Promises Made to Be Broken? Standstill Agreements in Change of Control Transactions
65 Pages Posted: 13 Mar 2012 Last revised: 7 May 2013
Date Written: March 12, 2012
Many promises are made in the negotiation of a merger but not all promises are necessarily enforceable or consistent with a board of directors’ fiduciary duties. This article explores the enforceability of one such promise: the buyer’s standstill agreement. When a publicly traded company explores a sale, that company, the target, customarily requires each potential buyer to execute a standstill agreement. A typical standstill prevents potential buyers from publicly making or announcing a bid for the target during the sale process without the target’s prior consent and for a period of approximately twelve to eighteen months from the conclusion of the sale process.
The enforcement of standstills can cause a conflict between two fundamental principles of mergers and acquisitions – a board’s duty to maximize stockholder value when selling a controlling stake of a target (or a board’s Revlon duties) and a board’s ability to use certain deal protection devices under the Delaware Supreme Court's decision in Unocal Corp. v. Mesa Petroleum Co. and its progeny. This conflict is particularly evident after the target has executed a merger agreement with a “winning bidder” and a “losing bidder” makes a higher offer in contravention of the standstill. This overbid, or the potential for it, raises a number of questions that the Delaware courts, and academics alike, have yet to address. Namely, those questions revolve around a target board’s ability to consider a third party superior offer made in contravention of a standstill; a board’s promise not to waive a standstill; and a board’s ability to grant a “winning” bidder the right to enforce a standstill against a “losing” bidder.
This article argues, that when ultimately presented with these questions, Delaware courts will answer each question by examining the value maximization tools utilized by the board pre-signing to determine the reasonableness of the board’s decision-making process. Namely, the court will consider the extent to which the board “shopped” the company pre-signing. Moreover, in determining whether the board may legitimately promise not to waive a standstill or grant the “winning bidder” the right to enforce a standstill, the courts, consistent with Unocal, will also consider the purpose of the board’s actions under the circumstances of each case. Specifically, if a valid value maximization purpose is articulated and the board is not acting to further its own self-interests, then a Delaware court would likely find the board’s actions to be reasonable and uphold the board’s promises. In making these predictions, this article attempts to fill a thirty-year void in academic literature regarding standstills.
Keywords: standstill, Revlon, Unocal, fiduciary duties, confidentiality agreement, Don't Ask, Don't Waive standstills, superior offer, superior proposal, overbid, hostile offer, fiduciary out, board of directors, informational vacuum, waiver, change of control
JEL Classification: K22, K12, K2
Suggested Citation: Suggested Citation