DealLawyers.com Blog

January 14, 2013

More from Delaware on “Don’t Ask/Don’t Waive Standstill Agreements”

Here’s a follow-up from Steven Haas of Hunton & Williams on a new development in standstill agreements (and there are memos posted on this case in our “Standstill Agreements” Practice Area):

Following up on Vice Chancellor Laster’s November ruling in Complete Genomics, Chancellor Strine has now weighed in on the legality of “don’t ask/don’t waive” standstill provisions. In In re Ancestry.com, C.A. No. 7988-CC (Del. Ch. Dec. 17, 2012), Chancellor Strine rejected the notion that “don’t ask/don’t waive” provisions are per se unenforceable under Delaware law. He went on to say that such provisions could be used effectively as a “gavel” in running a sale process. In particular, he stated that a “well-motivated seller” could use a “don’t ask/don’t waive” provision to “impress” upon bidders that the sale process is “meaningful,” that “there is really an end to the auction for those who participate,” and “therefore, you should bid your fullest because if you win, you have the confidence of knowing you actually won that auction at least against the other people in the process.”

Nevertheless, based on the preliminary record before the court, Chancellor Strine indicated that the target company’s board of directors may have breached its duty of care. Among other things, the target company’s directors, senior managers, and investment banker may not have understood the “potency” of the “don’t ask/don’t waive” provisions. In addition, Chancellor Strine indicated that, in the circumstances of the case, the target’s board of directors might have waived the standstill provisions prior to entering into a definitive merger agreement because the buyer had not requested an assignment of the target company’s rights to enforce them. Chancellor Strine also ruled that the plaintiffs had a reasonable probability of success in proving a disclosure violation because the company had not previously disclosed the existence of the “don’t ask/don’t waive” provisions to its stockholders. “[T]he electorate,” he wrote, “should know that with respect to the comfort they should take in the ability to [receive] a superior proposal, they should understand that there is a segment of the market … that… cannot take advantage of that.”

It is important to recognize that, like Complete Genomics, Ancestry.com is a bench ruling that lacks the detail and analysis set forth in memorandum opinions. Thus, further word on “don’t ask/don’t waive” provisions will have to come in the future. Nevertheless, target companies should now be prepared to disclose the existence of “don’t ask/don’t waive” provisions. Targets should also expect increased scrutiny in litigation as to how “don’t ask/don’t waive” provisions were used to induce bids and maximize stockholder value. From a process perspective, furthermore, directors will need to understand how “don’t ask/don’t waive” provisions work.