From No-shops to Go-shops:
An Analysis of Recent
Delaware Case Law
Clarity or Heightened Ambiguity?
By:
Allison M. Siavage
Georgia State University College of Law
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I. Introduction
A. Overview
In 2007, Delaware courts addressed the issue of the validity certain deal protection
measures in a number of cases involving transactions for the sale of a controlling interest. The
Court has not provided a bright-line test for what types of provisions are permissible, indeed, it is
not clear whether the recent opinions will serve to heighten the ambiguity of the law in this area
or to provide more clarity as to the enforceability of deal protection provisions. An analysis of
the leading cases, in conjunction with the recent decisions, brings to light several principles the
court emphasizes in evaluating whether directors have fulfilled their fiduciary duties in
transactions involving the sale of a controlling interest.
The following discussion will analyze the tension between the competing interests of
shareholders and directors, with a focus on the evolution of Delaware law as it relates to no-shop
and go-shop provisions. The first section is a discussion of Delaware law in the area of directors’
duties in a sale of a controlling interest. The second section is a brief overview of deal protection
measures generally, followed by a description of no-talk, no-shop, window-shop, and go-shop
provisions. The third section is a description of the law related to no-shop and go-shop
provisions, beginning with a discussion of the seminal no-shop case, followed by an in-depth
look at three recent Delaware cases. The fourth section analyzes the progression of the law
through a discussion of the implications of the recent cases and principles derived therefrom.
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II. Director’s Duty in a Sale
A. Business Judgment Rule and Enhanced Scrutiny
Delaware Corporate Law recognizes that the management of the business of a Delaware
company is entrusted to its directors, who are the authorized representatives of the shareholders.1
The Business Judgment Rule applies under normal circumstances, creating a strong presumption
in favor of the directors that they have acted in the best interest of the corporation.2 In situations
where directors have an interest in a transaction, the Delaware courts take a more active role in
evaluating the reasonableness of the board’s actions, using an enhanced scrutiny approach, to
determine whether the those decisions were in line with the directors’ fiduciary duties.3
B. Fiduciary Duty in the Change of Control Context
1. Rational for Enhanced Scrutiny
The Delaware Supreme Court noted in Paramount Communications, Inc. v. QVC
Network, Inc. (“QVC”), that in a change of control context, where the majority of voting shares
are acquired by a single entity or by a group acting together, there is a diminution in voting
power of those who become minority stockholders as a result of the transaction.4 The Court
remarked:
“In the absence of devices protecting the minority stockholders, stockholder votes
are likely to become mere formalities where there is a majority
stockholder…Absent effective protective provisions, minority stockholders must
rely for protection solely on the fiduciary duties owed to them by directors and the
majority stockholders.”5
1
8 Del.C. §131(a).
Aronson v. Lewis, 473 A.2d 805, 811 (Del. 1984).
3
Weinberger v. UOP, Inc., 457 A.2d 701, 710-711 (Del. 1983).
4
Paramount Communications, Inc. v. QVC Network, Inc., 637 A.2d 34, 42 (Del. 1994).
5
Id.
2
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Thus, the law provides a layer of protection for minority shareholders in a change of control
context by taking a closer look at the board’s actions in order to ensure the directors acted in
accordance with their fiduciary duties.6 The Delaware Supreme Court identified the key features
of the enhanced scrutiny test in QVC:
“(a) a judicial determination regarding the adequacy of the decision-making
process employed by the directors, including the information on which the
directors based their decision; and (b) a judicial examination of the
reasonableness of the directors’ action in light of the circumstances then existing.
The directors have the burden of proving that they were adequately informed and
acted reasonably.”7
2. Shift in Fiduciary Duty in a Sale of Control Context
It is well settled under Delaware law that the directors’ general duty to act in the best
interest of the corporation shifts once a sale of control becomes imminent, or the company is “in
play”.8 The Delaware Supreme Court, in Revlon v. MacAndrews, held that “the directors’ role
changed from defenders of the corporate bastion to auctioneers charged with getting the best
price for the stockholder at a sale of the company.”9 In the context of a sale of control, the
directors have one primary objective and that is to secure the transaction that offers the best
value reasonably available to the shareholders.10
3. Activities the Give Rise to a Revlon Duty
After the establishment of this shift in fiduciary duty in the Revlon case, the Delaware
courts, in a number of rulings, clarified at what point that duty is instituted. The law today is that
there are two situations which may give rise to Revlon duties: (1) where a company has initiated
6
Id. at 42-43.
