The Delaware Court of Chancery advises in In re Celera Corporation that it may enjoin enforcement of "Don't-Ask-Don't-Waive" standstill agreements with potential bidders if the board has separately agreed to a no-shop provision with the buyer.
On March 23, 2012, Vice Chancellor Parsons of the Delaware Court of Chancery certified a class and approved a settlement reached by the lead plaintiff in the class-action lawsuit brought over the acquisition of Celera Corporation by Quest Diagnostics Incorporated. In its review of the settlement, the court discussed the potential breach of fiduciary duty that can arise if a board agrees to a no-shop provision after it has already entered into broad standstill agreements with potential bidders that forbid them from approaching the board for a waiver. These "Don't-Ask-Don't-Waive" standstills, when combined with a no-shop provision, undermine the no-shop's fiduciary out and create a problematic "information vacuum" for the board.Close speedread
On March 23, 2012, Vice Chancellor Parsons of the Delaware Court of Chancery certified (www.practicallaw.com/2-518-7119) a class and approved a settlement reached by the lead plaintiff in the lawsuit brought over the acquisition of Celera Corporation (Celera) by Quest Diagnostics Incorporated (Quest). For a summary of the merger agreement in the Quest/Celera transaction, see PLC What's Market, Quest Diagnostics Incorporated/Celera Corporation Merger Agreement Summary.
In its decision, the court analyzed the benefits achieved in the settlement for purposes of awarding attorney fees to counsel. Among those benefits, the court emphasized the modification of the merger agreement's no-shop covenant to allow competing offers by bidders who had been subject to broad standstill provisions. The court considered that modification valuable, as it would have otherwise likely issued an injunction against enforcement of the standstill agreements.
On March 17, 2011, Quest and Celera entered into a merger agreement for the acquisition of Celera by a subsidiary of Quest, in a deal valued at roughly $680 million. The acquisition was structured as a front-end tender offer with a top-up option, followed by a second-step squeeze-out merger. The merger agreement contained several common deal-protection measures, including a break-up fee of about 3.5% of the total deal value and a no-shop provision forbidding Celera from soliciting competing offers. The no-shop included the typical fiduciary out for Celera's board. The transaction closed on May 17, 2011.
In the months leading up to Celera's entry into the merger agreement, Celera's financial advisor contacted nine potential bidders for the company, five of whom, including Quest, entered into confidentiality agreements with Celera. All five confidentiality agreements included standstill provisions that expressly prohibited the bidders from making offers for shares of Celera without receiving consent from Celera's board. The standstills also restricted the bidders from even asking the board to waive the consent requirement, a provision the court called a "Don't-Ask-Don't-Waive" standstill. For an example of a standstill provision in a confidentiality agreement for an M&A transaction, see Standard Document, Confidentiality Agreement: Mergers and Acquisitions: Section 9 (www.practicallaw.com/6-381-3253).
Soon after announcement of the merger agreement, the putative lead plaintiff, the New Orleans Employees' Retirement System (NOERS), filed a class-action complaint over the transaction. Following discovery, the parties entered into a memorandum of understanding (MOU) to settle the case. The MOU did not contemplate a raise in the consideration, but did lower the break-up fee by a third and modified the no-shop to invite competing offers from the bidders subject to the Don't-Ask-Don't-Waive standstills.
After reaching agreement on the MOU but before the closing of the acquisition, NOERS sold its shares of Celera on the secondary market at a price slightly above the tender-offer consideration. Celera's largest stockholder argued that NOERS' sale amounted to its acquiescence to the merger, which should have disqualified it as lead plaintiff.
Much of the court's decision revolved around the acquiescence issue. The court ruled that NOERS' sale of its shares of Celera came only after the closing of the merger was inevitable, which therefore did not amount to NOERS' acquiescence to the deal.
Having certified NOERS as lead plaintiff, the court reviewed the terms of the MOU for their fairness and to determine an award of attorney fees to NOERS' counsel. As part of that review, the court discussed the value achieved by the negotiation of a modification to the no-shop in light of the existing standstill agreements.
The plaintiffs argued that the no-shop provision was especially onerous in this case because the most likely competing bidders for Celera were the very same companies who were bound by the Don't-Ask-Don't-Waive standstills. Those standstills rendered the no-shop's fiduciary out effectively worthless because the parties most interested in Celera could not request a waiver of the standstill to make a competing offer.
The court agreed. As Vice Chancellor Parsons explained, standstills and no-shops, on their own, are common and acceptable. Viewed in isolation, Don't-Ask-Don't-Waive standstills "foster legitimate objectives," such as ensuring that confidential information is not misused and giving the target corporation leverage to extract concessions during negotiations. Similarly, the no-shop here, viewed in isolation, would appear legitimate, as it contained a fiduciary out that would have allowed the board to discuss competing offers with third parties who approached Celera.
The combined effect of a no-shop and Don't-Ask-Don't-Waive standstills, however, is problematic, according to the court. A Don't-Ask-Don't-Waive standstill prevents parties known to be interested in the target company from informing the board of their willingness to bid, even as the no-shop prevents the board from inquiring into that same interest. This has the effect, in the court's words, of creating an "informational vacuum" for the board, resigning it to "a measure of willful blindness" and "emasculat[ing] whatever protections" the fiduciary out would have provided. Entering into contracts with these combined terms "conceivably could constitute a breach of fiduciary duty," according to the court.
The court emphasized that it was not making a blanket ruling that Don't-Ask-Don't-Waive standstills necessarily are unenforceable. But it did state for purposes of evaluating the benefit of the settlement that had the plaintiffs succeeded on this claim, the likely remedy would have been an injunction against enforcing the standstills.
The decision in Celera preserves the ability for target companies to negotiate Don't-Ask-Don't-Waive standstills. However, once drafting a merger agreement with a winning bidder that includes a no-shop, counsel would be best advised to include waivers of those standstills. The waivers can be drafted into the merger agreement itself, such as in the form of a limited go-shop provision, or as separate amendments to each previous confidentiality agreement.