A trio of Delaware Court of Chancery rulings in 2012 have re-emphasized a target board's duty to stay informed of material information throughout all stages of a transaction and have highlighted possible tensions between that duty and the use of so-called "don't ask, don't waive" standstill provisions – provisions which, in addition to containing customary standstill prohibitions on hostile bids, prohibit a bidder from directly or indirectly submitting to the target board a non-public proposal or request for a waiver or amendment of the standstill. Evidencing an apparent divergence of opinion among Delaware Chancery Court members, the cases indicate that, while Delaware recognizes the legitimacy of auction-finalizing mechanics (such as don't ask, don't waive standstills) in encouraging interested parties to submit their highest bids within the context of a board-controlled sale process, caution must be exercised when using procedures or deal protections that limit the target board's access to information at any stage to ensure that such procedures and protections are being used in a manner consistent with the proper exercise of the board's fiduciary duties. In considering the propriety of don't ask, don't waive standstills, the Delaware courts once again have underscored the importance of striking an appropriate balance between the objectives of obtaining (and protecting) the best deal reasonably available and of preserving a target board's flexibility to be informed of, evaluate and respond to alternatives.
This article briefly reviews the recent Delaware cases together with the 2007 decision of the Ontario Court of Appeal in Ventas, Inc. v. Sunrise Senior Living Real Estate Investment Trust, a case Osler successfully handled that suggests that a similar balancing act should be applied to the use of don't ask, don't waive standstills in Canada. Read together, the cases serve as a useful reminder of the significant role played by standstill provisions in setting overall auction dynamics and highlight key points of consideration for M&A practitioners on both sides of the border, including the following:
- Courts generally respect the process-oriented decisions of well-advised and engaged target boards. Where don't ask, don't waive standstills are to be used, advisers should ensure that the target board is fully informed of the existence and effect of these provisions and that the board has had an opportunity to consider the value of the provisions in the context of the deal's unique negotiating dynamics.
- Target boards and their advisors should consider use of auction mechanics that limit the board's access to information, such as don't ask, don't waive standstills, only where a clear process-enhancing benefit to the use of such provisions can be identified, and such benefit has been discussed and approved by the board. Where possible, protection mechanisms that serve to deprive the board of access to information should be avoided and parties should instead seek to protect their agreed deal by means of other contractual mechanisms (e.g., termination fees, match rights, etc.).
- Don't ask, don't waive standstills have the greatest potential value to the efficacy of an auction, and are hence most likely to withstand challenge, where bidders understand that all interested parties are subject to substantially the same restrictions.
The Delaware Cases
In re Celera Corporation Shareholder Litigation
Certain of Celera Corporation's stockholders filed a class action suit challenging Celera's acquisition by Quest Diagnostics, Inc. The Delaware Chancery Court approved a settlement to the litigation that included a waiver of don't ask, don't waive standstills binding unsuccessful bidders and a modification of the acquisition agreement's no-shop provision (which was already subject to a customary fiduciary out feature) to permit the Celera board to respond to any resulting offers.
In so doing, Vice Chancellor Parsons noted in dicta that, while he did not view don't ask, don't waive standstills as per se unenforceable, the combination of both the don't ask, don't waive standstills and the no-shop in the deal protection mechanics undermined the effectiveness of the no-shop's fiduciary out feature. In the Vice Chancellor's words:
"The need for adequate information is central to the enlightened evaluation of a transaction that a board must make. Here, the Don't-Ask-Don't-Waive Standstills block at least a handful of once interested parties from informing the Board of their willingness to bid (including indirectly by asking a third party, such as an investment bank, to do so on their behalf), and the No Solicitation Provision blocks the Board from inquiring further into those parties' interest. Thus Plaintiffs have at least a colorable argument that these constraints collectively operate to ensure an informational vacuum. Moreover, the increased risk that the Board would outright lack adequate information arguably emasculates whatever protections the No Solicitation Provision's fiduciary out otherwise could have provided. Once resigned to a measure of willful blindness, the Board would lack the information to determine whether continued compliance with the Merger Agreement would violate its fiduciary duty to consider superior offers. Contracting into such a state conceivably could constitute a breach of fiduciary duty." (Internal quotations omitted.)
