Don't Ask, Don't Waive Standstill Provisions: A Tool To Maximize Value Or Willful Blindness?

Two recent bench rulings by respected Delaware Chancery Court judges-In re: Complete Genomics, Inc. Shareholder Litigation1(Vice-Chancellor Laster) and In re: Ancestry.com Inc. Shareholder Litigation2 (Chancellor Strine)-questioned and, in one case, enjoined the enforcement of so-called "don't ask, don't waive" standstill provisions in deal process confidentiality agreements. Although we do not believe that these provisions are now per se unenforceable in Delaware, target companies will need to employ these provisions with care to ensure that they survive judicial scrutiny.

A Primer on the Jargon

Deal professionals love jargon, and this area has plenty of it:

A potential acquirer that is bound by a "standstill" is typically obligated to refrain from various actions that relate to acquisition of control of the target, such as making proposals to acquire the target, buying shares, and launching a proxy contest. A "don't ask, don't waive" provision in a standstill prohibits a potential acquirer from making any public or private request that a target waive the standstill restrictions. Merger agreements entered into after a strategic process usually have "no shop" or "no talk" provisions that prohibit a target from sharing confidential information with or discussing a potential competing acquisition with potential acquirers. However, merger agreements also typically include "fiduciary out" clauses, which permit the target to communicate with a potential interloping bidder that makes an unsolicited superior proposal. The Utility of "Don't Ask, Don't Waive" Provisions

In Delaware and some other states, in certain circumstances company sales processes are characterized as auctions-processes designed to produce the highest short-term value reasonably available to stockholders.3 Auctioneers of rare art or other items say "going, going..." and pause before saying "gone" for a reason-to induce the best bid. But they never let bidders hold back and rebid after the gavel comes down for good reason. Before Genomics, most deal practitioners believed that the same thinking applied to company sale processes. The rationale behind "don't ask, don't waive" provisions is the same-once a bidder has been invited into the process to make an offer and has been given access to confidential information, the target board wants to incentivize bidders to make their best and final proposals as to price and terms. Consider the following fairly typical hypothetical:

Acquirer A and Acquirer B are active participants in a consolidating industry. Both Acquirer A and Acquirer B have ample financial resources. While the target's investment banker sends out dozens of feelers, these two are commonly understood to be the most likely bidders. In order to allow the target to control its own sale process and force Acquirer A and Acquirer B to play within a board-supervised sale process, the target includes a standstill in its confidentiality agreement with all bidders, which provides that the bidders are precluded from making an unsolicited public bid for the target. The confidentiality agreement does not, however, include a "don't ask, don't waive" provision. Acquirer A values the target at $12 per share, and Acquirer B, which has significantly more synergies with the target and a lower cost of capital than Acquirer A, values the target at up to $20 per share. Acquirer B senses that it can pay a lot...