Id. at 45.
8
Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d. 173, 182 (Del. 1986).
9
Id.
10
QVC, 637 A.2d at 44, See Also Barkan, 567 A.2d 1279, 1286 (Del. 1989) (“The board must act in a neutral
manner to encourage the highest possible price for shareholders.”); Revlon, 506 A.2d at 182; Mills v. Macmillan,
Inc., 559 A.2d 1261, 1288 (Del. 1989) (“In a sale of corporate control the responsibility of the directors is to get the
highest value reasonably attainable for the shareholders.”).
7
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an active bidding process seeking to sell itself or to effect a business reorganization involving a
clear break-up of the company; and (2) where, in response to a bidder’s offer, a target abandons
its long-term corporate strategy and seeks and alternative transaction involving the break-up of
the company.11 Both a change in control and a break-up are not required and either will suffice to
cause both the implication of the duty on the directors to seek the best value reasonably available
to the shareholders and closer judicial scrutiny of the board’s actions during the negotiation and
bidding process.12 However, a stock for stock merger between two public companies will not
necessarily constitute a break-up or change in control and thus will not necessarily trigger Revlon
duties.13
4. What is Required of Directors to Satisfy Their Revlon Duty?
Directors must always act in accordance with their fundamental duties of care, loyalty
and good faith, even in the change of control context, as there is “no single blueprint: that a
board must follow to fulfill its duties.”14 As the Delaware Supreme Court noted in Mills, “A
stereotypical approach to the sale and acquisition of corporate control is not to be expected in the
face of the evolving techniques and financing devices employed in today’s corporate
environment.”15 When there are bidders competing for control of a corporation in an active
bidding process, the directors are not permitted to use any defensive mechanisms to thwart an
auction or to favor one bidder over another.16 Additionally, when the board is contemplating and
negotiating a single offer and does not avail itself of information in order to judge the adequacy
of the offer, the fairness concerns demand that the board canvas the market to determine whether
11
QVC, 637 A.2d at 47.
Id. at 48.
13
Id.
14
Barkan v. Amsted Industries, Inc. 567 A.2d 1279, 1286 (Del. 1989).
15
Mills, 229 A.2d at 1288.
16
Revlon, 506 A.2d at 184.
12
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higher bids could be elicited.17 On the other hand, if the directors have reliable information upon
which to judge the fairness of the transaction, they may not be required to do a market canvass.18
“The need for adequate information is central to the enlightened evaluation of a transaction that a
board must make.”19
The board is not limited to considering only the amount of cash involved in a particular
bid, when evaluating whether a transaction gets the most for the shareholders.20 The directors
must analyze the entire situation and evaluate the consideration being offered, the deal structure,
and other relevant terms in order to obtain the best value reasonably available to the
shareholders.21
The standard by which the court judges the action of the board, in the context of a sale of
control, is one of reasonableness.22 The board must act reasonably to avail itself of all relevant
information and refrain from taking any action which may forestall the bidding process or
discourage potential third-party bidders.23 The Delaware courts recognize that there are many
ways a board can go about maximizing value and, thus, only require that the directors’ actions be
in the “range of reasonableness”, and the court will not hold a board liable for failing to make the
best decision, so long as it was reasonable given the circumstances.24
III. Deal Protection Measures
A. The Tension: Protecting the Deal and Fiduciary Duties
Over the course of a negotiation of a merger or acquisition, the acquiring company
becomes increasingly more invested in the transaction in terms of both management focus and
17
Barkan, 567 A.2d at 1287.
Id.
19
Id.
20
Mills, 559 A.2d at 1282.
21
Id.
22
Barkan, 567 A.2d at 1289.
23
Id. at 1287.
24
Id. at 1289.
18
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economics. Although each company has a vested interest in closing the deal, the acquiring
company is particularly wary of becoming a “stalking horse” for other potential buyers.
