Recent Developments on “Don’t Ask, Don’t Waive” Provisions - Has the Auction Gavel Lost its Edge?
Corporate & Finance Alert
August 30, 2013
A public company seeking to be sold in an auction proceeding will typically include a “standstill” provision in the confidentiality agreement to be signed by all bidders, which prohibits a prospective buyer from buying stock of the target or take any other action (such as a tender offer or proxy fight) that may result in a business combination or change of control, without the express consent of the board of the target. The provision in essence prevents a losing bidder to take advantage of the confidential information obtained under the confidentiality agreement to launch a second attempt to acquire the target. This, together with the “no-shop” clause that the winning bidder usually includes in its acquisition agreement with the target, results in a strong deal protection for the winning bidder. The protection is further enhanced if the standstill provision includes a section expressly preventing bidders from requesting waivers of the standstill provision, the so called “Don’t Ask, Don’t Waive” provision.
The Auction Gavel Function
To understand the effect of a “Don’t Ask, Don’t Waive” provision, consider an auction proceeding with, for the sake of simplicity, only two bidders. Each bidder knows that if its offer is rejected because the other bidder’s offer was higher, it will not be allowed to take a second bite at the apple, at least not for the duration of the standstill,1 and won’t even be allowed to ask the board for a waiver of that prohibition. Accordingly, each bidder is incentivized to make its first offer also its best offer. Chancellor Leo Strine of the Delaware Chancery Court, in his bench ruling in In re Ancestry.com Shareholder Litigation, C.A. No. 7988-CS (Del. Ch. Dec. 17, 2012), compared the effect of a “Don’t Ask, Don’t Waive” provision to an auction gavel, thereby producing the highest short-term value reasonably available to stockholders.
Three Recent Delaware Decisions
Within the last year, the Delaware Chancery Court has rendered three decisions dealing with the enforcement of “Don’t Ask, Don’t Waive” provisions, which do not give a black and white answer to the question of enforceability of these provisions, thereby highlighting that public target companies looking for a buyer must act very cautiously when using these provisions.
In In re: Complete Genomics, Inc. Shareholder Litigation, C.A. No. 7888-VCL (Del. Ch. Nov. 27, 2012), Vice Chancellor Laster, in a bench ruling, enjoined the enforcement of a “Don’t Ask, Don’t Waive” provision in connection with BGI-Shenzhen’s contemplated acquisition of Complete Genomics in an auction. Complete Genomics had announced in June 2012 that it was looking for strategic alternatives and commenced an auction proceeding in the course of which it entered into several confidentiality agreements with standstill provisions. One bidder’s agreement included a “Don’t Ask, Don’t Waive” provision. Vice Chancellor Laster reasoned that “[b]y 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.” In other words, the court was of the view that to get the best price for Complete Genomics’s stockholders, Complete Genomics needed to allow the other bidder to come back with a topping offer, notwithstanding the “Don’t Ask, Don’t Waive” provision. Note, however, that the Vice Chancellor did not question the validity of a prohibition against public waiver requests, but reasoned that the prohibition against a private waiver request (as customarily included in “Don’t Ask, Don’t Waive” provisions) constituted a “bidder -specific no-talk clause” which courts generally hold to be invalid.
Chancellor Strine, in the above mentioned bench ruling in In re Ancestry.com Inc. Shareholder Litigation, C.A. No. 7988-CS (Del. Ch. December 17, 2012), went a different route and stated that “Don’t Ask, Don’t Waive” provisions are generally enforceable. In that case, Ancestry conducted an auction sale in which all bidders were required to sign confidentiality agreements with standstill and “Don’t Ask, Don’t Waive” provisions. Plaintiffs argued that these provisions prevented Ancestry’s board to make an informed recommendation to its stockholders. Chancellor Strine, however, stated that there was no per-se rule against “Don’t Ask, Don’t Waive” provisions and emphasized their role as auction gavel to maximimze shareholder value. The Chancellor acknowledged the function of these provisions as “pretty potent [deal protection] provisions” and that the “directors need to use [these provisions] consistently with their fiduciary duties, and they better be darn careful about them.” In other words, it seems that in Chancellor Strine’s view these provisions are enforceable as long as the board has made an informed and reasoned decision to use them for the intended purpose.
In Koehler v. NetSpend Holdings Inc., C.A. No. 8373-VCG (Del. Ch. May 21, 2013), the court, in a memorandum opinion, enjoined the enforcement of “Don’t Ask, Don’t Waive” provisions, but the facts were somewhat different than in Ancestry and Complete Genomics. Here, NetSpend had entered into two confidentiality agreements with two private equity firms interested in acquiring a minority stake in NetSpend, at a time when the board had expressly indicated that the company was not up for sale. Later, NetSpend was approached by a stratigic buyer, the board indicated its interest in a sale, and discussions with the private equity funds were terminated. The board did not waive the “Don’t Ask, Don’t Waive” provisions in the confidentiality agreements at that point. The court noted that the clause did not contain a sunset provision in the event that subsequent to the commencement of the negotiations with the private equity funds the board decided to pursue a sale of the company as a whole. But the court’s main argument in prohibiting the enforcement of the “Don’t Ask, Don’t Waive” provision was that the board, when changing its mind about the sale of the company as whole and commencing negotiations with the strategic buyer, did not even consider the effect and a possible waiver of the “Don’t Ask, Don’t Waive” provisions in the agreements with the private equity funds. Based on this lack of consideration of the effect of the “Don’t Ask, Don’t Waive” provisions, the court enjoined them.
Complete Genomics seemed to spell out a general reluctance to enforce at least private “Don’t Ask, Don’t Waive” provisions, while Ancestry viewed these clauses, public or private, as generally enforceable, as long as the board takes a hard, serious look at their effect. NetSpend elaborated on this concept and enjoined “Don’t Ask, Don’t Waive” provisions in a situation where the board had given no thought to their effect.
In our view, “Don’t Ask, Don’t Waive” provisions generally remain enforceable, but target companies need to take particular care to ensure such enforceability. First, and most important, boards need to consider the impact of a particular “Don’t Ask, Don’t Waive” provision (and create an appropriate record to such effect). Those considerations should also be communicated to the target’s shareholders. Second, the provision should include a sunset provision in the event that the target publicly announces that it plans to complete a sale of all, or a controlling interest in, its equity (in our experience, many forms of “Don’t Ask, Don’t Waive” provisions already include such sunset or “fall away” provisions). Third, to be in line with all three cited Delaware cases, it should be considered to limit the “Don’t Ask, Don’t Waive” provision to public waiver requests only.
So, to answer the question in the heading of this Alert, if these considerations are reflected in the preparation of “Don’t Ask, Don’t Waive” provisions, then they have not lost their edge in functioning as auction gavels.
1 Often, however, the standstill terminates when the target has announced that it is up for sale or has entered into a definitive agreement with another bidder. Still to get back into the race at that point, in particular if an agreement with another bidder is signed, is very difficult.