Tuesday, February 5, 2013
Christina Sautter has just released a new paper on dont'-ask, don't-waive provisions in standstills and the fiduciary challenges they pose to directors. She's ambivalent. And right to be so:
Abstract: Recent 2011 and 2012 Delaware Court of Chancery rulings, including Chancellor Leo Strine’s December 2012 ruling in In re Ancestry.com Inc., have placed a new spotlight on the use of standstill agreements in mergers & acquisitions and specifically in change of control transactions. In particular, these cases highlight the restrictiveness of some standstills and open up discussion as to how restrictive a standstill may be without violating a target company board of directors’ Revlon duty to maximize stockholder value. Using auction theory and recent cases, this Article examines whether standstills aid in enhancing value maximization. It argues that to the extent standstills provide an entry into the due diligence and auction processes, standstills may help to enhance value.
Moreover, the promise of standstill restrictions continuing post-signing may aid in incentivizing bidders to submit their highest offers during the pre-signing sale process. But, at the same time, a question remains as to whether standstills in which a bidder agrees not to request a waiver and a target board agrees in advance not to waive a standstill, or Don’t Ask, Don’t Waive standstills (DADWS), aid in value maximization and should be upheld. This Article argues that whether a court should uphold a DADWS should turn on whether strategic or financial bidders are involved in the process as well as the process used by the target board. Namely, when strategic bidders (or private value bidders) are involved, more restrictive standstills may be legitimate as a means of further encouraging strategic bidders to submit their highest offers. Because standstills are closely tied to the release of nonpublic information, stronger, more restrictive standstills like DADWS may help to protect the target while at the same time incentivizing the strategic bidder to bid higher. Targets intending to utilize a DADWS should engage in significant pre-signing shopping of the target and provide fully informed notice to all bidders of the rules of the game, including the inability to waive the standstill post-signing. Moreover, a DADWS should be paired with a minimal fiduciary out allowing a bidder to privately request a waiver, and allowing a target to provide a waiver, should the bidder set forth compelling and clearly delineated reasons it seeks to make an over-bid. These reasons should be based on external and intervening factors such as information that has come to light since bidding closed. Finally, this Article proposes that in such circumstances a slightly increased termination fee should be applicable if the target were to ultimately terminate the existing agreement to enter into an agreement with the bidder who was previously subject to a DADWS.
Conversely, more restrictive standstills like a DADWS may not help to extract additional value from financial bidders (or common value bidders) as scholars suggest that financial bidders already abide by gentlemen’s agreements not to overbid another’s executed deal and sometimes do not even participate in an auction if other financial bidders are known to participate. This Article also advocates that in lieu of more restrictive standstill terms, the target and “winning” bidder could include a staggered termination fee pursuant to which a higher termination fee would be applicable to bidders who previously executed a standstill with the target. In adopting such a policy, dealmakers would strike a balance between keeping bidders from becoming foes to the “winning” bidder while at the same time encouraging the maximization of stockholder value.