25
On
the other hand, the goal of the target board may be to maintain a certain level of flexibility in the
current negotiations in order to be free to consider alterative deals that offer better value.26
Historically, purchasers were more cautious to enter, as third-party bidders, into deals that were
already in negotiations with others, but the recent trend reveals that purchasers have become
much more aggressive in the post-hostile takeover era of the 1980’s. 27 Thus, it has become more
of a necessity to incorporate contractual protections for the deal at the consummation of the
negotiation.28
As deal protection measures have become more commonplace, the Delaware courts have
increasingly protected the interests of shareholders in the context of a sale of the company. 29 As
discussed in the above section, while directors always owe fiduciary duties of loyalty, care, and
good faith to the corporation, in the context of a sale of control where the directors derive a
benefit from the transaction, the court looks at the fairness of the deal with enhanced scrutiny
and the board no longer receives the benefit of the Business Judgment Rule.30 Again, once a
company is on the auction block, the directors’ fiduciary duty to the shareholders can only be
fulfilled by selling the company to the highest bidder.31 Negotiated deal protection measures are
25
Simon M. Lorne, Acquisitions and Mergers: Negotiated and Contested Transactions, §3:61, 3-218, 3-219 (West
Group 2002)
26
Diane Holt Frankel, Fiduciary Duties in Considering Deal Lockups: What’s a Board to Do?, in, Negotiating
Business Acquisitions, vol. 1, § K, 1, 1 (ABA 2007)
27
Id.
28
Lorne, Acquisitions and Mergers: Negotiated and Contested Transactions at 3-219.
29
Id.
30
Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 361 (Del. 1993)
31
Revlon, 506 A.2d at 183.
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not permissible if they have the effect of precluding other bidders before a thorough auction has
been conducted.32
Thus, there is a tension between protecting the deal from third-party infiltration and the
directors’ fiduciary duty to the shareholders to get the best price for the company. Directors of
both companies must work together to find a balance between protecting the deal from other
bidders and not discouraging other bidders completely. In a sale of a controlling interest, the
minority shareholders have only the fiduciary duties of the directors to protect them. The Court
held in QVC, “Measures such as break-up fees, no-shop provisions and lock-up clauses in
documentation for the ‘favored transaction’ are not permissible if they have the effect of
precluding other bidders before a thorough auction has been conducted, thereby operating to the
detriment of the stockholders.”33 Thus, the Court does not permit “draconian” protection
measures that have the effect of discouraging a potential bidder due to the high cost of breaking
up the current negotiation, as that prevents the shareholders from benefiting from the value of a
potentially higher bid. 34
B. Description of Specific Measures
While this discussion focuses on the development of the law as it relates specifically to
the no-shop clauses, it is important to note that merger negotiations often involve a combination
of several different types of protection measures. Transactions involving the sale of a controlling
interest typically involve a combination of various protective provisions, such as lock-ups and
break-up fees, which the court considers as a whole when determining whether they are a barrier
to competition for the deal. Since the Delaware courts generally analyze the reasonableness of
the protective measures as a whole, a discussion of one specific mechanism, in isolation, is
32
Id. at 182.
QVC, 637 A.2d at 49.
34
Id.
33
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somewhat challenging. However, it is worthwhile to examine the decisions surrounding this
provision to illustrate a progression in practice from the no-talk, to the no-shop, to the windowshop, to the go-shop provision.35
1. No-talk Provisions
No-talk provisions, a total prohibition no-shop variation, generally prohibit the seller
from talking to other prospective buyers, regardless of whether the other prospective buyer is
solicited by the seller or not.36 The Delaware courts generally view these provisions as overly
restrictive and prevent the seller’s Board from fulfilling their fiduciary duty to be informed of all
material information reasonably available.37
2. No-shop Provisions
No-shop provisions typically provide that a target may not seek, encourage, solicit or
provide information to or negotiate with other bidders.38 Generally, to be enforceable, a no shop
clause must include a fiduciary-out provision, which generally provides that the directors are
permitted to take certain actions in order to satisfy their fiduciary duty.39 In large public company
transactions, the conventional wisdom among practitioners is that the no-shop provision is in line
with the board’s fiduciary duty to obtain the highest value for the company because the market
creates an active bidding environment without the need for the company to actively solicit bids.40
35
Koppes, Richard, The Role of Outside Counsel, (Atlanta, Ga., March 17, 2008)
Frankel, Fiduciary Duties in Considering Deal Lockups: What’s a Board to Do? at 4.
