A standstill is a contractual provision entered into between a prospective buyer (or bidder) and a publicly traded target company. A standstill generally restricts the prospective buyer from purchasing a target company's stock or taking certain other actions that may lead to a change of control unless the target company's board approves that action and participates in the process. In principal, standstills protect target companies from hostile takeovers by a formerly friendly bidder.

A common, key element of the standstill is the restriction that has been referred to by the Delaware Court of Chancery as "Don't Ask, Don't Waive" (DADW). Provisions in two separate contracts combine to make up the DADW restriction:

Throughout 2012 and 2013, the Delaware courts issued more decisions on this particular topic than in the prior judicial history of standstills. Because the issue is both new and fraught with potential to cause a breach of fiduciary duties, the market is still evolving on the question of whether pre-existing standstills should continue in effect once a merger agreement has been entered into. For example, in the recent leveraged buyout of Steinway Musical Instruments, Inc. by an affiliate of Kohlberg & Company, the merger agreement not only authorized the target board to waive standstills during the go-shop period, but included a form waiver of the standstill as an exhibit to the merger agreement. For a summary of and link to the merger agreement and form waiver, see What's Market, Kohlberg & Company/Steinway Musical Instruments, Inc. Merger Agreement Summary.

To summarize the current state of Delaware law on "Don't Ask, Don't Waive" restrictions, the following discussion is taken from Practical Law Corporate & Securities' newest resource, Practice Note, Standstill Agreements in Public M&A Deals.

In November 2012, Vice Chancellor Laster of the Delaware Court of Chancery issued a bench ruling enjoining a target company from enforcing a "Don't Ask, Don't Waive" standstill provision agreed to in a confidentiality agreement (see In re Complete Genomics, Inc. Shareholder Litigation, C.A. No. 7888–VCL (Del. Ch. Nov. 27, 2012) (TRANSCRIPT)). In enjoining the DADW provision, the Vice Chancellor Laster reasoned that the provision has the same disabling effect as a no-talk clause, although on a bidder-specific basis, because it impermissibly limits certain of the board's ongoing statutory and fiduciary obligations to:

The ruling was not the first time the Court of Chancery addressed the issue of blanket prohibitions impacting a party's ability to privately seek a waiver of a standstill agreement. Earlier in the year, Vice Chancellor Parsons in the Celera decision discussed the potential breach of fiduciary duty that can arise if a board agrees to a no-shop provision after it has already entered into broad DADW standstills, noting that it can undermine the no-shop's fiduciary out and create a problematic "information vacuum" for the board (see In re Celera Corp. Shareholder Litigation, (Del. Ch. Mar. 23, 2012), aff'd in part, rev'd in part, 59 A.3d 418 (Del. Dec. 27, 2012)).

A month after the Complete Genomics bench ruling, Chancellor Strine addressed the issue with another bench ruling in the Ancestry.com litigation. In declining to enjoin enforcement of the provisions directly, Chancellor Strine noted that these provisions can be useful (for example, by forcing bidders to put their best offers on the table during the auction process) and are not per se illegal (see In re Ancestry.com Inc. Shareholder Litigation, C.A. No. 7988–CS (Del. Ch. Dec. 17, 2012) (TRANSCRIPT)). However, Chancellor Strine did note that the provisions can be problematic if used by the board to shield itself from remaining informed of materially higher subsequent bids.

Lastly, in May 2013, Vice Chancellor Glasscock of the Court of Chancery took up the issue in Koehler v. NetSpend when he strongly admonished the NetSpend (target) board for its decision to retain the DADW standstills with two private equity bidders (see Koehler v. NetSpend Holdings Inc., (Del. Ch. May 21, 2013)). The board had apparently not given this decision any particular attention, with the result that it "blinded itself" to any potential interest from those bidders.

Vice Chancellor Glasscock acknowledged Chancellor Strine's decision in Ancestry.com that DADW standstills can be justified to the extent that they produce auction-like pressures on bidders. However, that justification became irrelevant once the target decided to pursue a sale because the standstills were artifacts from previous discussions that should have been waived once NetSpend entered into negotiations with the buyer. Instead, the NetSpend situation was more like Complete Genomics, where Vice Chancellor Laster enjoined the application of similar standstill agreements.

The takeaway from this line of DADW decisions is that "Don't Ask, Don't Waive" restrictions can be useful at the negotiating stage because they can mimic an auction scenario and help elicit the best possible bid. However, once the transaction moves on to the stage of stockholder approval, the board must consider waiving these clauses. If it fails to do so, let alone if it retains them in the definitive merger agreement as in NetSpend, it creates the possibility that the stockholders will not have been presented with the best possible opportunity to maximize the return on their investment.

For a discussion of practical steps for including DADW restrictions while minimizing the risk of triggering a breach of fiduciary duties, see Practice Note, Standstill Agreements in Public M&A Deals: Don't Ask, Don't Waive.