period of time between a board's authorization of a merger agreement and the necessary stockholder vote. And I don't see how the board's agreement to proceed as it did could result in a finding of a breach of duty. Transcript at 127-28. Next, as to Optimas argument that the boards refusal to release it from the standstill amounted to a breach of fiduciary duty, the Court held: [At the] time the board refused the request made by Optima [to be released from the standstill agreement, it] did so because it came to the conclusion, quite rightly, that the transaction that Optima was proposing to pursue was one that threatened rather than was protective of the interests of all of the stockholders of the company. I think this isn't like Topps where the board had no reasonable basis not to allow a higher bidder to directly approach the stockholders. Rather, the board made a business decision that waiving the standstill would have merely threatened litigation with the union. At the same time the board reasonably concluded that given the company's severe liquidity crisis and the relatively high offer from Severstal, the company could not afford to challenge the union in a strenuous way. [S]ince Optima and the company were never able to come to an agreement about what such an alternative structure could take that
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Transcript at 21-22. In the words of Optimas counsel: we're not saying that it's per se wrong to approve a merger agreement in this context by written consent; but we are saying that under the facts of this case, it was a breach of fiduciary duty for the board to do so. That's our position. Transcript at 23.
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wouldn't unduly threaten the company with protracted litigation with the union, there really was no occasion to permit Optima to be released from that undertaking to make a proposal that the board had a reasonable basis to conclude was not in the best interests of the stockholders. Transcript at 128-30. Finally, addressing the Revlon claims, the Court held that [t]he board, from what I can see, exercised a very thorough judgment, weighed all the risks associated with the different offers then available and concluded as it did that it was the appropriate judgment to make to approve the merger. In this regard, Optimas bid still lacked union support and Optima had not identified any alternative deal structure that did not entail undue risks. (Transcript at 137-38). Much of the Courts analysis turned on (and validated) the boards action in furtherance of the wishes of a clear majority of its stockholders that the board be sure not to lose the Severstal bid.5 In other words, there comes a point when directors and majority stockholders may act definitely to sign and consummate a deal that is, in the boards judgment, in the best interests of the stockholders of the company.6

Transcript at 133. It may be relevant that the board had called a meeting inviting all 28 of its stockholders where a presentation reviewing the status of the transaction along with the advantages and disadvantages of the competing bids as well as the role of the Unions effective veto right. In the Courts words: at that time a clear majority [of the stockholders] were in favor of the board acting in such a way as to be sure not to lose the Severstal bid. Id. 6 Compare the view of the dissent in Omnicare that deal protections permit parties to exchange certainties and that Certainty itself has value.
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