December 3, 2012
On November 27, 2012, Vice Chancellor Travis Laster of the Court of Chancery of the State of Delaware issued a bench ruling enjoining the enforcement of a “Don’t Ask, Don’t Waive” provision in a standstill agreement. These provisions have become common in M&A standstill agreements and prohibit a potential bidder that has consented to a standstill agreement from publicly or privately requesting that the target company waive the terms of the standstill agreement — a request that could facilitate putting the company “in play” and otherwise assist the bidder in bypassing the terms and spirit of the standstill agreement.
In In re Complete Genomics, Inc. Shareholder Litigation, C.A. No. 7888-VCL, the Court analogized Don’t Ask, Don’t Waive standstills to “No-Talk” provisions in merger agreements, which prohibit a target company and its board from discussing alternative transactions with third parties, and have been deemed impermissible by the Court of Chancery. The Court found that, by agreeing to a standstill containing a Don’t Ask, Don’t Waive provision, 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. It is worth noting that the Court of Chancery issued its injunction in Genomics regarding enforcement of the Don’t Ask, Don’t Waive provision even though the counterparty in the applicable standstill agreement gave no indication that it planned to make a topping bid.
When properly designed and implemented, a standstill agreement with a Don’t Ask, Don’t Waive provision empowers a diligent board to structure and run an orderly auction process where bidders are incentivized to make their highest bid prior to the seller signing and announcing a definitive sale agreement. Furthermore, these provisions give added comfort to target boards that a determination to commence an exploration of a potential sale process will not lead to a hostile process at a later point. But until further guidance is given by the Delaware courts, targets entering into a merger agreement should consider the potential effects of any pre-existing Don’t Ask, Don’t Waive standstill agreements with other parties in light of the Court’s ruling in Genomics. We note in particular that the ruling does not appear to invalidate per se all Don’t Ask, Don’t Waive standstills, as the opinion only questions their enforceability where a sale agreement with another party has been announced and the target has an obligation to consider competing offers. In addition, the Court expressly acknowledged the permissibility of a provision restricting a bidder from making a public request of a standstill waiver. Therefore, we expect that target boards will continue to seek some variation of Don’t Ask, Don’t Waive standstills.
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