On November 27, 2012, in In re Complete Genomics, Inc. S’holders Litig., C.A. No. 7888-VCL (Del. Ch. Nov. 27, 2012), Delaware Court of Chancery Vice Chancellor J. Travis Laster issued a bench ruling enjoining the enforcement of a “Don’t Ask, Don’t Waive” provision in a standstill/confidentiality agreement with a potential bidder that forbade private requests from the bidder for a waiver of the standstill restrictions. It has become common in change-of-control transactions for targets to enter into standstill agreements that prohibit a potential bidder from publicly or privately requesting that the target waive the terms of the standstill agreement. However, the court noted such a provision may preclude the free flow of information that is required for the board to properly evaluate a competing offer, disclose material information, and make a meaningful recommendation to stockholders. The court reasoned that, in this context, a Don’t Ask, Don’t Waive provision that prohibits private communications with the target board are tantamount to bidder-specific “No-Talk” provisions in merger agreements, which the Delaware Court of Chancery has previously declared invalid.
The court’s holding arose in connection with the sale of Complete Genomics, Inc. (Genomics). In June 2012, Genomics, facing financial difficulties and after unsuccessfully attempting to raise capital, began soliciting potential acquirers for a merger. During the solicitation process, Genomics and four parties entered into standstill agreements that prevented the parties from making bids to acquire Genomics. The standstill agreements contained a Don’t Ask, Don’t Waive provision that contractually forbade the potential acquirer from asking the company, both publicly and privately, to waive the standstill restrictions.
On September 15, 2012, upon conclusion of the solicitation process, the Genomics board of directors approved a two-step transaction with the successful bidder, BGI-Shenzhen (BGI). Genomics and BGI agreed that BGI would make a tender offer for a majority of Genomics shares and then merge with Genomics, cashing out the non-tendering shareholders.
The Court of Chancery’s Holding
The Court of Chancery preliminarily enjoined the Genomics board of directors from enforcing the standstill agreement containing the Don’t Ask, Don’t Waive provision because it “impermissibly limited [the 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.” The court found that because the Genomics board agreed to the change-in-control transaction with BGI, it has “an ongoing statutory and fiduciary obligation to provide a current, candid and accurate merger recommendation.” The court explained that Don’t Ask, Don’t Waive provisions hinder the board’s ability to meet this obligation because they prevent the “flow of incoming information” to the target corporation’s board. The court reasoned that, in this way, Don’t Ask, Don’t Waive provisions in standstill agreements are comparable to a bidder-specific “No-Talk” provisions in merger agreements, which the Court of Chancery has declared invalid in Phelps Dodge Corp. v. Cyprus Amax Minerals Co., 1999 Del. Ch. LEXIS 202 (Del. Ch. Sept. 27, 1999). The court, accordingly, found that the Don’t Ask, Don’t Waive provision in the Genomics transaction precluded the Genomics board from fulfilling its fiduciary and statutory obligations. Therefore, the court held that the plaintiffs established a reasonable probability of succeeding on the merits that the board of directors violated their fiduciary duty by enforcing the Don’t Ask, Don’t Waive standstill provision.
Don’t Ask, Don’t Waive standstill provisions are effective tools for a corporation’s board of directors to promote an orderly sales process. These provisions encourage potential acquirers to submit their highest bid before the target enters into a binding agreement with another bidder. Nonetheless, Don’t Ask, Don’t Waive standstill provisions that forbid private (in addition to public) requests for waiver of the standstill in cases in which a corporation’s Revlon duties have been triggered are likely unenforceable for violating the board’s fiduciary and statutory duties to stockholders. The Court of Chancery’s ruling, however, does not appear to invalidate Don’t Ask, Don’t Waive standstill provisions that merely forbid public, but not private, requests for waiver of the standstill that do not violate the board’s fiduciary duties. In addition, the Court has not invalidated Don’t Ask, Don’t Waive standstill provisions in cases in which the corporation has not agreed to a change-of-control transaction or otherwise triggered its Revlon duties. With further clarification from Delaware courts, variations of Don’t Ask, Don’t Waive standstill provisions may be still be employed to capture the benefits of these provisions without subjecting the board of directors to breach of fiduciary duty liability.