The emerging issue of “don’t ask/don’t waive†standstills is a debate that, let’s face it, only a Delaware deals lawyer could love. But it has the potential to change the way that public companies are sold.
In other words, it’s a technical argument that really matters.
A don’t ask/don’t waive standstill is increasingly requested of buyers when companies auction themselves. As a condition to allowing the potential buyer to take part in the auction, the target will require that the buyer agree to a standstill. The standstill will state that the bidder will not make a bid to acquire or acquire shares of the company outside the auction process for a period of time, typically six to 18 months.
The result is that the potential buyer can bid only in the auction process. If the bidder loses the auction, the standstill prevents the bidder from coming back and making another attempt. The standstill not only prevents the bidder from announcing or making a public bid but even asking he target’s board of directors to consider a bid.
To make doubly sure that a higher bid doesn’t come from a bidder that loses an auction and tries for a second bite at the apple, a standstill agreement is also drawn up to prevent the bidder from even asking for the standstill provision to be waived. Hence the term don’t ask/don’t waive standstills.
All of this was accepted practice until a December hearing before Vice Chancellor J. Travis Laster of the Delaware Chancery Court over the sale of Complete Genomics to BGI-Shenzhen. In that hearing, the judge questioned the validity of don’t ask/don’t waive standstills.
In a series of cases in the Delaware courts, judges have held that a board cannot render itself “willfully blind†to a competing bid through a provision in a! n acquisition agreement that prohibits it from talking to another bidder. Vice Chancellor Laster analogized these cases to the don’t ask/don’t waive paradigm. He reasoned that if a board can’t prevent itself from speaking to a bidder about a competing bid, why should the directors be able to prevent themselves from even receiving the bid
The vice chancellor thus blocked the enforcement of a don’t ask/don’t waive standstill that Genomics had entered into with an anonymous bidder. The decision appeared to be in contrast to a Canadian case a couple of years ago that had validated these types of agreements if reached by the board in good faith.
Practitioners were not happy with Vice Chancellor Laster’s ruling. In a memorandum, the law firm Wachtell, Lipton Rosen & Katz stated, “Although its intention is to enhance value maximizaton in sale situations, this decision could thus prove value-destructive.â€
The basis for Wachtell’s complaint can be found in simple auction theory.
Let’s say you held a silent auction for a painting. Once the bids were unsealed and the highest price revealed, that would normally end the matter. But after the auction closes and a winning bidder is announced, the rest of the bidders can then step in and bid again. The auction continues ad infinitum until the highest price is reached - opening and closing again and again until only one bidder is willing to bid.
This outcome may be good for the seller, but in such circumstances, a potential buyer may not want to bid because it never had assurances of paying less than maximum value. The buyer will not want to take the time to bid knowing that its winning bid can always be trumped. The result is that you have fewer bidders and therefore lower prices because of less competition.
This is what Wachtell’s lawyers were referrin! g to when! they contended that eliminating don’t ask/don’t waive standstills would destroy value. If these provisions weren’t permitted then bidders could bid in an auction and then again after it is done. This might deter bidders from participating in auctions for companies resulting in fewer bidders and lower prices for public companies.
This is the theory, but whether it works in actuality is uncertain.
In any event, a few weeks later, Chancellor Leo E. Strine Jr. of the Delaware Chancery Court again addressed these standstills in a case involving the buyout of Ancestry.com.
Ancestry had sold itself via an auction, and in the process it obtained a don’t ask/don’t waive standstill from about a dozen bidders. When the plaintiffs’ lawyers challenged these provisions in a lawsuit, Ancestry wrote to all of the bidders and and waived this prohibition, likely because of Vice Chancellor Laster’s ruling in Complete Genomcs.
Since the question was now moot, Chancellor Strine did not address the validity of the standstill. However, the judge went out his way to state that these provisions were not “per se†invalid. Instead, he interpreted prior cases including Genomics to say something to the effect of “Woah, this is a pretty potent provision†and boards need to be careful about using them.
Chancellor Strine continued that these provisions might be permitted under Delaware law when they have a “value-maximizing purpose.†He added that they should not be used carelessly and should be used in an auction to put a definitive end “for those who participate.â€
So that is where we are today. These provisions do not appear per se illegal, but when they can be used is still open to question.
Given that there is some question about their use, what is likely to happen now is that plaintiffs’ lawyers will simply challenge these standstills in all cases, happy to have another issue to lit! igate. Th! e question really then is whether these provisions are still used in the meantime or counsel frowns on even giving the plaintiffs’ lawyers another claim to litigate. And of course, there is still the question of whether these provisions create or destroy value.
In other words, the don’t ask/don’t waive debate is going to continue giving yet more joy to Delaware deal lawyers.
