The Delaware Court of Chancery recently addressed “don’t ask, don’t waive” provisions in a bench ruling in a case involving Ancestry.com. A “don’t ask, don’t waive” provision is a provision in a standstill agreement that prohibits a potential buyer of a target company from requesting that the target company waive the restriction on taking actions to control the target company such as making offers for the target company’s shares without an express invitation to do so from the target company’s board of directors. The rationale for such a provision is to incentivize each potential bidder invited into the bidding process by the target company’s board of directors to make its best and final proposals for the acquisition through the bidding process.
Ancestry.com initiated a sale process in May 2012. In June 2012, several potential buyers entered into confidentiality agreements with Ancestry.com in order to conduct due diligence, and such agreements contained “don’t ask, don’t waive” provisions. In October 2012, the board approved and executed a definitive merger agreement. Several shareholders of Ancestry.com brought suit, alleging that the directors breached their “Revlon” duties (which are the duties of directors in a sale transaction to maximize immediate shareholder value by securing the highest sale price). The shareholders alleged that the “don’t ask, don’t waive” provisions impermissibly precluded the board from being fully informed about other possible superior offers.
Despite another recent bench ruling of the Delaware Court of Chancery (In re Complete Genomics) which enjoined the enforcement of “don’t ask, don’t waive” provisions, in this case the Delaware Court of Chancery ruled that there is no per se rule in Delaware against such provisions. The Court emphasized that because such provisions are so potent, a target board must establish a clear record that it consciously and carefully employed the “don’t ask, don’t waive” provisions to maximize the sale price. The Court also stated that the use and effect of “don’t ask, don’t waive” provisions are material to shareholders’ voting decisions and should be publicly disclosed. The Court ruled that Ancestry.com’s proxy statement failed to disclose the import of the “don’t ask, don’t waive” provisions, creating the false impression that any bidder would be able to make a superior bid at any time. Accordingly, the Court enjoined the shareholder vote until Ancestry.com disclosed the effect of the “don’t ask, don’t waive” provisions and when such provisions were waived.
In re Ancestry.com Inc. Shareholder Litigation, C.A. No. 7988-CS (Del. Ch. Dec. 17, 2012