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.
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.