Delaware Has No Per Se Rule Against "Don't Ask, Don't Waive" Standstill Provisions, But Boards Must be Careful in Using Them
In In re Ancestry.com Inc. Shareholder Litigation, C.A. No. 7988-CS, Chancellor Strine of the Delaware Chancery Court held that Delaware has no per se rule against “don’t ask, don’t waive” standstill provisions, but cautioned that boards using “a powerful tool like that” need to deploy it consistent with their fiduciary duties. This decision comes less than three weeks after another Delaware judge (Vice Chancellor Laster) enjoined a target company from enforcing a “don’t ask, don’t waive” standstill provision in In re Complete Genomics, Inc. Shareholder Litigation, C.A. No. 7888-VCL.
“Don’t ask, don’t waive” standstill provisions prohibit the counterparty potential bidder from making a non-public request that the target company waive the terms of the standstill provision. They have become common in the public company auction process. Chancellor Strine’s ruling provided needed guidance to boards of public company targets, potential bidders and their respective advisors with respect to the use and enforceability of such standstill provisions. As a result, we believe public company targets will continue to negotiate for “don’t ask, don’t waive” standstill provisions as a tool designed to maximize shareholder value in a well-structured auction process.
On November 27, 2012, in Complete Genomics, Vice Chancellor Laster enjoined a target company from enforcing a “don’t ask, don’t waive” standstill provision and analogized it to a "no-talk" provision in a merger agreement, albeit that the standstill provision only applied to the bidder that was bound by it. The court noted that Delaware courts have deemed no-talk provisions impermissible because by agreeing to them a board would be violating its duty to take care to be informed of all material information reasonably available. Vice Chancellor Laster held that by agreeing to the “don’t ask, don’t waive” standstill — which prevented the board from knowing whether a bidder that did not win the auction is willing to offer a higher price despite its contractual agreement not to do so — the Complete Genomics board impermissibly limited its ability to discharge its ongoing statutory and fiduciary obligations to properly evaluate a competing offer, disclose material information and make a meaningful merger recommendation to its stockholders. The court issued an injunction even though there was no indication that the counterparty to the applicable standstill agreement intended to make a topping bid.
Commentators were concerned that Vice Chancellor Laster’s ruling in Complete Genomics, if broadly adopted, could affect the way public company auctions are conducted. Target companies often seek a “don’t ask, don’t waive” standstill to help run an orderly auction process where the bidders that are invited to participate in the process are incentivized to submit their highest bid prior to the seller signing and announcing the deal. If auction bidders read the court’s ruling as assuring themselves a last look, they could be incentivized to not put their full bid on the table or to stand back rather than bid against themselves.
Just three weeks later, on December 17, 2012, in Ancestry.com, Chancellor Strine recognized that “don’t ask, don’t waive” standstills may be properly used by sellers “as a gavel, to impress upon the people that it has brought into the process the fact that the process is meaningful; that if you're creating an auction, there is really an end to the auction for those who participate. And therefore, you should bid your fullest because if you win, you have the confidence of knowing you actually won that auction at least against the other people in the process.” Chancellor Strine cautioned, however, that directors must “be darn careful” when using these types of standstills. His ruling highlighted that neither the CEO nor the board was informed about the potency of the provision, and he noted that it was not clear whether the banker was even aware of it. Chancellor Strine also stated that if “don’t ask, don’t waive” standstills are going to be used, stockholders need to be aware that there are a group of potential bidders who are contractually prohibited from submitting a topping bid. The court enjoined the Ancestry.com stockholder meeting until proper disclosure was made.
In Ancestry.com, Chancellor Strine recognized the value-maximizing purpose of effectively employed “don’t ask, don’t waive” standstills in a well-structured auction process, but cautioned that there use will be subject to careful review. His ruling should give public company boards comfort that as long as they are well informed of the effect that “don’t ask, don’t waive” standstills have on potential bidders who are bound by them, and the directors believe that such standstills will help maximize value for stockholders, such standstills can be used.
From a disclosure perspective, if a “don’t ask, don’t waive” standstill provision is used, stockholders should be informed that although a bidder who did not participate in the auction process may submit a topping bid, stockholders should not assume that the potential bidders who did participate in the process and who are subject to the standstill will be able to do so.
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