Following a trilogy of cases1 decided in late 2012 by the Delaware Court of Chancery, dealing with standstill provisions2 in non-disclosure agreements ("NDAs"), the same court on February 25, 2013 denied, in a Memorandum Opinion3 of Vice Chancellor Glasscock, a motion to expedite brought by class action plaintiffs attempting to enjoin the acquisition of BioClinica, Inc. ("BioClinica") by private equity firm JLL Partners, Inc. ("JLL").
While the motion to expedite the complaint to enjoin the merger was based upon (i) an allegation of improper process and (ii) inadequate disclosure claims, the following only addresses the allegation of improper process.
The plaintiffs specifically alleged that the agreement of the Special Committee of BioClinica to a combination of deal protection devices, including a no-shop clause, a top-up feature, matching rights, a termination fee, a poison pill, and the standstill provisions in the NDAs with prospective bidders, impermissibly locked up the merger agreement with JLL and was preclusive to other potential bidders.4
The Court focussed on the joint effect of BioClinica's poison pill and the NDA standstill provisions which restricted potential bidders from engaging in several practices that would enable the bidder to acquire BioClinica.
While the defendants contended that the NDAs did not contain "don't ask, don't waive" restrictions (see footnote 2), the Court cited the plaintiff's motion record to the effect that this was likely to be a contested fact "because the NDA... still limits the circumstances in which [a bidder] can re-enter any bidding process to a tender offer process." The Court continued to cite the plaintiff's motion record arguing that the rights agreement (poison pill) was triggered by a public announcement of an intent to commence a tender or exchange offer for BioClinica, and the plaintiff's assertion that:
"Therefore, it appears the NDAs, in the context of the Rights Agreement, and in the context of the Deal Protection Terms of the Merger Agreement, operate to prevent former prospective purchasers from seeking either publicly or privately to re-enter the bidding process."
It would appear that the plaintiffs were attempting to characterize the issue within the "don't ask, don't waive" line of cases and the Court appeared to agree:
"A deal protection tool that could both (1) relegate a bidder to making a tender offer, without approaching the board of directors, and then (2) trigger the onerous provisions of a poison pill upon the mere announcement of such a tender offer could indeed preclude a bid from any party that had signed such an NDA".
However, after reviewing BioClinica's poison pill, the Court concluded that the pill's harsh efforts were not, in fact, triggered by the mere announcement of the intent to launch a tender offer. This was so because the dilution mechanics and pricing worked as follows: prior to a bidder acquiring over 20% of BioClinica'scommon stock, stockholders only had the right to purchase preferred stock at a price of $16 for 1/1000 of a preferred share, and a 1/1000 interest in a preferred share equated to the value of approximately one common share. Mathematically, this meant that the "right" was an option to acquire common stock worth $7.25 a share for a price of $16 and that "obviously, no rational stockholder would make such a purchase." Accordingly, substantial dilution was not triggered by the mere public announcement of a tender offer under the rights plan.
The Court went on to conclude that the "teeth of the rights plan are only exposed once a bidder acquires over 20% of the BioClinica's common stock" since only at that point are stockholders given the option to purchase two common shares, at half price, for every one share they hold.
The drafting of these mechanics avoided the "traditional discriminatory impact on the bidding stockholder" since the true trigger was not the announcement of the bid by the bidder but, rather, the acquisition of 20% of the stock, since prior to that point the board has the right to redeem the pill at its option.
The Court relied upon Vice Chancellor Noble's decision in In re Orchid Cellmark Shareholder Litigation5 whereby the Vice Chancellor refused to preliminarily enjoin a merger with a similar set of deal protection devices, on the basis that "the deterrent effects of a poison pill on any serious competing bidder would be minimal" and concluded "the same is true here."
The takeaway here, as is so often the situation in deal protection challenges, would appear to be that drafting and mechanics matter. Provided that stockholders can withdraw their tendered shares from the initial bidder's offer prior to takedown and provided the acquisition agreement contains a fiduciary-out clause permitting the target board to deal with superior offers where the initial bidder has a matching right, the mechanics are in place to allow the auction to continue, thus "ensuring the stockholders receive the highest price available to them." If the target board refuses to redeem the pill in the face of a superior offer, the Court suggested that "the stockholders and the hostile bidder would be free to petition this Court for relief." The Court concluded that, as in Orchid, "a sophisticated buyer could navigate [these] shoals if it wanted to make a serious bid."
Footnotes
1 "In re Celera Corporation Shareholder Litigation, C.A. No. 6304-VCP (Del. Ch. Mar. 23, 2012); In re Complete Genomics, Inc. Shareholder Litigation, C.A. No. 7888-VCL (Del. Ch. Nov. 27, 2012); and In re: Ancentry.com Inc. Shareholder Litigation, C.A. No. 7988-CS (Del. Ch. Dec. 17, 2012).
2 Standstill provisions are often included in NDAs which prospective bidders participating in an auction process for a target company are obliged to provide in order to protect the validity of the auction process. The trilogy of cases examined the combination of the provisions in the NDA, which often include a covenant by the potential bidder not to ask, privately or publicly, the target to release it from its agreement not to bid for the company (often for 18 months), coupled with provisions in the acquisition agreement (a merger agreement or plan of arrangement) whereby the target agrees with the successful bidder not to waive any provisions in the NDA. This combination has come to be known as "don't ask, don't waive" deal protection. The third bench opinion in the trilogy of cases, Ancestry.com, decided by Chancellor Strine, appeared to conclude that such a combination, although a "powerful tool", was not per se illegal, and in the right circumstances could be consistent with the target directors' fiduciary duties, but caution was required.
3 In re BioClinica, Inc. Shareholder Litigation, No. 8272-VCG, 2013 WL 673736 (Del. Ch. Feb. 25, 2013).
4 The plaintiffs relied upon Omnicare, Inc. vs. NCS Healthcare, Inc., 818 A.2d 914, 938 (Del. 2003). Omnicare was a decision by the Delaware Supreme Court which is often cited for the proposition that a target board cannot accede to a demand by a successful bidder for an absolute lock-up that is either preclusive to other bidders or coercive to the stockholders.
5 2011 WL 1938253 (Del. Ch. May 12, 2011).