- Standstills have been the subject of a number of cases in the USA and Canada.
- In some cases, the use of and reliance on, standstills by target companies in particular contexts has been found to be inappropriate or anti–competitive.
- In other cases, the ‘permitted purpose’ provisions in confidentiality agreements have operated as quasi–standstills.
- There is uncertainty about whether enforcing a standstill against a bidder who has not received confidential and price material information would give rise to unacceptable circumstances in Australia.
The use of standstills in Australia is widespread but the operation of standstill provisions has rarely been tested in Australia. On the other hand, there have been a number of US and Canadian cases that have reviewed standstills, that are worth examining given the lack of Australian guidance in the area.
The cases below serve as a reminder that confidentiality agreements and standstills can have more expansive effects than envisaged by the parties and that care is required in negotiating and drafting them.
Standstills are typically used in confidentiality agreements as a quid–quo–pro for allowing due diligence by a bidder. Typically a standstill operates to prevent the bidder from launching a hostile bid or acquiring a stake in the company for a certain period after the bidder receives confidential or price–sensitive information from the target. The term of the standstill, and the circumstances in which it lapses, are matters of negotiation.
In Australia, the Takeovers Panel has commented (in the International All Sports Limited case in 2009) that a standstill is a legitimate tool available to a target company considering the disclosure of confidential information to a potential bidder, although the term of the standstill must be commercially justifiable having regard to the nature of the information disclosed to the bidder.
A standstill can be anti–competitive
In the recent Delaware case of In Re Celera, healthcare company Celera signed confidentiality agreements with bidders as part of an auction process. The agreements contained a standstill with a ‘don’t–ask–don’t–waive’ clause, which prevented bidders from requesting a release from the standstill. Presumably the clause was designed to allow for an orderly auction process, since any such request for a waiver could potentially require the target to engage with the requesting party and thereby disrupt the sale process.
Celera then signed a merger agreement which contained a no–shop provision that prevented Celera from seeking other bids. While the merger agreement had a typical fiduciary–out from the no–talk clause allowing the board to consider unsolicited bids, this was frustrated by the ‘don’t–ask–don’t–waive’ clause preventing other bidders from approaching Celera.
After considering various issues relating to the class action, the court noted that although a standstill and no–shop provision are each acceptable individually, in this case the combined effect of the ‘don’t–ask–don’t–waive’ provision in the standstill and the no–shop clause had trapped Celera and resigned its board to ‘a measure of wilful blindness’.
Standstill can’t be used to block a superior bid
The case of In Re Topps (2007, Delaware) is an example of a standstill being used defensively.
Topps negotiated a deal to be purchased by a private equity firm controlled by Michael Eisner. The merger agreement executed by the parties included a go–shop provision allowing Topps to solicit alternative bids for a specified period, and to negotiate with bidders who submitted a superior proposal.
During the go–shop period, Topps’ competitor Upper Deck submitted a proposal to purchase Topps and entered into a confidentiality agreement containing a standstill. Upper Deck then made a secondary proposal at a higher price than Eisner.
Determined to be sold but unwilling to be purchased by its competitor, however, Topps continually claimed that Upper Deck’s proposal was not superior and refused to release Upper Deck from the standstill. Topps’ shareholders brought a class action against the board, demanding Upper Deck be released from the standstill as it was being used for improper purposes. The court obliged and ordered Topps to release Upper Deck.
Permitted purpose restrictions can amount to quasi–standstills
Another set of cases concerns applications for injunctions against friendly–turned–hostile bidders for using information given under a confidentiality agreement to launch a bid.
In Martin Marietta (2012, Delaware), a confidentiality agreement was executed by the target and bidder during friendly negotiations. After the negotiations broke down, the bidder launched a hostile bid. While there was no standstill in the confidentiality agreement, the court nonetheless granted an injunction against the hostile bid on the basis that the bidder had used confidential information for the purposes of making a hostile bid, and this purpose was not permitted under the terms of the confidentiality agreement.
Certicom v RIM (2009, Ontario) goes one step further. In that case, there was a standstill in the confidentiality agreement but the period of its effectiveness had expired. Notwithstanding this, when a hostile bid was launched by the bidder, the court found that confidential information given under the agreement had been used to make the bid, breaching the permitted purpose provisions in the confidentiality agreement. The bid could not proceed, and the fact that an explicitly negotiated standstill had expired did not alter the court’s view.
Standstills without confidential information
A question arises where a standstill can be enforced in situations where no confidential information has been provided to the bidder.
In Northgate (2006, British Columbia), the court found as a matter of contractual interpretation that the standstill was not connected to the provision of information. This was because the standstill came into effect from the date of the agreement, not the date information was given. Therefore, the target was entitled to enforce the standstill irrespective of whether confidential information had been provided to the bidder.
In comparison, in International All Sports the Panel (in a side note, since the information was actually found to be price–sensitive) thought that in such a situation, not releasing a bidder from the standstill may give rise to unacceptable circumstances. It appears that, despite careful drafting of a standstill, the Panel may look at the issue more broadly and come to a decision based on commercial rather than legal considerations.
Frankie Barbour, Graduate.