Delaware Chancery Court indicates that the combination of No Shop Provisions and Don't-Ask-Don't-Waive Standstills may constitute a breach of fiduciary duties

In connection with the approval of a settlement of plaintiffs' breach of fiduciary duty claims against the board of directors (the "Board") of Celera Corp. ("Celera"), arising from the acquisition of Celera by Quest Diagnostics ("Quest"), the Delaware Chancery Court recently analyzed whether the Board breached its fiduciary duties to stockholders by agreeing to "Don't-Ask-Don't-Waive Standstills" as well as a "Non-Solicitation Provision" in a merger agreement.   Here, the Board solicited bids for a purchase of Celera from various potential bidders and, in each instance, required each such potential bidder to enter into confidentiality agreements that expressly prohibited them from making offers for Celera shares without the express invitation from the Board or without the Board waiving this restriction (the "Don't-Ask-Don't-Waive Standstills").  The Board subsequently entered into a merger agreement with Quest, which required the Board to terminate all discussions with all other potential bidders and prohibited the Board from soliciting competing offers (the "Non-Solicitation Provision"), except when required to do so by their fiduciary duties. 

In dicta, the Court stated that while individually Don't-Ask-Don't-Waive Standstills and Non-Solicitation Provisions may serve legitimate purposes, the combination of the Don't-Ask-Don't-Waive Standstills and the Non-Solicitation Provision could be problematic.  Don't-Ask-Don't-Waive Standstills prevent potential bidders from informing the Board of their willingness to bid on a target company and the Non-Solicitation Provision prevents the Board from asking potential bidders whether they are interested in placing bids.  Taken together, these restrictions could increase the risk that the Board may lack relevant information, including information necessary to consider whether to comply with the merger agreement or pursue a competing bid pursuant to its fiduciary duties.  Given the Court's discussion, a board of directors should consider carefully entering into a combination of Don't-Ask-Don't-Waive Standstills and Non-Solicitation Provisions that may effectively keep the board willfully in the dark with respect to competing bids and therefore cause a breach of its fiduciary duties to stockholders.

In re Celera Corporation Shareholder Litigation., C.A. No. 6304-VCP (Del. Ch. March 23, 2012).