On November 27, 2012, the Court of Chancery of the State of Delaware in In re Complete Genomics, Inc. Shareholder Litigation,1 issued a bench ruling enjoining Complete Genomics, Inc. ("Genomics") which was engaged with a merger with BGI-Shenzhen ("BGI") from enforcing a "Don't Ask, Don't Waive" standstill agreement given by a third-party bidder in the auction leading to the merger with BGI.
Standstills allow the board of a target to run an auction process and settle on a deal with the chosen bidder without subsequent interference from other (unsuccessful) bidders. Therefore, they encourage participants in the auction to make their best offer as part of the auction process. "Don't Ask, Don't Waive" standstills preclude a potential bidder from requesting publically or privately a release from the terms of the standstill in order to make a competing offer and serve as additional deal protection so that boards are not faced with the duty to consider superior offers from auction participants after the auction has been concluded.
The Genomics decision invalidated the "Don't Ask, Don't Waive" standstill on the basis that it was an impermissible limit on the ability of the board to give a meaningful and current recommendation to its shareholders regarding the advisability of a merger, including, if necessary, recommending against the merger as a result of subsequent events. Notwithstanding its ruling in connection with the "Don't Ask, Don't Waive" standstill, the Court declined to enjoin the merger transaction as a whole.
THE GENOMICS DECISION
By way of background, in June of 2012, Genomics canvassed numerous potential acquirers and eventually entered into confidentiality agreements with nine parties, four of which contained a standstill, and one of which contained a "Don't Ask, Don't Waive" standstill. Ultimately, Genomics agreed with BGI to be acquired in a two-step tender offer and merger transaction. Shortly after the announcement of the transaction, several shareholders of Genomics brought a motion for a preliminary injunction against the enforcement of various provisions of the merger agreement. In support of their motion, the shareholders argued that the merger agreement contained impermissible deal protection measures and that the Genomics board had disseminated materially misleading disclosures.
In respect of the "Don't Ask, Don't Waive" standstill, the Court voiced concern that this type of provision limits the target board's ability to recommend other potential bids and accordingly impairs fulfillment of the duties owed to target shareholders to communicate truthfully. The Court further held that this type of standstill resembles bidder-specific no-talk clauses which compromise the target board's ongoing obligation to remain informed. Accordingly, the Court enjoined Genomics from enforcing the "Don't Ask, Don't Waive" standstill (even though there was no evidence that a potential bidder had requested and was denied a waiver of the standstill).
The take-away message from this ruling is clear: a standstill in which a bidder is prohibited from seeking a release in order to make a competing offer will likely not be enforceable in Delaware.
STANDSTILLS IN CANADA
Canadian courts have generally enforced standstill agreements entered into in connection with an auction.
In Ventas, Inc. v. Sunrise Senior Living Real Estate Investment Trust,2 the Ontario Court of Appeal held that Sunrise Senior Living Real Estate Investment Trust ("Sunrise") was obliged to enforce the terms of a standstill agreement entered into between it and Health Care Property Investors, Inc. ("HCPI") in the course of the auction process which prohibited HCPI from making an offer for the Sunrise assets without Sunrise's consent.
Sunrise conducted an auction where potential bidders were required to enter into confidentiality agreements with standstills. At the end of this process, there were two main bidders, Ventas, Inc. ("Ventas") and HCPI. Only Ventas submitted a final bid and subsequently entered into a purchase agreement with Sunrise pursuant to which Ventas agreed to acquire Sunrise at the price of $15 per unit. The Ventas purchase agreement required Sunrise to enforce all existing confidentiality agreements. Shortly thereafter, HCPI submitted a bid to the trustees of Sunrise offering to acquire Sunrise on the same terms as the Ventas agreement, except at the price of $18 per unit.
The Court of Appeal, affirming the Superior Court decision, held that Sunrise was required to comply with its obligations under Ventas purchase agreement, including enforcing the standstill with HCPI. In other words, Sunrise was required to enforce the standstill that prohibited HCPI from making a bid without the consent of Sunrise. The Court emphasized the fiduciary duty of a target board to take steps to maximize shareholder value in the process "by ensuring that they are not precluded from considering other bona fide offers that are more favourable financially to the shareholders or unitholders than the bid in hand". However, the Court went on to say that it is not necessary, nor would it be wise to go further and "adopt the principle gleaned from some American authorities, that the target vendor can place no limits on the directors' right to consider superior offers and that any provision to the contrary is invalid and unenforceable." The Court concluded that the auction process is well-accepted as being the "appropriate mechanism to ensure that the board of a target company acts in a neutral manner to achieve the best value reasonably available to shareholders in the circumstances".
It is not clear whether a Canadian court would take the same approach to a "Don't Ask, Don't Waive" standstill as the Delaware court in Genomics. However, it does not appear likely that such clauses provide any material benefit to the auction process that would justify their use in Canada.
1 C.A. No. 7888-VCL (Nov. 27, 2012).
2 2007 ONCA 205.About BLG
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