Delaware Law Update: Don t Ask, Don t Waive Standstills

Transcription

1 Delaware Law Update: Don t Ask, Don t Waive Standstills Subcommittee on Acquisitions of Public Companies February 1, 2013 Jennifer Fonner DiNucci Cooley LLP Patricia O. Vella Morris, Nichols, Arsht & Tunnell LLP

2 Don t Ask, Don t Waive Standstill A Don t Ask, Don t Waive Standstill prohibits the recipient of confidential information under a confidentiality agreement from privately or publicly requesting a waiver from the target board of the agreed standstill in the confidentiality agreement in order to make a topping bid. 2

3 Sample Don t Ask, Don t Waive Standstill You further agree that neither you nor any of your Affiliates (defined below) nor any other person acting at your or your Affiliates direct or indirect instruction will, directly or indirectly, alone, jointly, or in concert with any other person, for a period of eighteen (18) months after the date of this Agreement, without the prior written consent of the Company: (i) acquire, announce an intention to acquire, offer or propose to acquire, or agree to acquire, directly or indirectly, by purchase or otherwise, beneficial ownership of any of the issued and outstanding capital stock, equity securities, debt securities or indebtedness of the Company;... (ix) take any action challenging the validity or enforceability of this Section; or (x) make a public request to the Company or its stockholders to take any action in respect of the foregoing matters or request that the Company amend or waive any provision of this Section. 3

4 Works in Tandem with Provisions of Acquisition Agreement No-shop provides that target will not engage in discussions or negotiations with a third party; provided that target is permitted if third party makes an acquisition proposal the target board believes will lead to a Superior Proposal. Acquisition agreements may also prohibit the target board from waiving any standstills. 4

5 Don t Ask, Don t Waive Standstill: A Misnomer? Don t Ask : Provision in standstill where potential buyer agrees to not ask target to waive the standstill + Don t Waive : Provision in acquisition agreement where target agrees with buyer to not waive any existing standstills = Don t Ask, Don t Waive Standstill 5

6 Benefit of Don t Ask Don t Waive Standstills? In Topps, notwithstanding the Court s order enjoining the stockholder vote on the merger until, among other things, the Topps Board waived provisions in the Standstill Agreement that prohibited a third party from (1) disclosing its negotiations with Topps and (2) launching a hostile tender offer to compete with the wining bidder, the Court hypothesized that a standstill agreement might be properly used as an auction gavel: Contemplate, for example, a final round auction involving three credible, but now tired bidders, who emerged from a broad market canvass. One can easily imagine how a board striving in good faith to extract the last dollar they could for their stockholders might promise the three remaining bidders that the top bidder at 8:00 p.m. on the next Friday will get very strong deal protections including a promise from the target not to waive the Standstill as to the losers. Is a Don t Ask, Don t Waive Standstill a value maximizing tool? 6

7 The Issue Can a target board, consistent with its fiduciary duty to maximize value for stockholders, agree to a Don t Ask, Don t Waive Standstill when definitive merger agreement will limit board from shopping and waiving existing standstills? 7

8 Don t Ask, Don t Waive Standstills: Getting Attention in Delaware In re Celera Corp. S holder Litig., 2012 WL (Del. Ch. Mar. 23, 2012). In re Complete Genomics, Inc. S holder Litig., C.A. No VCL (Del. Ch. Nov. 9, 2012) (Transcript). In re Complete Genomics, Inc. S holder Litig., C.A. No VCL (Del. Ch. Nov. 27, 2012) (Transcript). In re Ancestry.com Inc. S holder Litig., C.A. No CS, Tr. at *19 (Del. Ch. Dec. 17, 2012) (Transcript) ( Now I ll get to the emerging issue of December of Who would have thunk that this would be the no-ask, no-waiver month? ). 8

9 In re Celera Corp. S holder Litig., 2012 WL (Del. Ch. Mar. 23, 2012): Facts In 2010, the board of directors of Celera retained Credit Suisse to market all or part of Celera. Five bidders signed confidentiality agreements and received diligence. Each confidentiality agreement included a standstill provision and a provision prohibiting requests for waivers of the standstill: The Counterparty... agrees... not to request [Celera] (or its directors, officers, employees or agents), directly or indirectly, to amend or waive any provision of this paragraph (including this sentence). Quest offered $10.25/share in cash, conditioned on entering into agreements with management. Quest withdrew its offer in June 2010, after being unable to agree on employment terms with Celera s CEO. Quest returned in January 2011 with a $7.75/share offer. Celera countered at $8.25 and a merger agreement was signed for $8.00/share, including a no-solicitation provision. In a proposed settlement with plaintiffs, approved by the Court, defendants agreed to reduce the termination fee, waive standstills and extend the tender offer period. To be clear, I do not find, either in the circumstances of this case or generally, that provisions expressly barring a restricted party from seeking a waiver of a standstill necessarily are unenforceable. Such a ruling should be made, if ever, only on the merits of an appropriately developed record.... 9

