Court of Chancery Enjoins Enforcement of "Don't Ask, Don't Waive" Standstill Provision | Practical Law

Court of Chancery Enjoins Enforcement of "Don't Ask, Don't Waive" Standstill Provision | Practical Law

The Delaware Court of Chancery enjoined enforcement of a "Don't Ask, Don't Waive" standstill provision that prevented a private request for waiver of the standstill by a rejected bidder in a public-company auction process following the public announcement of a deal with another bidder. 

Court of Chancery Enjoins Enforcement of "Don't Ask, Don't Waive" Standstill Provision

by PLC Corporate & Securities
Published on 20 Dec 2012 • Delaware
The Delaware Court of Chancery enjoined enforcement of a "Don't Ask, Don't Waive" standstill provision that prevented a private request for waiver of the standstill by a rejected bidder in a public-company auction process following the public announcement of a deal with another bidder.
On November 27, 2012, Vice Chancellor Laster of the Delaware Court of Chancery issued a bench ruling in In re Complete Genomics, Inc. Shareholder Litigation enjoining a target company from enforcing a "Don't Ask, Don't Waive" standstill provision agreed to in a confidentiality agreement for a public-company auction process. The case involved the potential acquisition of Complete Genomics by BHI-Shenzhen (BHI), where Complete Genomics had entered into:
  • A standstill in the confidentiality agreement with one of the third-party bidders that prohibited the bidder from privately or publicly requesting a waiver from the board of the standstill in order to make a topping bid following the auction (a "Don't Ask" provision).
  • A merger agreement with BHI containing a deal protection provision prohibiting the board from waiving the standstill provision with the other third-party bidders (a "Don't Waive" Provision).
For a summary of the BHI-Complete Genomics merger agreement, see PLC What's Market, BGI-Shenzhen/Complete Genomics, Inc. Merger Agreement Summary.
In enjoining the Don't Ask, Don't Waive provision of the standstill, the Court reasoned that the provision has the same disabling effect as a no-talk clause, although on a bidder-specific basis, because it impermissibly limits the board's ongoing statutory and fiduciary obligations to:
  • Properly evaluate competing offers.
  • Disclose material information.
  • Make a meaningful, current merger recommendation to its stockholders.
The Court focused on the standstill agreement's restriction on private requests for waiver (which was in addition to the agreement's restriction on publicly announced requests for waiver) in the context of a board's fiduciary duties in providing the company's stockholders with a recommendation. It emphasized that Delaware law requires an ongoing fiduciary duty with respect to the boards' merger recommendation, including to recommend, if necessary, against a merger as a result of subsequent events. The Court concluded that private Don't Ask, Don't Waive provisions interfere with the boards' ability to determine whether to change its merger recommendation because those provisions "absolutely preclude the flow of incoming information to the board." The Court did note that a standstill provision that only restricted public requests for a waiver could meet the boards' fiduciary obligations so long as it allowed for a non-public waiver request.
The Court's ruling is not the first time the Court of Chancery has addressed the issue of blanket prohibitions on a party's ability to privately seek a waiver of a standstill agreement. Earlier this year, Vice Chancellor Parsons 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 Don't Ask, Don't Waive standstills, opining that it can undermine the no-shop's fiduciary out and create a problematic "information vacuum" for the board (see Legal Update, In re Celera: Fiduciary Out is Ineffective if Potential Bidders Have Agreed to Standstills that Forbid Requests for Waiver).

Ancestry.com Shareholder Litigation

In addition to the Complete Genomics and Celera rulings, Thomson Reuters reports that on December 17, 2012, Chancellor Strine issued a bench ruling in the Ancestry.com Shareholder Litigation requiring additional proxy disclosures relating to the Don't Ask, Don't Waive standstills provisions ahead of a December 27 shareholder meeting to vote on a sale of the company. For a summary of the merger agreement for the sale of Ancestry.com Inc., see PLC What's Market, Permira Funds/Ancestry.com Inc. Merger Agreement Summary. In that case, the board had disclosed that it could terminate the transaction in the event of a superior proposal, but it had not disclosed that rejected bidders from the auction process had all executed Don't Ask, Don't Waive standstill provisions effectively preventing any topping bid from those bidders. Although he did not enjoin enforcement by the target company of the Don't Ask, Don't Waive provisions directly while also noting 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, 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.

Practical Implications

In light of the concerns about blanket Don't Ask, Don't Waive standstill provisions recently raised in multiple Delaware Court of Chancery cases, practitioners should be mindful that their use can place the board of a target company at risk of violating its Revlon duties following the announcement of a deal. While the use of these provisions to foster competition and expediency in an auction process is widely accepted, practitioners should proceed with caution when using Don't Ask, Don't Waive provisions in an auction process that include a prohibition on private requests for waiver. Until further insight from the Delaware Court of Chancery on Don't Ask, Don't Waive provisions is forthcoming, these recent cases may force many practitioners to consider designing the provisions with either:
  • A standstill fall-away provision following the announcement of a sale.
  • An ability for rejected bidders to ask the board for a waiver of the standstill prohibition in a manner that does not require a public announcement by the target company.
The Court in In re Complete Genomics, Inc. Shareholder Litigation stated during its bench ruling that a definitive order will be issued at a later date. PLC Corporate & Securities will update accordingly.
For more on standstill provisions in confidentiality agreements, including further discussion of standstill fall away and private standstill waiver provisions, see Standard Document, Confidentiality Agreement: Mergers and Acquisitions: Standstill. For more on no-shops and no-talk clauses, see Practice Note, No-shops and Their Exceptions.