Here’s news from Steven Haas of Hunton & Williams LLP:
On Tuesday, in In re Complete Genomics, Inc. S’holders Litig., Vice Chancellor J. Travis Laster of the Delaware Court of Chancery issued a noteworthy bench ruling in which he enjoined enforcement of a standstill agreement. The litigation involves the pending acquisition of Complete Genomics by BHI-Shenzhen. The standstill agreement at issue was with a third party and contained a “don’t ask/don’t waive” provision, meaning that the counter-party was prohibited from privately or publicly requesting a waiver of its restrictive covenants.
The court reasoned that the “don’t ask/don’t waive” provision was tantamount to a “bidder-specific no-talk clause.” In 1999, the Court of Chancery invalided a no-talk clause in Phelps Dodge Corp. v. Cyprus Amax Minerals Co. The Complete Genomics court held that no-talks and “don’t ask/don’t waive” provisions “impermissibly limit” a board’s “statutory and fiduciary obligations” to provide a current and candid recommendation to stockholders – an obligation that, according to the court, applies to both tender offers and long-form mergers. Thus, because the board had recommended the BHI-Shenzhen transaction, the “don’t ask/don’t waive” provision “represent[ed] a promise by a fiduciary to violate its fiduciary duty, or represent[ed] a promise that tends to induce such a violation.” As such, the target was enjoined from enforcing it.
Interestingly, the counter-party to the standstill agreement was not a party to the litigation, had not requested any judicial relief, and had not otherwise suggested it might submit a topping bid. Thus, this was not a situation like In re The Topps Co. S’holders Litig., 926 A.2d 58, 91 (Del. Ch. 2007), where a party to a standstill was trying to communicate with the target’s stockholders.
Nevertheless, this isn’t the first time Delaware courts have expressed concern over blanket prohibitions from seeking waivers under standstill agreements. At a settlement hearing last year in In re Rehabcare Group, Inc. S’holders Litig., C.A. No. 6197-VCL (Del. Ch. Sept. 8, 2011), Vice Chancellor Laster said “it is weird that people persist in the ‘agree not to ask’ in the standstill” and asked “[w]hen is that ever going to hold up if it’s actually litigated, particularly after Topps.” More recently, Vice Chancellor Parsons, in In re Celera Corp. S’holder Litig., C.A. No. 6304-VCP, mem. op. (Del. Ch. Mar. 23, 2012), commented on the combination of a “don’t ask, don’t waive” provision when combined with a broad no-solicitation covenant:
Plaintiffs have at least a colorable argument that these constrains 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 (emphasis added).
Because Complete Genomics focused on the interaction of the “don’t ask/don’t waive” provision and a current board recommendation, the ruling doesn’t seem to preclude such provisions as a matter of law in every situation. Nevertheless, M&A parties should consider the implications of the ruling and consider revising their form standstills to permit non-public requests for waivers or include sunset provisions that cause the restrictive covenants to terminate once the target enters into a superior proposal.