Court of Chancery Provides Guidance Regarding “Don’t Ask, Don’t Waive” Provisions of Standstill Agreements
March 11, 2013
In two recent bench rulings in the preliminary injunction context, the Court of Chancery addressed “don’t ask, don’t waive” provisions of standstill agreements in connection with a target company’s auction process. In In re Complete Genomics, Inc. Shareholder Litigation, C.A. No. 7888-VCL (Del. Ch. Nov. 27, 2012), Vice Chancellor Laster questioned the validity under Delaware law of a “don’t ask, don’t waive” provision prohibiting private requests for waiver of a standstill agreement, and enjoined enforcement of the provision in that case. Several weeks later, in In re Ancestry.com Inc. Shareholder Litigation, C.A. No. 7988-CS (Del. Ch. December 17, 2012), Chancellor Strine stated that Delaware has no per se rule against “don’t ask, don’t waive” provisions, but made clear that such provisions will be subject to close scrutiny. Going forward, “don’t ask, don’t waive” provisions will be closely scrutinized on a case-by-case basis.
“Don’t ask, don’t waive” provisions, while relatively new, have become common features of standstill agreements entered into by potential bidders for a target that has put itself up for auction. Although terms of standstill agreements can vary greatly, their purpose is to ensure an orderly auction by prohibiting potential bidders from making a public bid for the target outside of the target-controlled auction process. A “don’t ask, don’t waive” provision of a standstill agreement prohibits a potential bidder from requesting, publicly or privately, a waiver by the target of the standstill agreement so as to allow the potential bidder to make another bid for the company after the bidder was outbid during the auction process. Thus, the provision is designed to ensure an orderly auction that encourages bidders to put their best bids forward prior to the target’s execution of a definitive merger agreement.
In Complete Genomics, a potential bidder for Complete Genomics was subject to a standstill agreement that contained a “don’t ask, don’t waive” provision, which prohibited it from requesting, publicly or privately, that the target board waive the standstill agreement. In the bench ruling, Vice Chancellor Laster did not question the target’s ability to prohibit a public waiver request, but stated that the prohibition against a private waiver request resembled an impermissible “bidder-specific no-talk clause.” By agreeing to the “don’t ask, don’t waive” provision and prohibiting “incoming information from that bidder under any circumstances,” “the Genomics board impermissibly limited its ongoing statutory and fiduciary obligations to properly evaluate a competing offer, disclose material information, and make a meaningful merger recommendation to its stockholders.” The Court enjoined Complete Genomics from enforcing the “don’t ask, don’t waive” provision in the standstill.
In Ancestry.com, Chancellor Strine acknowledged that “don’t ask, don’t waive” provisions could be used “for value-maximizing purposes,” by forcing bidders to come forward with their best price during the auction, and stated that such provisions are not per se invalid under Delaware law. Referring to Complete Genomics, the Chancellor stated, “I know people have read a bench opinion that way,” but “there was a lot going on in that case” and “there is a role that bench opinions play, and I don’t think it’s to make per se rules.” The Chancellor cautioned that a “don’t ask, don’t waive” provision is “potent” and stated that the use of such a provision will be evaluated in light of the factual context, including whether the board was informed about the provision and used the provision for the purpose of enhancing stockholder value. Before the preliminary injunction hearing, the target sent letters to the unsuccessful bidders waiving the “don’t ask, don’t waive” provision, but the Court nevertheless granted a limited injunction against the stockholder vote, requiring the target to disclose to its stockholders information about the “don’t ask, don’t waive” provision and how it was used in the bidding process, which the Court considered to be “absolutely essential” information.