On November 27, 2012, in In re Complete Genomics, Inc. Shareholder Litigation,1 the Delaware Chancery Court (Laster, V.C.) enjoined the enforcement of a so-called “Don’t Ask, Don't Waive” standstill provision. These types of provisions are common in standstill agreements and prohibit the potential bidder who is a party to the agreement from, publicly or privately, requesting a waiver of the standstill.
In June 2012, Complete Genomics, Inc. (“Genomics”) announced publicly that it was pursuing strategic alternatives. Genomics contacted forty-two parties, of which nine parties entered into confidentiality agreements with Genomics, four of which contained standstill provisions.
On September 15, 2012, Genomics agreed to be acquired by BGI-Shenzhen (BGI). The transaction was structured as a tender offer followed by a second-step merger at a price representing a 54% premium over the closing price of Genomics’ shares the day before its public announcement to pursue strategic alternatives. The merger agreement contained a number of deal protection mechanisms, including a no-shop provision, a 4.8% breakup fee, and no ability of Genomics to terminate the merger agreement to accept an alternative proposal (but Genomics did retain the ability to terminate the merger agreement following the failure of the tender offer to be completed by the outside date).
Several Genomics shareholders filed a motion for a preliminary injunction on September 21, 2012, seeking to enjoin portions of the merger agreement. On November 9, 2012, the Court issued its first ruling, addressing disclosure and deal protection claims.2 On November 13, 2012, Genomics disclosed that an unsolicited topping bid had emerged at a 5% premium to the price in the BGI transaction. On November 27, 2012, the Court issued another ruling after learning that one of the confidentiality agreements entered into by Genomics contained a “Don’t Ask, Don't Waive” standstill provision.
Standstills and the “Don’t Ask, Don’t Waive” provision
Visit us at www.hoganlovells.com In connection with the potential sale of a company, target companies often request that potential bidders enter into confidentiality agreements with standstill provisions in order to, among other things, prevent unsolicited acquisition attempts and to encourage bidders to put their best offer forward prior to the target company entering into a definitive agreement with respect to a transaction. Such standstill agreements often contain provisions prohibiting the potential bidder from publicly or privately requesting a waiver of the standstill agreement, as allowing the ability to make such a request can circumvent the intent behind the standstill agreement itself and increase the likelihood that the winning party in a sales process will ultimately serve as a stalking horse for other bidders.
The Court expressed concern that these types of “Don’t Ask, Don't Waive” standstill provisions that prohibit private waiver requests compromise the ability of a target company board to stay informed. The Court compared the provision to a “bidder-specific no-talk clause” in merger agreements and, quoting Phelps Dodge Corp. v. Cyprus Amax Minerals Co.,3 noted that a no-talk provision “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.” These concerns are not dissimilar from those previously expressed by Vice Chancellor Laster in In re RehabCare Group, Inc. Shareholders Litigation4 over whether a “Don’t Ask, Don't Waive” standstill would hold up if litigated, and those expressed by Vice Chancellor Parsons in In re Celera Corp. Shareholder Litigation5 over the combination of this type of provision and a non-solicitation provision in a merger agreement resulting in an increased risk that a board lacks adequate information. Consistent with these concerns, in Complete Genomics, the Court found that:
“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.”
As a result, the Court found that the plaintiffs had met their burden of establishing a reasonable probability of success on the merits of their claim and enjoined the enforcement of the standstill provision. In addressing irreparable harm, notwithstanding the lack of any indication as to whether the third party subject to the “Don’t Ask, Don’t Waive” provision intended to make a topping bid, the Court noted that, in light of the provision, one would never be able to know whether the third party intended to make a topping bid unless the third party “decides to cavalierly breach its own promise” not to do so.
The Delaware Chancery Court decision does not question the validity of provisions that merely limit a potential bidder’s ability to “publicly” request a waiver of a standstill provision. Moreover, the Court did not specifically address whether a standstill agreement prohibiting private waiver requests would be permissible if coupled with a “fall-away” provision pursuant to which the standstill agreement would terminate upon the target company entering into an acquisition agreement. Furthermore, it is not clear that the Court would have struck the provision in question if the target company had not yet entered into a definitive acquisition agreement. Nonetheless, until further guidance is provided by the Delaware courts, parties should carefully consider whether to continue to include “Don’t Ask, Don’t Waive” prohibitions on private waiver requests in their standstill agreements, particularly in the specific context addressed by the Court.