In re Complete Genomics, Inc. Shareholder Litigation
In its agreement to be acquired by BGI-Shenzhen, Complete Genomics, Inc. agreed not to waive, terminate or amend any standstill or similar agreement it had entered into with any third party, including a don't ask, don't waive standstill with an unsuccessful bidder (Party J). Certain stockholders of Complete Genomics sought, among other things, to prohibit Complete Genomics from enforcing its standstill agreements. Vice Chancellor Laster granted the plaintiffs' motion with respect to the don't ask, don't waive standstill binding Party J, but declined to interfere with Complete Genomics' enforcement of its other standstill agreements. The Vice Chancellor drew a distinction between standstills that prohibit only a public request to amend or waive and provisions that also limit a party's ability to submit a private proposal to the target board. In his view, the former are acceptable because they permit the board to consider all reasonably available information when complying with its ongoing statutory and fiduciary obligations whether to recommend (or continue to recommend) in favor of an executed deal. Conversely, the Vice Chancellor considered don't ask, don't waive standstills to be functionally equivalent to bidder-specific no-talk clauses – clauses prohibiting the target board from engaging in dialogue with a potential acquirer under any circumstances – and noted that prior Delaware case law had deemed such provisions to be in violation of a board's ongoing duty to remain "informed of all material information reasonably available" throughout the course of a transaction. The Vice Chancellor commented:
"[A] Don't Ask, Don't Waive Standstill is impermissible because it has the same disabling effect as the no-talk clause, although on a bidder specific basis. By agreeing to this provision, the Genomics board impermissibly limited its ongoing statutory and fiduciary obligations to properly evaluate a competing offer, disclose material information, and make a meaningful recommendation to its stockholders."
In re: Ancestry.com Inc. Shareholder Litigation
In mid December 2012, shortly after Vice Chancellor Laster's bench ruling in Complete Genomics, Chancellor Strine enjoined the scheduled meeting of Ancestry.com Inc.'s stockholders to approve its acquisition by Permira Advisers LLP pending supplemental disclosures regarding the factual background to the transaction, including a description of the don't ask, don't waive standstills that had bound certain unsuccessful bidders after completion of the company's sale process.
In the course of his bench ruling, Chancellor Strine echoed Vice Chancellor Parsons in Celera and explicitly stated that he knew of no per se Delaware rule invalidating use of don't ask, don't waive standstills. But in an apparent effort to move toward a case-by-case approach, he cautioned that, while such provisions may be properly used by a target board to maximize value insofar as they encourage bidders to make their best offer within the context of a structured auction process, "directors need to use these things consistently with their fiduciary duties, and they better be darn careful about them." In the Chancellor's view, a don't ask, don't waive standstill could only serve as a value-maximizing tool where it allowed "a well-motivated seller to use it as a gavel, to impress upon the people that it has brought into the process the fact that the process is meaningful; that if you're creating an auction, there is really an end to the auction for those who participate."
The Chancellor further suggested that the potential benefits of don't ask, don't waive standstills could be enhanced by making it clear that the winner of the auction would receive an assignment of the target's right to enforce any such standstills against unsuccessful bidders. The Chancellor noted that Permira had not been given an assignment of such rights and expressed significant concern that the Ancestry.com board was not informed about the existence or effect of the don't ask, don't waive standstills. He nevertheless declined to enjoin the deal so long as certain curative disclosures were made to stockholders in advance of the merger vote.
The Canadian Parallel: Ventas, Inc. v. Sunrise Senior Living Real Estate Investment Trust
After emerging as the winning bidder in the auction for Sunrise Senior Living Real Estate Investment Trust, Ventas, Inc. negotiated an agreement with several deal protections, including a no-shop provision (qualified by a fiduciary out exception), and a provision requiring Sunrise to enforce its existing standstills. Following announcement of the deal, Health Care Property Investors, Inc., an unsuccessful bidder subject to a standstill agreement with Sunrise, made a topping bid for the target trust. The parties applied to the Ontario courts to determine whether Sunrise's obligation to enforce its standstills was unenforceable as an impermissible breach of the board's duty to preserve flexibility to assess competing proposals.
