M & A Law Prof Blog

Editor: Brian JM Quinn
Boston College Law School

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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. 

-bjmq

December 19, 2012 in Delaware, Leveraged Buy-Outs, Lock-ups, Transaction Defenses | Permalink | Comments (0) | TrackBack (0)

Tuesday, December 4, 2012

Gibson Dunn on "Don't Ask, Don't Waive" Standstill Provision

The typical M&A confidentiality agreement contains a standstill provision, which among other things, prohibits the potential bidder from publicly or privately requesting that the target company waive the terms of the standstill.  The provision is designed to reduce the possibility that the bidder will be able to put the target  "in play" and bypass the terms and spirit of the standstill agreement.

In this client alert, Gibson Dunn discusses a November 27, 2012 bench ruling issued by Vice Chancellor Travis Laster of the Delaware Chancery Court that enjoined the enforcement of a "Don't Ask, Don't Waive" provision in a standstill agreement, at least to the extent the clause prohibits private waiver requests.

As a result, Gibson advises that

until further guidance is given by the Delaware courts, targets entering into a merger agreement should consider the potential effects of any pre-existing Don't Ask, Don't Waive standstill agreements with other parties .  . .. We note in particular that the ruling does not appear to invalidate per se all Don't Ask, Don't Waive standstills, as the opinion only questions their enforceability where a sale agreement with another party has been announced and the target has an obligation to consider competing offers. In addition, the Court expressly acknowledged the permissibility of a provision restricting a bidder from making a public request of a standstill waiver. Therefore, we expect that target boards will continue to seek some variation of Don't Ask, Don't Waive standstills.

MAW

December 4, 2012 in Cases, Contracts, Deals, Leveraged Buy-Outs, Litigation, Lock-ups, Merger Agreements, Mergers, State Takeover Laws, Takeover Defenses, Takeovers, Transactions | Permalink | Comments (0) | TrackBack (0)

Tuesday, May 3, 2011

K&E Survey of Recent Developments in Public M&A Deal Terms

K&E just published this "survey" of recent developments in public M&A deal terms.  Unlike the broad, quantitative surveys put out by oganizations like the ABA or PLC, this one seems more impressionistic, so it may be biased by the universe of deals the authors were exposed to.  Still, a worthwhile read.

MAW

May 3, 2011 in Deals, Lock-ups, Merger Agreements, Mergers, Private Equity, Tender Offer, Transactions | Permalink | Comments (0) | TrackBack (0)

Monday, June 25, 2007

In Re Topps Company Shareholders Litigation/In re Lear Corporation Shareholders Litigation

On June 14, 2007, Vice Chancellor Strine issued an opinion in In re Topps Shareholders Litigation, 2007 WL 1732586 (Del.Ch. June 14, 2007).  Vice Chancellor Strine, a well-respected member of the Delaware Chancery Court, preliminarily enjoined the shareholders meeting of The Topps Company to vote on Topps´s agreement to be acquired by a group consisting of The Tornante Company LLC and Madison Dearborn Partners, LLC for $9.75 per share in cash.  The Tornante Company is headed by former Disney CEO Michael Eisner.  Topps is also subject to a competing proposal to be acquired by The Upper Deck Company for $416 million offer or $10.75 per share. (For a history of this transaction so far, see my prior posts The Battle for Topps and Trading Baseball Card Companies).

In his opinion, Vice Chancellor Strine issued a preliminary injunction against the holding of a vote on the Eisner acquisition agreement until such time as:

(1) the Topps board discloses several material facts not contained in the corporation's “Proxy Statement,” including facts regarding Eisner's assurances that he would retain existing management after the Merger; and (2) Upper Deck is released from the standstill for purposes of: (a) publicly commenting on its negotiations with Topps; and (b) making a non-coercive tender offer on conditions as favorable or more favorable than those it has offered to the Topps board.

The opinion is 67 pages and worth a full read for the nuggets it contains, but I want to point out two important parts: 
         
Go-Shops.  In the opinion, Vice Chancellor Strine broadly endorses the use of ¨go-shops¨ as a way to meet Revlon´s requirement that in a sale the board must take reasonable measures to ensure that the stockholders receive the highest value reasonably attainable.  Here, the Eisner merger agreement had contained a 40-day "go-shop" period with a lower 3.0% termination fee during the "go-shop" period and matching rights for the Eisner group.  Thereafter, the fee rose to 4.6%. Vice Chancellor Strine stated:

