M & A Law Prof Blog

Editor: Brian JM Quinn
Boston College Law School

Wednesday, December 19, 2012

Strine weighs in on Don't Ask-Don't Waive

So, the relevant question is - if the world is going to end on Friday, why did I spend the past week in a cocoon grading exams?  Anyway...

On Monday, Chancellor Strine weighed in on Dont Ask-Don't Waive provisions in a bench ruling in the Ancestry.com shareholder litigation.  This issue has come before the court a couple of times in the past few months.  In November, Vice Chancellor Laster was asked to consider the provision in In re Complete Genomics.  He found it troubling.  And before that in Celera Corporation Shareholders Litigation Vice Chancellor Parsons also had an opportunity to weigh in on don't ask-don't waive.  In Celera, Parsons found them troublesome:

Here, the Don't-Ask-Don't-Waive Standstills block at least a handful of once-interested parties from informing the Board of their willingness to bid (including indirectly by asking a third party, such as an investment bank, to do so on their behalf), and the No Solicitation Provision blocks the Board from inquiring further into those parties' interest. Thus, Plaintiffs have at least a colorable argument that these constraints 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.

Bidders aren't allowed to bid and sellers aren't allowed to ask.  To the extent previous Chancery Court rulings have ruled that boards violate their duties to the corporation by engaging in willful blindness, Don't-Ask Don't Waive provisions in standstills do raise legitimate issues.

Chancellor Strine recognized these potential problems on Monday when he considered the same provision in the Ancestry.com Shareholder Litigation.  He noted a couple of important things. First, these provisions are not per se illegal.  There are uses of don't ask-don't waive that are consistent with a director's fiduciary duties under Revlon.  For example, in designing an auction process, directors might want to design credible rules that will generate incentives for bidders to put their best bids on the table right away and thereby avoid potentially lengthy serial negotiations down the road.  The don't ask-don't waive provision signals to bidders (credibly, if it's enforceable) that they get only one shot at the apple.

On the other hand, such provisions as Strine noted, can be used by boards in a way that is inconsistent with their fiduciary duties. If directors lean on such provisions to close their eyes to a materially higher subsequent bid, they may be violating their duties to remained informed in the manner that Vice Chancellor Parsons was worried about in Celera.  

In this case, the board had disclosed to shareholders - who are supposed to vote on December 27 - that the board could terminate the transaction in the event it received a superior proposal.  The board did not disclose to shareholders that the most likely topping bidders were all boxed out by don't ask-don't waive provisions in the standstill agreement.  Strine ordered additional disclosures prior to the planned shareholder meeting, sidestepping for the timebeing the question of the don't ask-don't waive provision.  

I understand what he's trying to accomplish.  On the one hand, shareholders need to know that there isn't effective competition for the seller because of the provision that leaves out the most likely bidders.  On the other hand, if shareholders miss the Dec 27 window, then "fiscal cliff" implications may leave shareholders holding a much bigger tax bill.  Damned if you do, damned if you don't so to speak. So, he let it proceed and left it to shareholders with all the information in their hands, to decide whether or not to accept the offer on the table. 



Delaware, Leveraged Buy-Outs, Lock-ups, Transaction Defenses | Permalink

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