37
Phelps Dodge Corp. v. Cyprus Amax Minerals Co., 1999 WL 1054255, 2 (Del.Ch. 1999).
38
David A. Katz, Takeover Law and Practice 2007, in, Negotiating Business Acquisitions, vol. 2, § O, 1, 58 (ABA
2007)
39
Phelps, 1999 WL 1054255 at 2.
40
Guhan Subramanian, Go-Shops vs. No-Shops in Private Equity Deals: Evidence and Implications, 63 Bus. Law.
729, 734 (May 2008).
36
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3. Window-shop Provisions
Window-shop clauses are similar to no-shop provisions, but they permit a target to give
confidential information to an unsolicited offeror and to consider those unsolicited bids.41 Thus,
the company may not actively solicit bids, but if another buyer expresses interest and requests
information, the company is permitted to provide information and negotiate with the potential
bidder.42
4. Go-shop Provisions
Go-shop provisions permit the target to actively solicit offers for a limited period of time,
typically 30-50 days, after signing the acquisition agreement.43 During the go-shop period, the
target solicits proposals from and enters into talks with other potential bidders.44 The target also
exchanges information with the prospective bidders, and often any confidential information that
is exchanged with these bidders must also be shared with the initial bidder.45
Oftentimes, go-shop provisions involve a “bifurcated” or reduced break-up fee if the
agreement is terminated and the company sells to another bidder.46 In fact, 67% percent of the
transactions involving go-shop provisions in 2006 included a bifurcated termination fee, while
every 2007 go-shop transaction included a bifurcated termination fee.47 Termination fees during
the period are typically between one to two-thirds less that the full termination fee.48 The
bifurcated termination fee ensures that the initial bidder receives some compensation for the
expense it incurred in making the initial bid and negotiating the agreement, as opposed to the
41
Phelps, 1999 WL 1054255 at 2.
Id.
43
Mark Morton and Roxanne Houtman, Go-Shops: Market Check Magic or Mirage?, in, Negotiating Business
Acquisitions, vol. 1, § L, 1, 2 (ABA 2007).
44
Id.
45
Id.
46
Katz, Takeover Law and Practice 2007, at, 43
47
Morton and Houtman, Go-Shops: Market Check Magic or Mirage? at 2.
48
Id. at 5
42
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pre-signing auction that takes place in a no-shop context.49 If a higher offer is made within the
go-shop period, the target board, in most cases, provides the initial bidder with a “match right”, a
promise to negotiate with the initial bidder for a period of 3-5 days in order to determine whether
the initial bidder will match the terms of the topping bid.50 If the topping bidder wins the auction,
typically, the target board will pay the initial bidder the reduced break-up fee.51
The agreements provide for different steps that a higher bidder must take in order to
obtain the lower termination fee during the go-shop period.52 For example, an “open go-shop” is
one that only requires the target board to conclude before the end of the go-shop period that the
higher bidder has presented a proposal that is reasonably likely to lead to a superior proposal in
order to board terminate the initial proposal.53 In an open go-shop, the target has the whole goshop period to solicit competing proposals. On the contrary, a “closed go-shop” requires that,
before the end of the stated period, (1) the higher bidder must execute a confidentiality
agreement, resolve all due diligence issues, and prepare and submit the higher bid and form of
merger agreement, and (2) the target board must determine that the higher bidder has submitted a
superior proposal, then wait for the initial bidder to exercise their match right if applicable,
accept the higher bid, approve the merger agreement and terminate the initial agreement.54 Thus,
the closed go-shop mandates that much of the deal with the higher bidder be completed before
the end of the period.
49
Joseph L. Morrel, Student Author, Go Shops: A Ticket to Ride Past a Target Board’s Revlon Duties?, 86 Tex. L.
Rev. 1123, 1123 (2008).
50
Subramanian, 63 Bus. Law. at 735.
51
Id.
52
Morton and Houtman, Go-Shops: Market Check Magic or Mirage? at 5.
53
Id.
54
Id.
