The Delaware Court of Chancery, in its recent ruling, In re Celera Corporation Shareholder Litigation C.A. No. 6304-VCP (March 23, 2012), addressed whether the flexibility intended to be provided by the customary “fiduciary out” clause in acquisition agreements was improperly limited by standstill agreements that the target company had entered into with prospective third-party bidders in the pre-signing auction period. With respect to In re Celera, the standstill agreements prohibited bidders from making acquisition offers without the target board’s consent and also from requesting the target board to waive the “no unconsented offers” restrictions (so-called “Don’t-Ask-Don’t-Waive” standstill agreements). Because the fiduciary out clause applies only to unsolicited offers, these Don’t-Ask-Don’t-Waive standstill provisions might prevent those prospective third-party bidders that executed those standstill agreements from making an unsolicited offer, thereby arguably undermining the purpose of the fiduciary out.
Court’s Analysis and Discussion
In re Celera came before the court on an application for the approval of a class settlement. The plaintiff alleged that various defendants, including the board of directors, breached their fiduciary duties in connection with Celera Corporation’s (“Celera”) acquisition by Quest Diagnostics Inc. (“Quest”). During the pre-merger auction period, all the prospective bidders who performed due diligence on Celera entered into Don’t-Ask-Don’t-Waive standstill agreements with Celera, prohibiting them from making offers for Celera shares without an express invitation from the board. After the board accepted Quest’s offer, the board entered into a merger agreement with a no shop provision prohibiting the board from soliciting offers from other third-party bidders, including those once-interested and subject to the Don’t-Ask-Don’t-Waive standstill agreements, or from waiving the Don’t-Ask-Don’t-Waive standstill provisions unless required to do so by its fiduciary duties.
In the context of reviewing the settlement, the court considered whether the fiduciary duty exception to the no shop provisions in the merger agreement fulfilled its purpose of providing the board with the ability to consider potential superior offers. The court observed that, when combined with Don’t-Ask-Don’t-Waive standstill agreements, a fiduciary out is limited in fulfilling its purpose because the board would not be informed of potential bidders’ interests. The court noted that the plaintiffs would have had a “colorable” claim if the defendants had not voluntarily waived the Don’t-Ask-Don’t-Waive standstill agreements as part of the settlement. However, the court made clear that these types of standstill provisions and no shop provisions are commonly enforceable and that a ruling to the contrary should only be made on the merits with a full factual record.
In light of Vice Chancellor Parson’s comments in In re Celera and Chancellor Strine’s 2007 opinion in In re The Topps Company Shareholders Litigation, a board should carefully consider, in connection with the entry into a definitive acquisition agreement, whether to release those parties, who had previously expressed an interest in acquiring the target, from provisions of any standstill agreements prohibiting them from seeking a waiver of the restrictions on their ability to submit an offer to the board. Failure to do so before a lawsuit, as Celera and Topps show, could result in a significant award of lawyers’ fees to plaintiff’s counsel if done as part of a settlement or a risk that a court on a full record might enjoin the transaction for a period of time and release potential bidders from the non-waiver portion of the standstill.
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This article was originally published by Bingham McCutchen LLP.