On November 27, 2012, in a significant decision for those engaged in competitive acquisitions, the Delaware Court of Chancery enjoined a standstill provision in a confidentiality agreement that would prohibit a potential bidder from privately asking a public company target, which had signed a merger agreement with another bidder, to waive provisions of a confidentiality agreement that limited the potential bidder’s ability to communicate with the target.1 The court ruled that the so-called “Don’t Ask/Don’t Waive” provision “impermissibly limited [the target board’s] ongoing statutory and fiduciary obligations to properly evaluate a competing offer, disclose material information, and make a meaningful merger recommendation to its stockholders.”2 The court reasoned that such provisions could preclude a bidder from making a topping bid and therefore could prevent the target board from meeting its duty under Revlon to get the best offer reasonably available and from having all information available and necessary for effective shareholder communications regarding the deal it had signed. The court noted that limitations on public communications may still be permissible.
The facts of In re Complete Genomics, Inc. Shareholder Litigation are straightforward and typical of competitive auction situations. Faced with dwindling cash, the Genomics board put the company up for sale and received nine bids. The confidentiality agreement with one bidder, which did not win the auction, included a “Don’t Ask/Don’t Waive” provision that (i) limited the bidder’s right to communicate with the Genomics board, even if only to raise its offer, and (ii) barred the bidder from requesting a waiver of this provision. The Genomics board ultimately agreed to merge with BGI-Schenzhen (“BGI”), which agreed to launch a first-step tender offer for Genomics’ shares. The BGI merger agreement barred Genomics from waiving the provisions of any standstill agreement then in effect with any other bidder. The court emphasized that the “Don’t Ask/Don’t Waive” provision could prevent the board from receiving information from a potential competing bidder that could be relevant, and perhaps critical, to the communication regarding the BGI tender offer that SEC Rule 14D-9 required Genomics to make to its shareholders within ten business days of its commencement.
The court ruled that its views would apply equally to one-step mergers not involving a tender offer because in both cases the board’s duty to remain informed and communicate meaningfully with its shareholders must not be fettered by contractual restrictions.
Overall, the court’s decision, if widely followed, will probably spell the end of Don’t Ask/Don’t Waive provisions at least as to private communications between prospective bidders and targets. This in turn may alter the “game theory” of auctions for public companies. In particular, it may reduce the ability of sellers to design rules for competitive auctions that encourage bidders to put their best bids on the table early in the process. The Genomics case emphasizes that under Delaware law the board’s duty to be informed and communicate effectively with its shareholders outweighs its right to design its own auction procedures.