"Don't Ask, Don't Waive" Standstill Provisions: Impermissible Limitation on Director Fiduciary Obligations or Legitimate, Value-Maximizing Tool?
Under Revlon and its progeny, directors of Delaware corporations have a duty to take reasonable steps to ensure that stockholders receive the highest price reasonably available in a sale of the company. One way that target boards ensure such value maximization is by conducting an auction or sales process and requiring potential bidders to enter into confidentiality agreements with standstill provisions before providing them access to confidential information or allowing them to participate in the process. Generally, such standstill agreements protect confidential information, promote an orderly auction, prevent unsolicited acquisition attempts, and provide target companies leverage to extract concessions from bidders. In structured public company auctions, such standstill agreements often include provisions that (1) prohibit the bidder from making an offer for the company without an express invitation from the company's board of directors, and (2) preclude the bidder from publicly and/or privately asking the board of directors to waive the foregoing restriction. The inclusion of such provisions in standstill agreements, colloquially referred to as "Don't Ask, Don't Waive" provisions, is designed to extract the highest possible offer from the bidder because the bidder only has one opportunity to make an offer for the company unless the company invites the bidder to make another offer sua sponte. Notably, however, bidders who do not execute standstill agreements with "Don't Ask, Don't Waive" provisions are not precluded from submitting multiple offers for the company, even after a winning bidder emerges from an auction.
Several recent court rulings and decisions by the Delaware Court of Chancery have prompted discussion regarding the continued validity of "Don't Ask, Don't Waive" standstill provisions under Delaware law. Challengers of such standstill provisions argue that a board's use of these restrictive provisions constitutes a breach of the duty of care, duty of disclosure, and value-maximizing Revlon duties. Such arguments are premised largely upon the differences between a public company auction and a traditional auction. While the latter ends definitively at the drop of the gavel, the former effectively continues until an affirmative stockholder vote on the proposed sale transaction. Because the sales process continues even after the auction "concludes," challengers of "Don't Ask, Don't Waive" provisions contend that by prohibiting receipt and consideration of unsolicited offers from losing bidders who would otherwise make topping bids, such provisions impermissibly limit directors' ongoing fiduciary obligations to evaluate competing offers fully, disclose all material information to stockholders, and provide stockholders with a current, candid, and meaningful recommendation at the time of the stockholder vote to approve the proposed transaction.
Proponents of "Don't Ask, Don't Waive" standstill agreements contend that such agreements serve a legitimate, value-maximizing purpose consistent with directors' fiduciary duties. In their view, fully informed directors can maximize stockholder value in an auction by utilizing these provisions to replicate a traditional auction and extract the highest offer from bidders. By creating a contractual definitive end to the auction, proponents argue that such provisions ensure that bidders submit their best offer, because they know the auction constitutes their only chance to make an offer for the company, and because they are less concerned that the winning party in the auction will be used as a stalking horse for other bidders.
Due to arguably conflicting rulings in the Delaware Court of Chancery, the validity of "Don't Ask, Don't Waive" standstill provisions currently is unclear under Delaware law. Given this uncertainty, practitioners who advise Delaware corporations should fully evaluate whether in a particular transaction such provisions are appropriate and reasonably designed to achieve value-maximization at the auction stage and, if utilized, consider whether at the latter stages of the transaction such provisions potentially could preclude directors and stockholders from being fully informed and fulfilling their fiduciary obligations.
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