January 7, 2015
Sell-Side Auctions: Be Careful with Playing Favorites
Here’s news culled from this memo by O’Melveny & Myers’ Paul Scrivano & Sarah Young:
It is not uncommon in sell-side auctions for the target board to make decisions on whether a particular bidder is capable of reaching the “finish line”, many times due to the perceived willingness or capability of the particular bidder to meet a certain price point or to agree to certain deal terms. This sometimes manifests itself in the target board making the rational decision to focus its energy on one bidder who is likely or “favored” to win, to the exclusion of one or more other bidders.
The recent Delaware Court of Chancery decision in In re Novell, Inc. Shareholder Litigation highlights the potential risks to a target board of a claim of breach of the duty of care, and possibly even breach of the duty of loyalty, for actions taken by a target board in Revlon-mode that go too far in favoring one bidder over another in a sell-side process.
In Novell, the court identified a number of target board actions as troubling. These included refusing to waive for the loser a “no partnering with other bidders” provision (although waiving it for other bidders), granting the winner exclusivity with multiple extensions, having discussions with the winner (but not the loser) as to the price necessary to win and inbound interest for target patents, and failing to respond to the loser’s last bid to see if it would increase its price.