Recent Delaware Court of Chancery rulings raise issues regarding the use of “don’t ask, don’t waive” (DADW) provisions in standstill agreements. In a November 2012 ruling on a motion to enjoin the merger of Complete Genomics, Inc., Vice Chancellor Laster found that a DADW standstill agreement impermissibly limited the board’s statutory and fiduciary obligations.1
A few weeks later, a similar issue came before Chancellor Strine in In re Ancestry.com Shareholder Litigation.2 Chancellor Strine noted that there was no statute or court ruling making DADW provisions per se invalid and he acknowledged their potentially positive role in an auction process, but he warned that directors need to use DADW provisions “consistently with their fiduciary duties, and they better be darn careful about them.”3
On May 21, 2013, Vice Chancellor Glasscock handed down another ruling in Koehler v. Netspend Holdings Inc.4 In this case, Chancellor Glasscock, while declining to enter a preliminary injunction due to the lack of other potential bidders, sharply criticized the seller’s use of a DADW provision.
A standstill agreement between a potential buyer and a target company, which is usually executed as part of a confidentiality agreement, prohibits the buyer from “going hostile” and attempting to acquire the target by means other than a negotiated merger agreement or purchase agreement. A DADW standstill provision generally prohibits a bidder from requesting a waiver of the standstill agreement by the target’s board of directors in order to allow the bidder to make a topping bid after the target has entered into a merger agreement with a different party.
The thinking behind a DADW standstill agreement is to encourage bidders participating in an auction process to put forward their best bid, rather than strategically submitting a lowball offer and then, if the initial lowball offer is unsuccessful, making a topping offer after the target and the winning bidder have signed an agreement. Upon signing a merger agreement, a board’s Revlon duty to maximize the sale price of the company attaches, such that the board would likely be obligated by its fiduciary duty to grant an unsuccessful bidder’s request for a waiver of its standstill in order to consider a potentially superior offer. The presence of a DADW provision helps foreclose this strategic behavior by preventing bidders from requesting such a waiver.
In re Complete Genomics, Inc. Shareholder Litigation
Complete Genomics, Inc. (Complete Genomics), a company engaged in the research and development of a gene‐sequencing technology, announced in June of 2012 that it was exploring strategic alternatives. Complete Genomics examined a number of possible acquirers, eventually executing confidentiality agreements with nine (four of which contained a standstill provision, including one that contained a DADW provision). The winning bidder was BGI‐Shenzhen, a Chinese genome sequencing company. BGIShenzhen signed a merger agreement with Complete Genomics at an 18% premium over the closing price of Complete Genomics stock the day before the agreement with BGI‐Shenzhen was announced. The merger agreement contained a number of deal protections, including, in the event Complete Genomics exercised its limited termination right under the merger agreement, a breakup fee of roughly 4.8% of the equity transaction value of the transaction to be paid to BGI‐Shenzhen by Complete Genomics.
In September 2012, a number of Complete Genomics stockholders filed suit in Delaware Chancery Court to enjoin various provisions of the merger agreement and the enforcement of the standstill agreements, including the standstill agreement containing the DADW provision.
In November 2012, after Complete Genomics disclosed that an unsolicited topping bid offering a 5% premium over the price of the BGI‐Shenzhen agreement had emerged, Vice Chancellor Laster declined to enjoin the merger agreement, but issued a preliminary injunction against enforcement of the DADW standstill agreement.
Vice Chancellor Laster reasoned that the DADW provision interfered with the target board’s “ongoing statutory and fiduciary obligation” to be informed and to make or update its recommendation on the merger. Vice Chancellor Laster compared the DADW provision to the “no‐talk” clause at issue in Phelps Dodge v. Cyprus Amax.5 In Phelps Dodge, the target’s board was held to have committed the legal equivalent of “willful blindness” and breached its fiduciary duty by agreeing to a provision that “not only prevents a party from soliciting superior offers or providing information to third parties, but also from talking to or holding discussions with third parties” because such a provision violated the board’s “duty to take care to be informed of all material information reasonably available.”6 Vice Chancellor Laster held that the “Don’t Ask, Don’t Waive Standstill is impermissible because it has the same disabling effect as the no‐talk clause. … By agreeing to this provision, [the Complete 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.”7
In re Ancestry.com Shareholder Litigation
The broad language in the Complete Genomics decision, drawing on a long line of cases hostile to deal protection devices that impermissibly cut off the flow of information to the target’s board might have been read to suggest a rule that all DADW standstill provisions are per se invalid. However, Chancellor Strine rejected any such per se rule in In re Ancestry.com Shareholder Litigation.