The Ontario courts, both at trial and at the Court of Appeal, held that Sunrise was obligated to enforce the standstill against HCPI's topping bid. In reaching its decision, the Court of Appeal expressly considered whether the Sunrise board's "fiduciary obligation to maximize shareholder (or unitholder) value" meant that as a matter of law in Ontario there are "no limits on the directors' right to consider superior offers". Presaging the analysis Chancellor Strine suggested, the Court noted after reviewing the record that "[t]he Trustees did not contract away their fiduciary obligations. Rather, they complied with them by setting up an auction process, in consultation with their professional advisers, that was designed to maximize the unit price obtained for Sunrise's assets ... by requiring bidders to come up with their best price in the second round".
In light of the decisions discussed above, parties involved in competitive acquisitions should consider each of the following points:
- The law with respect to don't ask, don't waive standstills remains unsettled in Delaware. Though not per se unenforceable, such provisions are subject to scrutiny by the Delaware courts. Courts in Ontario have not addressed the issue but the Court of Appeal's discussion in Ventas suggests that a per se rule with respect to don't ask, don't waive standstills should not be adopted. Rather, in both Ontario and Delaware, the cases suggest that an informed and engaged target board should be given latitude to structure an auction process reasonably designed to result in the best deal possible. Use of don't ask, don't waive standstills, as well as other auction mechanics and deal protections, should be considered on a case-by-case basis in light of the target board's twin (but sometimes conflicting) duties of establishing deal dynamics designed to obtain the best deal available in a sale while preserving its flexibility to respond to unsolicited proposals. Where standstills and other auction mechanics are employed without the oversight of the target board and its evaluation of their appropriateness in the context of the particular deal, the courts may closely scrutinize their use and effect.
- Until the law in each jurisdiction is clarified, practitioners should only consider use of a don't ask, don't waive standstill where the target board, together with its advisers, has assessed the value of the provision in the context of its particular situation and can identify and articulate a clear process-enhancing benefit to its use. These latest cases serve as a reminder to practitioners that standstills (especially don't ask, don't waive standstills) form an important part of a sale process but the target board should be informed of and carefully evaluate when and how they are being used. Boards that fail to engage in a considered evaluation of their sale processes risk attracting retrospective criticism of the process by the courts.
- When negotiating deal protections more generally, target boards and their advisers must bear in mind the board's obligation to remain informed of all material information reasonably available throughout the entire course of the transaction, particularly in light of the board's obligation to update its recommendation in respect of the transaction. Protection mechanisms that serve to deprive the board of access to information that may be material to its view and recommendation should be avoided unless the board considers them to be meaningfully beneficial to the process or price. Where possible, parties should instead seek to protect their agreed deal by means of other contractual mechanisms (e.g., termination fees, match rights, etc.).
- The process-enhancing effect of don't ask, don't waive standstill provisions (and standstill provisions, generally) is greatest where each auction participant is subject to substantially the same restrictions and is made aware that its competitors are similarly bound. Where some, but not all, bidders are bound by this form of standstill, the utility of the provision is arguably lessened and the board and its advisers should consider again its value in the context of their particular process. Targets should preserve the ability to proactively waive or amend don't ask, don't waive standstills where they are no longer considered valuable.
- Targets and their advisers should consider whether it is appropriate to bolster the utility of don't ask, don't waive standstills by providing an acquirer with rights to enforce standstills in favor of the target prior to closing. The parties should also consider including in the acquisition agreement express authorization for the target to amend or waive any don't ask, don't waive standstills to permit private proposals to the target board throughout any post-signing market check or go-shop period.
- Provisions prohibiting a bidder from making a public request to amend or waive a standstill have been accepted by the Delaware courts.
- Full disclosure of the board's process and deliberations, including the existence and effect of any don't ask, don't waive standstills binding competing bidders should be made to target stockholders.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.