Most important, I do not believe that the substantive terms of the Merger Agreement suggest an unreasonable approach to value maximization. . . . Critical, of course, to my determination is that the Topps board recognized that they had not done a pre-signing market check. Therefore, they secured a 40-day Go Shop Period and the right to continue discussions with any bidder arising during that time who was deemed by the board likely to make a Superior Proposal. Furthermore, the advantage given to Eisner over later arriving bidders is difficult to see as unreasonable. He was given a match right, a useful deal protection for him, but one that has frequently been overcome in other real-world situations.  Likewise, the termination fee and expense reimbursement he was to receive if Topps terminated and accepted another deal-an eventuality more likely to occur after the Go Shop Period expired than during it-was around 4.3% of the total deal value. Although this is a bit high in percentage terms, it includes Eisner's expenses, and therefore can be explained by the relatively small size of the deal. . . . Although a target might desire a longer Go Shop Period or a lower break fee, the deal protections the Topps board agreed to in the Merger Agreement seem to have left reasonable room for an effective post-signing market check. For 40 days, the Topps board could shop like Paris Hilton. Even after the Go Shop Period expired, the Topps board could entertain an unsolicited bid, and, subject to Eisner's match right, accept a Superior Proposal. The 40-day Go Shop Period and this later right work together . . . .In finding that this approach to value maximization was likely a reasonable one, I also take into account the potential utility of having the proverbial bird in hand.

The important point here is that Strine is merely endorsing the use of a ¨go-shop¨as one way to satisfy Revlon duties.  But it does not appear that he is going so far as to suggest that this is a requirement that a "go-shop" be included any time there has not been a full auction in advance of signing a merger agreement when Revlon duties apply.  However, as ¨go-shops¨become increasingly common, it may be likely that at some point the Delaware courts more firmly embrace their use under Revlon (though this is my own conjecture).

Standstills.  Vice Chancellor Strine found that the Topps Board had violated its Revlon duties by favoring the Eisner bid by, among other things, continuing to require Upper Deck to honor its standstill agreement.  In making this ruling, Strine emphasized that it is important for a board which has not previously engaged in a shopping process to reserve the right to waive a standstill if its fiduciary duties require.  However, Strine also noted that standstills provide "leverage to extract concessions from the parties who seek to make a bid" and in a footnote contemplated that in certain circumstances such as a full auction it may be appropriate for a target to agree not to waive standstills for the losing bidders.  Strine then held that the Topps board´s refusal to waive Upper Deck´s standstill likely was a breach of its Revlon duties since the:

refusal not only keeps the stockholders from having the chance to accept a potentially more attractive higher priced deal, it keeps them in the dark about Upper Deck's version of important events, and it keeps Upper Deck from obtaining antitrust clearance, because it cannot begin the process without either a signed merger agreement or a formal tender offer.

The opinion is also notable as another instance where a Delaware court found the proxy disclosure concerning a financial advisor´s fairness opinion to be deficient.  I´ll post more on this point later in the week. 

The Topps opinion was followed the next day by In re Lear Corporation Shareholders Litigation, 2007 WL 1732588  (Del. Ch., June 15, 2007).  Here, the Chancery Court also granted preliminary injunctive relief because the Lear ¨proxy statement [did] not disclose that shortly before Icahn expressed an interest in making a going private offer, the CEO had asked the Lear board to change his employment arrangements to allow him to cash in his retirement benefits while continuing to run the company.¨ However, the Court refused to grant injunctive relief on the plaintiffs´other claims stating that ¨the Lear Special Committee made an infelicitous decision to permit the CEO to negotiate the merger terms outside the presence of Special Committee supervision, [but] there is no evidence that that decision adversely affected the overall reasonableness of the board's efforts to secure the highest possible value.¨

June 25, 2007 in Going-Privates, Lock-ups, Takeovers | Permalink | Comments (0) | TrackBack (0)

Wednesday, April 25, 2007

ABN AMRO's Fast Shuffle

ABN Amro yesterday filed with the SEC the agreement with respect to Bank of America's $21 billion dollar purchase of ABN Amro's U.S. subsidiary, LaSalle Bank.

Per the terms of the agreement (and Bank of America counsel Wachtell's fine negotiating skills), the LaSalle Bank contract contains a "calendar" 14 day "go shop" clause which continues until 11:59 PM New York time on May 6th, 2007. Under that clause an alternative bidder has 14 days to execute a definitive sales agreement on superior terms for cash and not subject to a financing condition. This is followed by a 5 business day right for Bank of America to match the new bidder's superior proposal. There is a $200 million termination fee to be paid by ABN Amro if Bank of America does not match.

This short time fuse almost certainly forestalls other bids for LaSalle Bank.  And, as I speculated it would do on Monday, through an almost certain sale of LaSalle Bank ABN Amro has implemented a big roadblock to the $103.75 billion cash and RBS shares bid for ABN Amro announced today by the RBS consortium (Fortis, RBS and Santander).  This competing bid is conditioned on ABN Amro having taken such steps as may be required to ensure that LaSalle Bank remains within the ABN Amro group.  This is all just wrong.  Nonetheless, under Netherlands law no ABN Amro shareholder vote here is required for the LaSalle Bank sale because it consitutes less than 30% of ABN Amro's assets, and Netherlands law does not otherwise prohibit a "crown-jewel" lock-up of this nature.  For those who are wondering, it is questionable whether Delaware in a similar situation would permit these machinations. 

April 25, 2007 in Hostiles, Lock-ups, Takeovers, Transaction Defenses | Permalink | Comments (0) | TrackBack (0)