In May of 2012, the board of Ancestry.com, Inc. (Ancestry) initiated a sale process. By June, 12 suitors had executed confidentiality agreements, all of which included DADW provisions. Three bidders advanced to a second round of bidding, two of whom withdrew, leaving Permira Advisers, LLC (Permira) as the winning bidder (Permira’s bid for Ancestry was supplemented by Ancestry’s largest existing stockholder and Ancestry senior management rolling over some of their equity into the surviving company). The final merger agreement was executed in October.
Following announcement of the merger, several public shareholders of Ancestry filed suit in Delaware alleging breach of the Ancestry directors’ Revlon duties (to maximize the sale price of the company) and seeking to enjoin the shareholder vote on the merger. Among other contentions, the plaintiffs (relying on Vice Chancellor Laster’s decision in In Re Complete Genomics, described above) argued that the DADW provisions were preclusive as they prevented the board from being fully informed of possible competing offers.
Although Chancellor Strine enjoined the shareholder vote in Ancestry, he acknowledged that DADW provisions could have a value‐maximizing purpose in theory. Such provisions, properly used, are: “a gavel, to impress upon the people that [the target board] 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.”9 The key lies in when they are properly used. Chancellor Strine emphasized that DADW provisions are strong medicine that target boards must be careful and judicious about employing. Critically, Ancestry’s eventual waiver of the DADW mooted the question of whether additional injunctive relief would be required because the “board was not informed about the potency of this clause” and likely had violated its duty of care.10
Finally, Chancellor Strine also found that the proxy statement sent to Ancestry shareholders “created the false impression that any of the [other bidders] who signed the [DADW] could have made a superior proposal.” This was a critical issue, which caused the court to enjoin the shareholder vote until Ancestry disclosed more information to its shareholders about the DADW provisions ‐ including the effect of those provisions and when they were waived.
Koehler v. Netspend
NetSpend Holdings, Inc. (NetSpend), a company that specializes in providing “reloadable prepaid debit cards and financial services to consumers who do not have traditional bank accounts or who rely on alternative financial services,”11 entered into discussions regarding a strategic transaction with Total System Services, Inc. (TSYS) in late September or early October of 2012. Such discussions were commenced even though “no decision to seek a sale of [NetSpend] had been made.”12 Simultaneously, NetSpend was attempting to find a single party to buy out one of its major stockholders, JLL Partners, Inc. and its affiliates (collectively, JLL), which held roughly a 20% stake in NetSpend. NetSpend was concerned about JLL flooding the market with these shares, which would depress NetSpend’s stock price.
In November 2012, NetSpend entered into preliminary discussions with two private equity firms regarding the purchase of JLL’s interest in NetSpend. Each of these firms executed a confidentiality agreement with NetSpend, each of which contained a standstill agreement prohibiting each private equity firm from “going hostile” for a one‐ or two‐year period with a DADW provision prohibiting the private equity firms from requesting a waiver or amendment of the standstill agreement.
In late November, one of the private equity firms indicated that it was interested in acquiring JLL’s 20% stake in NetSpend at $12 per share. Shortly thereafter, on December 3, TSYS indicated its interest in conducting an all‐cash tender offer for 100% of NetSpend’s shares for $14.50 per share (the indication was nonbinding and subject to various conditions).13 In response to the higher offer on the table, JLL indicated that it was no longer interested in selling its shares to the private equity firms.
The NetSpend board met on December 7, and discussed the TSYS proposal with its financial and legal advisors. TSYS had requested exclusivity, which the NetSpend board declined to grant; interestingly, it also decided not to contact other potential acquirors “because of the risk of leaks and rumors” and because “NetSpend was ‘not for sale’ at that point”.14 Within three weeks, there was a draft merger agreement.
Later in December, “NetSpend appears to have begun considering whether it had legal obligations to seek other bidders for the Company”.15 To that end, on December 27 it provided notice (pursuant to a commercial contract requiring such notice if NetSpend was considering selling itself) to a party with whom it had previously considered a strategic business combination that it was considering “a change of control transaction on an expedited basis”. 16 NetSpend’s financial advisor believed that this party could be a credible purchaser. However, the other party never indicated its interest in a transaction. NetSpend “took [this] silence as evidence of the marketplace’s lack of interest in NetSpend, in general.”17
After some negotiation (including NetSpend’s refusal to solicit other bidders because it was not necessarily “for sale”18), TSYS and NetSpend entered into a merger agreement with a per share price of $16.00 cash, which agreement contained, among other deal protections, a no‐shop clause and a prohibition on NetSpend’s ability to waive any standstill agreement to which it is a party without TSYS’s consent (including the two DADW standstill agreements with the two private equity funds). NetSpend had also requested a “go‐shop”19 provision as part of the merger agreement, but TSYS rejected this.
