Delaware Court Of Chancery Clarifies The Enforceability Of ‘Don’t Ask, Don’t Waive’ Provisions In Standstill Agreements

by Pepper Hamilton LLP

On December 17, 2012, in In re Inc. S’holder Litig., C.A. No. 7988-VS (Del. Ch. Dec. 17, 2012), the Delaware Court of Chancery issued a bench ruling addressing a recent decision enjoining enforcement of a “Don’t Ask, Don’t Waive” provision in a standstill/confidentiality agreement. The Court of Chancery clarified that there is no per se rule prohibiting “Don’t Ask, Don’t Waive” provisions. The Court of Chancery stated it is a court of equity and that enforceability of such provisions will be judged according to the circumstances of each case, including whether the board of directors purposefully employed such provisions as part of a plan to maximize shareholder value during the sales process.

On November 27, 2012, in In re Complete Genomics, Inc. S’holders Litig., C.A. No. 7888-VCL (Del. Ch. Nov. 27, 2012), the Court of Chancery enjoined enforcement of a “Don’t Ask, Don’t Waive” provision that forbade private requests for a waiver of the standstill restrictions. The court held that the board’s decision to engage in a change-in-control transaction resulted in “an ongoing statutory and fiduciary obligation to provide a current, candid and accurate merger recommendation.” The court explained that “Don’t Ask, Don’t Waive” provisions hinder the board’s ability to meet this obligation because they prevent the “flow of incoming information” to the target corporation’s board.

In response to this ruling, in our December 19, 2012 Corporate and Securities Alert, “‘Don’t Ask, Don’t Waive’ Provision of Standstill Agreement Forbidding Private Requests for Waiver Enjoined by Delaware Court of Chancery,” we advised that under proper circumstances “Don’t Ask, Don’t Waive” standstill provisions remain effective tools for a corporation’s board of directors to promote an effective sales process and may be still be employed without subjecting a board of directors to breach of fiduciary duty liability. The Court of Chancery’s ruling in In re Inc. S’holder Litig. confirms that “Don’t Ask, Don’t Waive” may indeed be used to maximize value for shareholders. The court explained that a company that has put itself up for sale and solicited potential bidders may use such provisions to design a sales process that encourages potential acquirers to submit their highest bid before the target enters into a binding agreement with another bidder.

The court did caution, however, that “Don’t Ask, Don’t Waive” provisions are “potent” mechanisms and will be subject to close judicial scrutiny. The court explained that the board of directors must act on an informed basis and ensure that the “Don’t Ask, Don’t Waive” provisions are employed in a manner likely to maximize shareholder value. Accordingly, boards of directors, when utilizing “Don’t Ask, Don’t Waive” provisions, especially in cases in which the board’s Revlon duties are triggered, must carefully evaluate the use of these provisions as part of an overall plan to increase bids during an auction process to maximize shareholder value during the sales process. Boards must make sure not to merely include the provisions among an assortment of deal protection devices without specifically considering the sale process as a whole that the company has undertaken and specifically how the provisions will help maximize shareholder value during the sales process. In connection with fulfilling their fiduciary duties, boards should be apprised from the outset of a transaction of the approach to be taken with confidentiality and standstill provisions to protect against issues arising after an agreement has been signed and another party makes a bid.

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.

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