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In recent years, there has been a surge of private-equity transactions, which has put a
significant amount of pressure on the target board to act quickly in making a decision.55 Go-shop
provisions have proven to be very useful in this context. Private equity deal volume has
increased at a rate of 45% per year during 2001 through 2007.56 Currently, there is fierce
competition among private equity firms to gain deal exclusivity in the form of a one-on-one
negotiation.57 The empirical evidence suggests that approximately 84% of deals involving U.S.
public companies larger than $50M in value between January 2006 and September 2007
involving go-shop provisions have been in private equity transactions.58 There are several
reasons that a go-shop is more attractive than a no-shop in a private equity transaction.59 For one,
the private equity firm has difficulty differentiating itself from other private equity firms, who
most likely all use the same valuation model and discount rates.60 Thus, the private equity firm
values exclusivity more than a strategic buyer, who may be able to offer more synergies and
competitive advantages.61 Furthermore, the publicity of losing a deal in a post-signing auction
would be more detrimental to a strategic buyer’s reputation than to a private equity firm.62 In
deals involving a “pure go-shop”, one that has absolutely no pre-signing market canvass, the
empirical evidence suggests that target boards and shareholders generally benefit from go-shops,
as they yield an average of a 5% higher return.63
Go-shops are also particularly favored in the management buy-out through private equity
transaction, where an active bidding process during the negotiation of the deal is inherently
55
Morrel, 86 Tex. L. Rev. at 1127.
Subramanian, 63 Bus. Law. at 732.
57
Id. at 734.
58
Id. at 741-742.
59
Id. at 742.
60
Id.
61
Id.
62
Id.
63
Id. at 730.
56
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difficult due to the involvement of management.64 Target boards tend to prefer go-shops in these
situations, in order to take the control of the deal away from management, who in many cases
may be attempting to steer the deal in the direction of one purchaser.65 Thus, the go-shop gives
the board more flexibility to sign the agreement while simultaneously ensuring that the offer
price is adequate.66 Additionally, companies may choose not to engage in an auction or a presigning market check for many other business reasons such as: (1) the risk that the result may be
bids that were lower than expected or no bids at all, causing the value of the company to
decrease as a result, or (2) a desire to retain employees or customers.67 Thus, the go-shop
provision presents a good alternative to the auction or pre-signing market check in the
management buy-out situation.
IV. Progression of the Law Relating to No-shop and Go-shop Provisions
A. Landmark Cases
1. No-talk Provisions
Beginning in 1999 with the decision in Phelps v. Cyprus, the Delaware courts have
criticized “no-talk” provisions because of their likelihood to limit the director’s ability to avail
themselves of all information available to them and make an informed decision about the fairness
of the deal.68 In Phelps, the Court held that a straight no-talk provision, with no fiduciary-out
clause, acted to prevent the target company from considering information about alternative
transactions and that this type of provision was likely to be unenforceable even in a non-Revlon
setting.69 While the directors are permitted to negotiate provisions in merger agreements that
64
Morton and Houtman, Go-Shops: Market Check Magic or Mirage? at 2.
Morrel, 86 Tex. L. Rev. at 1123.
66
Id.
67
Morton and Houtman, Go-Shops: Market Check Magic or Mirage? at 6.
68
Phelps, 1999 WL 1054255 at 2.
69
Id. at 1.
65
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restrict their ability to negotiate with other parties, that decision must be an informed one and
must not foreclose all opportunity to discuss alternatives.70 The Chancery Court noted in Ace
Limited v. Capital Re Corporation, “No-talk provisions are troubling precisely because they
prevent a Board from meeting its duty to make an informed judgment with respect to even
considering whether to negotiate with a third-party.”71
2. No-shop Provisions
a. Paramount Communications, Inc. v. QVC Network, Inc.
The Delaware Supreme Court, in a landmark decision in QVC, set out major principals
intended to guide the behavior of directors of Delaware corporations in transactions involving a
change of control.72
In the late 1980’s Paramount was interested in a strategic expansion through a possible
acquisition or merger with another company in the entertainment, communications, or media
industry.73 Paramount entered into negotiations with Viacom in April of 1993, with more serious
negotiations taking place in July.74 Viacom initially offered a package of cash and stock,
comprised primarily of Class B nonvoting stock, with a market value of $61 per share.
