In late 2012, the Delaware Court of Chancery made two significant rulings on the efficacy of standstill provisions. In In re Complete Genomics, Inc. Shareholder Litigation, Vice Chancellor J. Travis Laster analogized “don’t ask, don’t waive” standstills to “no-talk” provisions in merger agreements. No-talk provisions prohibit a target company and its board from discussing alternative transactions with third parties, and have been deemed impermissible by the Court of Chancery absent certain outs. Don’t ask, don’t waive provisions prevent potential bidders from requesting that the target company waive the terms of a standstill agreement to which the potential bidder agreed.
Complete Genomics, Inc., a life sciences company that developed a proprietary DNA sequencing process, decided to put itself up for sale. Hoping to protect its chief asset, Complete Genomics insisted that bidders sign confidentiality and standstill agreements before receiving access to information necessary for the potential bidders to undertake due diligence. Multiple potential bidders signed these contracts. After an auction, Complete Genomics agreed to a two-step tender offer and merger transaction with a U.S. subsidiary of a Chinese company.
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 knowledgeably evaluate competing offers, disclose material information and make a meaningful merger recommendation to its stockholders. The court therefore issued a preliminary injunction enjoining Complete Genomics from enforcing the provision.
The court analyzed the don’t ask, don’t waive provision by discussing a case that held strict no-talk provisions impermissible. In 1999, in Phelps Dodge Corp. v. Cyprus Amax Minerals Co., the Court of Chancery found a no-talk provision unenforceable because the board could not willfully blind itself to information it needed to carry out its duty of care. Specifically, the court held that a board must inform itself about whether it should enter into negotiations before deciding not to negotiate. In extending the rule from Phelps Dodge, the court held that plaintiff had a reasonable probability of success in demonstrating that the don’t ask, don’t waive provision functioned as a bidder-specific no-talk provision, and was therefore impermissible. The court found that plaintiff had established irreparable harm because, absent an injunction, the board would never know whether the counterparty wanted to make a topping bid or other acquisition proposal.
The court issued its injunction in Complete Genomics regarding enforcement of the don’t ask, don’t waive provision even though the counterparty in the applicable standstill agreement was not a party to the litigation and gave no indication that it planned to make a topping bid. Nevertheless, the court expressly acknowledged the permissibility of a provision restricting a bidder from making a public request that the target waive its obligations under a standstill agreement. The court spoke of public and private requests as different animals, suggesting that a board must allow private requests, but may still contractually prohibit public requests for waiver of a standstill.
Just three weeks after the Complete Genomics ruling, the Court of Chancery, in In re Ancestry.com, Inc. Shareholders Litigation, enjoined a merger pending two disclosures, one of which concerned the use of don’t ask, don’t waive provisions. The court first stated that transcript rulings tend not to make broad points of law, and that no reason exists to consider don’t-ask, don’t waive standstill provisions invalid in every case, thus registering disagreement with a common interpretation of Complete Genomics. The court then suggested these provisions have a legitimate role to play in some situations, because the board can use them for a “value-maximizing purpose” by creating a “gavel” to make clear “there is really an end to the auction for those who participate. And therefore, you should bid your fullest ….” The permissibility of the board’s use of this tool will depend, however, on a contextual analysis of whether a board uses it consistently with its fiduciary duties.
In the Ancestry.com case, the court held that this board probably breached its duty of care by allowing one bidder to ignore the don’t ask, don’t waive provision, but failing to relieve other parties constrained by similar provisions from their obligations until after this litigation commenced. Nevertheless, the fact that the board eventually freed all potential bidders from these restrictive provisions led the court to conclude there should be no further injunctive relief. The court enjoined the deal pending disclosure by the board that it used don’t ask, don’t waive provisions, reasoning that shareholders would want to know about these provisions because they may have prevented the emergence of a superior offer.
It is important to note that these opinions result from transcript rulings of the Court of Chancery, not the Delaware Supreme Court, when deciding motions for a preliminary injunction where the record is limited. Vice Chancellor Laster’s Complete Genomics ruling does not appear to invalidate per se all don’t ask, don’t waive standstills, but merely questions their enforceability where a sale agreement with another party has been announced and the target has an obligation to consider competing offers.
Corporations can benefit from using the approved form of don’t ask, don’t waive provisions. 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. These provisions can also 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.