Delaware Has No Per Se Rule Against "Don't Ask, Don't Waive" Standstill Provisions, But Boards Must be Careful in Using Them

by Sheppard Mullin Richter & Hampton LLP
Contact

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.

Background

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.

What Happened?

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.

Now What?

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.

What if you have questions?

For any questions or more information on these or any related matters, please contact any attorney in the firm’s corporate practice group. A list of such attorneys can be found by clicking the “ATTORNEYS” tab on the left-hand side of this page.

John P. Stigi III (310.228.3717; jstigi@sheppardmullin.com), John D. Tishler (858.720.8943, jtishler@sheppardmullin.com), and Edwin Astudillo (858.720.7468, eastudillo@sheppardmullin.com) participated in drafting this posting.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Sheppard Mullin Richter & Hampton LLP | Attorney Advertising

Written by:

Sheppard Mullin Richter & Hampton LLP
Contact
more
less

Sheppard Mullin Richter & Hampton LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.
Feedback? Tell us what you think of the new jdsupra.com!