Negotiations broke down shortly thereafter that because Paramount wanted at least $70 per
share.75 At that time, the CEO of Paramount learned that QVC was interested in making an offer,
but he told QVC’s CEO that Paramount was not for sale.76 In August, negotiations between
Paramount and Viacom resumed and on September 12, 1993, the Paramount Board unanimously
approved the a merger agreement, (the “Original Merger Agreement’), whereby Paramount
70
In re IXC Communications, Inc. Shareholder Litigation, 1999 WL 1009174, 6 (Del.Ch. 1999).
Ace Limited Capital Re Corporation, 747 A.2d. 95, 104 (Del.Ch. 1999).
72
QVC, 637 A.2d. at 34.
73
Id. at 38.
74
Id.
75
Id.
76
Id.
71
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would merge into Viacom with each share of Paramount common stock being converted into 0
.10 shares of Viacom Class A voting stock, 0.90 shares of Viacom Class B nonvoting stock, and
$9.10 in cash.77
The Original Merger Agreement also contained several deal protection measures,
including a no-shop provision, a termination fee, and a stock option agreement.78 The No-Shop
Provision provided that the Paramount Board would not solicit, encourage, discuss, negotiate, or
endorse any competing transaction unless: (a) a third party “makes an unsolicited written, bona
fide proposal, which is not subject to any material contingencies relating to financing”; and (b)
the Paramount Board determines that discussions or negotiations with the third-party are
necessary for the Paramount Board to comply with its fiduciary duties.79 The Termination Fee
was set at $100 million and would be triggered if the Paramount board terminated the Original
Merger Agreement for a competing transaction or if it recommended a competing transaction to
the shareholders.80 Finally, the Stock Option Agreement gave Viacom an option to purchase
19.9% of Paramount’s outstanding common stock at a price of $69.14 per share if any of the
triggering events of the termination fee occurred.
The Original Merger Agreement was signed and the merger was announced on
September 12, 1993. QVC made a competing bid in a letter to Paramount, offering $80 per share,
which consisted of 0.893 shares of QVC common stock and $30 in cash.81 The letter also
requested a meeting with the Paramount Board to discuss the details of the proposed
transaction.82 However, the Board was advised that the Original Merger Agreement prohibited
77
Id. at 39.
Id.
79
Id.
80
Id.
81
Id.
82
Id.
78
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them from talking to QVC unless certain conditions were met, but even after QVC provided
them with evidence of financing the discussions proceeded extremely slowly.83
On October 21, 1993, QVC filed suit in Delaware Court of Chancery and announced an
$80 per share cash tender offer, conditioned upon the invalidation of the Stock Option
Agreement, for 51% of Paramount’s outstanding shares.84 Within hours of this announcement,
Viacom entered into discussions with Paramount to negotiate a revised transaction.
85
Viacom
and Paramount executed an Amended Merger Agreement on October 24, 1993, which included
an increase in the price per share and the voting stock consideration to competitive with the QVC
offer.86 The Paramount Board, however, did not use its leverage in the negotiation to bargain for
the removal of the deal protection measures.87 Both the Viacom and the QVC tender offers were
launched in late October only two days apart.88 QVC then met with the Paramount board
proposing guidelines for fair bidding process, which were rejected by the Paramount Board
because they conflicted with their contractual obligations under the Amended Merger Agreement
with Viacom.89 A bidding war followed, ultimately resulting in QVC offering $90 per share.90
The Paramount Board met to consider the QVC offer and determined that the bid was overly
conditional, but they did not communicate with QVC regarding those conditions because they
believed they were prevented from doing so because of the No-Shop Provision.91
QVC and certain stockholders of Paramount sued in the Court of Chancery seeking
preliminary and permanent injunction relief against Paramount, members of the Paramount
83
Id. at 40.
Id.
85
Id.
86
Id.
87
Id.
88
Id. at 41.
89
Id.
90
Id.
91
Id.