10 In re Celera Corp. S holder Litig.: Discussion of the Standstill Viewed in isolation, these Don t-ask-don t-waive Standstills arguably foster legitimate objectives: ensur[ing] that confidential information is not misused... [,] establishing rules of the game that promote an orderly auction, and... giv[ing] the corporation leverage to extract concessions from the parties who seek to make a bid. Similarly, the No Solicitation Provision, viewed in isolation, appears legitimate; although it prevented the Company from contacting potentially interested parties, including the previously identified parties, it also contained a fiduciary out permitting the Board to waive the Don t-ask-don t-waive Standstills if strict compliance with the Merger Agreement would violate the Board s fiduciary duty to maximize shareholder value. Taken together, however, the Don t-ask-don t-waive Standstills and No Solicitation Provision are more problematic.... 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... and the No Solicitation Provision blocks the Board from inquiring further into those parties interest. The Court suggested that the interaction of these provisions collectively operate[d] to ensure an informational vacuum in violation of Delaware law. 10

11 In re Complete Genomics, Inc. S holder Litig., C.A. No VCL (Del. Ch. Nov. 9, 2012) (Transcript): First Hearing Target s banker solicited potential acquirors and four signed agreements with a version of a Don t Ask, Don t Waive Standstill provision. The Court distinguished between public and private requests to waive standstill; was under the impression that the agreements only prohibited public bear hug requests to waive. Target agreed to a negotiated two-step merger including a provision preventing the target from waiving or modifying the standstills. Stockholder plaintiff sought a preliminary injunction to enjoin enforcement of the nowaiver provision in the merger agreement. The Court denied a preliminary injunction against the no-waiver provision but on the following condition: that the [target] board provide prompt notice to the plaintiff... if any party to a standstill agreement makes a non-public request to be released from the agreement. That would make litigation over the waiver non-hypothetical. The November 9 ruling was not in writing, in order to not risk making a kind of equitable rule of law by proclamation, because none of the parties bound by standstills was requesting relief in order to make a bid. 11

12 In re Complete Genomics, Inc. S holder Litig., C.A. No VCL (Del. Ch. Nov. 27, 2012) (Transcript): Second Hearing Following the November 9, 2012 ruling, target s counsel informed the Court that an agreement with one of the potential acquirors (Party J) contained a true Don t Ask, Don t Waive Standstill, purporting to prohibit even private requests to waive. Plaintiffs moved for reconsideration. Target s counsel argued that Party J was not a likely bidder anyway and given Topps would have a road map for coming forward if [it] were seriously interested in making an offer, particularly in light of the questionable viability or enforceability of such agreement. The Court noted that Party J would need to breach the Don t Ask, Don t Waive provision to even express interest, regardless of the provision s validity: I have to assume that this provision would at least to some degree have inhibiting effect.... [S]ome people might say, Look, I promised not to do this. I m not going to do it. Acquiror s counsel: It s obviously not my provision, but I do think the point to be made is that [the Don t Ask, Don t Waive] provision merely serves to force participation in the open and public auction process... and make their best bid as part of the process. 12

13 In re Complete Genomics, Inc. S holder Litig.: Second Hearing Enjoining Genomics from enforcing the standstill agreement with Party J. In my view, a Don t Ask, Don t Waive Standstill resembles a bidder-specific notalk clause, in violation of a board s ongoing obligation to remain informed and to provide a current, candid and accurate merger recommendation. By agreeing to this provision, 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. 13

14 In re Complete Genomics, Inc. S holder Litig.: Blue Pencil? Merger Agreement, 6.1(c) closing condition: The consummation of the Merger shall not then be restrained, enjoined or prohibited by any order, judgment, decree, injunction or ruling (whether temporary, preliminary or permanent) of a court of competent jurisdiction or any other Governmental Entity.... The Court interpreted its targeted injunction as not triggering 6.1(c) (and similarly not triggering the injunction-related termination right) because it does not enjoin the capital M Merger. Merger Agreement, 8.7 severability clause included a caveat that it would only apply so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to any party. Finally, the merger agreement has a severability provision that indicates that the parties anticipated that this type of equitable relief would be available.... Yes, in some attenuated sense, any change in a state of the world alters the risk profile that someone anticipated... but I do not believe that that s what [the] economic rights [carveout to the severability provision] is getting at. 14