Plaintiff, a NetSpend shareholder, sued to enjoin the transaction, arguing, inter alia, that the presence of the DADW clause made the sale process unreasonable.
Vice Chancellor Glasscock declined to enjoin the transaction, based on the balance of the equities (significantly, noting that there is no evidence of a topping bid). However, citing Vice Chancellor Laster’s decision in Complete Genomics (discussed above), Vice Chancellor Glasscock noted that “[i]n agreeing to continue the vitality of the DADW provisions of the Standstill Agreements [by incorporating them into the Merger Agreement with TSYS and making their waiver subject to the consent of TSYS], the [NetSpend] Board blinded itself to any potential interest from [the private equity funds]. … Most problematically, it does not appear that the Board even considered whether the standstill agreements should remain in place once the Board began negotiating with TSYS, which would have been the ideal time to waive the DADW clauses. … The record suggests that the Board did not consider, or did not understand, the import of the DADW clauses and of their importation into the Merger Agreement.”20 While NetSpend argued that the presence of the DADW clauses was irrelevant because neither of the private equity funds was interested in bidding for NetSpend, Vice Chancellor Glasscock wrote that “NetSpend cannot have known with certainty”21 that they were 100% uninterested without waiving the DADW, and concludes that “it seemed appropriate to [him], at oral argument, that the DADW clauses be enjoined.”22
Critically, shortly after oral argument, NetSpend (with the consent of TSYS) waived the DADW clauses and notified the private equity funds of such waiver. Vice Chancellor Glasscock concluded that the “withdrawal of the DADW clauses after oral argument does not affect my analysis of the reasonableness of the process, although it does inform my decision on relief.”23 Ultimately, he concludes that, while the sales process was unreasonable and the board’s actions were problematic, the plaintiffs did not satisfy the “irreparable harm” and “balance of the equities” standard for the “extraordinary remedy” of a preliminary injunction.
While Delaware is considered by many to be the forum of choice for litigation of large corporate cases, other states have recently considered the legitimacy of DADW provisions. On March 15, 2013, a state judge in Washington refused to enjoin a shareholder vote on Honeywell International Inc.’s (Honeywell) acquisition of Intermec Inc. (Intermec).
In late 2012, Intermec entered into confidentiality agreements, containing DADW standstill provisions, with 11 parties. Eventually, the field was narrowed down to Honeywell and one other bidder, both of whom submitted offers of $10 per share.24 On December 6, 2012, the other party requested additional time for due diligence. The Intermec board declined, and four days later announced a deal with Honeywell.
The plaintiffs, Intermec shareholders, filed suit on December 18, alleging that the deal undervalued Intermec stock, and that the shareholder vote should be enjoined. The plaintiffs argued, inter alia, that the DADW provisions were grounds to enjoin the vote because they foreclosed the possibility of topping offers.
Judge Kurtz, however, ruled that it “seems reasonable here for the Intermec board to have said ‘enough’ ... [and] to want to strike while the iron was hot.” Echoing the rationale articulated by Chancellor Strine that DADW provisions have their place in obtaining the best sale price, he continued “[t]here’s always the risk of overplaying one’s hand and then have a good bidder walk away and a good deal evaporate.”
Both the Ancestry.com and the Complete Genomics decisions were bench rulings. As Chancellor Strine noted in Ancestry.com, bench rulings “are limited rulings” and “time pressured” rulings that therefore “shouldn’t make broad law.”25 The Netspend decision was a ruling on a preliminary injunction – “an ‘extraordinary remedy’ that will only enter if the plaintiff demonstrates ‘that [an injunction] is urgently necessary, that it will result in comparatively less harm to the adverse party, and that in the end, it is unlikely to be shown to have been issued improvidently.’”26 The Intermec‐Honeywell decision is a Washington state decision and, as such, is not binding precedent in Delaware.
Nevertheless, these decisions sent a clear message that care should be taken when employing DADW provisions. In particular, counsel will want to ensure that the board of directors is fully informed regarding the power of a DADW provision and the potential consequences of its use.