84
{00010994 v2}15
Board, and Viacom.92 On November 24, 1993, the Court of Chancery issued its decision in favor
of QVC and the plaintiff stockholders, granting the injunction.93 A request for an expedited
interlocutory appeal was granted and the Supreme Court affirmed the decision of the Chancery
court on December 9th, 1993.94
The Supreme Court began its analysis with an explanation of the heightened scrutiny the
court must engage in when there is, as there was in this case, the approval of a transaction
resulting in a change of control, and the adoption of defensive measures in response to a threat of
corporate control.95 As discussed in the second section above, the court explained that since
Revlon, Delaware courts have made it clear that a director’s obligation is to seek the best value
reasonably available to stockholders when a corporation “initiates an active bidding process
seeking to sell itself or to effect a business combination involving a clear break-up of the
company” or where “in response to a bidder’s offer, a target seeks an alternative transaction
involving a break-up” of the corporate entity.96 The court went on to say that the need for
information is essential in order for the directors to make an informed decision when evaluating
a transaction.97
The Court held that under the facts of this case, the Paramount Board had a duty to: (1)
be diligent in examining the Viacom and QVC offers, (2) act in good faith, (3) obtain, and act
with due care on, all material information reasonably available, including information necessary
to compare the two offers, and (4) negotiate actively and in good faith with both Viacom and
QVC.98 Even though the court recognized that, under Barkan, there are many methods a board
92
Id. at 35.
Id.
94
Id.
95
Id. at 42.
96
Id. at 47-48.
97
Id. at 48.
98
Id.
93
{00010994 v2}16
can employ to fulfill its obligation to seek the best value reasonably available to the stockholders,
the court held that the Paramount Board’s process was not in the range of reasonableness.99
Citing Barkan, the Court explained further, “Where a board has no reasonable basis upon which
to judge the adequacy of a contemplated transaction, a no-shop restriction gives rise to the
inference that the board seeks to forestall competing bids.”100 The Board did not give sufficient
attention to the potential consequences of the defensive measures that Viacom demanded.101 The
Court found that the Paramount Board should have known that the No-shop Provision, when
combined with the Stock Option and Termination fee, made it more difficult for a potential
competing bid to succeed and were, therefore, operating to impede the realization of the best
value available to the company.102
Moreover, the Court held that the No-shop Provision was invalid and unenforceable
because it prevented the directors from fulfilling the fiduciary duty to the company and its
shareholders.103 The No-shop Provision itself cannot define or limit the fiduciary duties of
directors, meaning the directors of Paramount were not free to contract away their fiduciary
obligation to the company.104
In sum, the Court held that the directors breached their fiduciary duty by agreeing to and
failing to amend the draconian deal protection provisions in their agreement with Viacom.105
99
Id. at 49.
Id.
101
Id.
102
Id.
103
Id. at 48.
104
Id. at 51.
105
Id.
100
{00010994 v2}17
B. Recent Delaware Cases
1. Window-shop
a. In re Netsmart Technologies, Inc. Shareholders Litigation
The Court of Chancery, in recent decision in the case In re Netsmart, held that a special
committee could not rely upon efforts to solicit interested parties in prior years and upon a
passive “window shop” provision in a Merger Agreement, as opposed to an active canvass of the
market, to satisfy its Revlon duties.106
Netsmart was a leader in the behavioral healthcare information technology market and
provided enterprise software solutions to healthcare organizations.107 Netsmart was a public
company, incorporated in 1992, that experienced significant growth, through both sales and
strategic acquisitions, to eventually become the largest company it its market niche in 2006.108
The company’s management had become concerned that it was outgrowing its market in the late
1990’s and discussed what could be done to address that concern.109 One option the company
considered at that time was finding a larger healthcare IT software firm to acquire Netsmart and
add its software to their larger line of products.110 One member of the board, Conway, had had
sporadic and isolated discussions with a handful of larger companies over the course of seven
years, ending in 2005.111 In 2003, Netsmart engaged William Blair as an investment banker in
connection with the acquisition of their largest competitor CMHC, a deal which consummated in
106
In re Netsmart Technologies, Inc. Shareholders Litigation, 924 A.2d 171, 196-199 (Del.Ch. 2007).
Id. at 177.
108
Id.
109
Id. at 179.
110
Id.
111
Id.