15 In re Ancestry.com Inc. S holder Litig., C.A. No CS (Del. Ch. Dec. 17, 2012) (Transcript): Facts Ancestry s banker engaged in an active pre-signing market check, soliciting 17 potential strategic and financial bidders and signing confidentiality agreements containing Don t Ask, Don t Waive provisions with 12 of them. In an 8-month process, the bidders were narrowed to 3: Permira submitted the winning cash bid and signed up a merger with a no-shop provision. Ancestry did not waive the standstill provisions, or the Don t Ask provisions, of the losing bidders prior to signing the merger, and it did not assign to Permira the ability to waive standstill provisions. Stockholder plaintiffs sought an injunction of the merger, arguing, among other things, that the no-shop, coupled with the Don t Ask provision, created an informational vacuum because all of the losing bidders were prevented from indicating interest to make a topping bid, and prevented the target board from complying with its Revlon duty to maximize short-term value. Plaintiffs also sought additional disclosures regarding the terms of the standstills and the fact that, after litigation was filed, Ancestry waived the Don t Ask element. In discovery, plaintiffs determined that the Board was unaware of the effect of the Don t Ask, Don t Waive provisions. 15

16 In re Ancestry.com Inc. S holder Litig.: Ruling Don t Ask provisions may not be per se illegal, but could be found inequitable. I know of no statute, I know of nothing, that says that [Don t Ask, Don t Waive] provisions are per se invalid. And I don t think there has been a prior ruling of the court to that effect. I know people have read a bench opinion [i.e., Complete Genomics] that way. I think there was a lot going on in that case.... And the Celera case expressly went out of its way to say it s not making a per se rule. I think what Genomics and Celera both say, though, is Woah [sic], this is a pretty potent provision. And precisely because of... the equitable overlay of the law, directors need to use these things consistently with their fiduciary duties, and they better be darn careful about them. Because they re often used in cases like this which are governed by Revlon and the board s obligation to try to get the highest value. 16

17 In re Ancestry.com Inc. S holder Litig. (cont d.) I m not prepared to rule out that they can t be used for value-maximizing purposes. But the value-maximizing purpose has to be to allow the seller as a well-motivated seller to use it as a gavel, to impress upon the people that it has brought into the process the fact that the process is meaningful; that if you re creating an auction, there is really an end to the auction for those who participate. And therefore, you should bid your fullest because if you win, you have the confidence of knowing you actually won that auction at least against the other people in the process. That s what I understand the... no-ask part of the waiver provision is.... [I]t s on this idea of we ve identified the most likely potential bidders. In advance of any deal protections inhibiting them from making a bid, we re bringing them in. We think they re the most likely. We recognize that other people may come forward, and they ll be subject to different rules. But how do we, in a public company context, get these most likely bidders to actually put their full bid on the table rather than hold something in reserve? We can use this tool to gain credibility so that those final-round bidders know the winner is the winner, at least as to them. 17

18 In re Ancestry.com Inc. S holder Litig. (cont d.) Finding that defendants should disclose the effect, and eventual waiver of, the Don t Ask provisions. I think the plaintiffs have pretty obviously shown that this board was not informed about the potency of this clause. The CEO was not aware of it. It s not even clear the banker was aware of it.... The only way [a Don t Ask provision] has value as an auction gavel is if it has the meaning I ve just described. [W]hen the electorate votes if these things are going to be used... then the electorate should know that with respect to the comfort they should take in the ability to make a superior proposal, they should understand that there is a segment of the market where that segment cannot take advantage of that.... I don t want to tip [the acquiror], but I would have had you guys sign [the merger agreement] first. And then the nanosecond after you didn t sign, I would have sent a letter to all those people and said, We re waiving the sentence in your standstill that says, Blank has hereby waived. The remainder remains in force and effect. Which then makes clear to all of them that if they wish to ask for a waiver in order to make a superior proposal, that they are legally allowed to do that. 18

19 Don t Ask, Don t Waive Standstills: Considerations Consider banker and board input to determine if standstill will fall away or if parties will be bound by Don t Ask, Don t Waive provisions. Consider waiver of Don t Ask, Don t Waive provisions later in process, prior to signing definitive acquisition agreement, if circumstances warrant. But consider effect of representations in definitive acquisition agreement. Consider existence of standstills entered into outside of current sale process possibility of limiting those parties, who were not involved in current sale process, from making a topping bid. Advise board of interplay between no-shop provision in definitive acquisition agreement and Don t Ask, Don t Waive provision in confidentiality agreements. Consider extent of disclosure required of details of standstills entered into by various bidders. 19

20 Don t Ask, Don t Waive Standstills: Considerations Can a party bound by a standstill agreement bring a claim to get a Topps ruling without violating the standstill by bringing the claim? In terrorem benefit See Ventas, Inc. v. HCP, Inc., 647 F.3d 291 (6 th Cir. 2011) (finding breach of a standstill agreement by topping bidder relevant in finding topping bidder liable for $100 million in damages). 20