107
{00010994 v2}18
2005.112 From late 2003 through 2005, William Blair dropped Netsmart’s name when it made
cold calls on corporations in the healthcare industry.113
After the acquisition of CMHC in 2005, a few private equity firms had begun expressing
interest in Netsmart.114 The board met in May of 2006, to discuss three options for the company:
(1) continuing to build as a public company; (2) finding and selling the company to a strategic
buyer; and (3) taking the company private by selling to a financial buyer.115 The presentation
focused largely on the benefits of a private equity transaction.116 It emphasized the upside to
management, saying that they would get “another bite at the apple”, meaning that management
would profit from the sale of their equity in the going private transaction, would be kept on to
manage the company, and would likely be granted options from the private equity buyer.117 The
presentation dismissed the option of finding and selling the company to a strategic buyer,
claiming that they had pursued that route and there was not any interest, referring to the informal
and sporadic conversations that Conway had over the last seven years.118
Having not canvassed the market for a strategic buyer, the company reached out to seven
private equity firms for an offer, four of which responded positively: Vista, Francisco, Cressey,
and Insight.119 The board formed a Special Committee to negotiate the transaction, though the
committee was largely guided by management, the interested directors, and the investment
banking firm.120 The Special Committee decided to offer the two highest bidders the opportunity
to conduct further due diligence in contemplation of a higher bid in late August of 2006. This
112
Id.
Id.
114
Id. at 180.
115
Id. at 181.
116
Id.
117
Id.
118
Id.
119
Id. at 187.
120
Id. at 194.
113
{00010994 v2}19
decision was based upon the belief that as long as the Merger Agreement had a fiduciary-out and
did not contain preclusive deal protections, other buyers with an interest would make a topping
bid after the public announcement.121 After the second round of due diligence, both bidders’
offers went down, but Insight, who had not been invited to the second due diligence round, was
still interested.122
Insight conducted further due diligence, and, at the end of October 2006, Insight and
Netsmart agreed to a merger at a price of $16.50 per share.123 The Special Committee, in
negotiations with Insight, sought the opportunity to actively shop Netsmart though a “go-shop”
clause after the Merger Agreement was publicly announced.124 Insight, however, refused and the
Special Committee agreed to a “window shop” provision, which allowed Netsmart to consider
only unsolicited bids that met a standard definition of a superior proposal.125 The parties also
negotiated a 1% reverse termination fee if Insight failed to close by exercise of its financing-out
and a 3% termination fee for Insight if Netsmart terminated the deal in favor of a superior
proposal.126
After the announcement of the Merger Agreement in November 2006, several
shareholders filed suit, seeking an injunction.127 The Plaintiffs alleged that the directors failed to
undertake efforts to secure the highest price realistically achievable and, thus, breached their
Revlon duties.128 The Plaintiffs claimed that the board lacked a reasonable basis for its decision
not to take steps to explore whether strategic buyers might be interested in Netsmart.
121
Id. at 188.
Id. at 189.
123
Id. at 190.
124
Id.
125
Id.
126
Id.
127
Id. at 191.
128
Id.
129
Id. at 193.
122
{00010994 v2}20
129
The
Court held that the Special Committee and the Netsmart board did not have a reasonable basis to
conclude that the Insight deal was the best one because they failed to take any reasonable steps to
explore whether strategic buyers might be interested in Netsmart.”130 In discussing Barkan, the
Court remarked:
“When directors posses a body of reliable evidence with which to evaluate the
fairness of a transaction, they may approve that transaction without conducting an
active survey of the market. The corollary to this is clear: when they do not
possess reliable evidence of the market value of the entity as a whole, the lack of
an active sales effort is strongly suggestive of a Revlon breach.”131
The Court was particularly troubled by the assertions by Conway and William Blair that
they had pursued the opportunity of a strategic merger with a larger company, but no interest was
expressed, and therefore it was not worthy pursuit.
132
The Court viewed the discussions by
Conway and William Blair as “erratic, unfocused, and temporally-disparate”, and, thus,
insufficient to constitute a reasonable evaluation of this option.133 The Court remarked: “the mere
fact that some healthcare IT players had not responded to less authoritative overtures in years
long-past does not mean that they might not have taken a look at Netsmart in 2006.”134 The
company was in a different position after its acquisition of its largest competitor in 2005, thus it
was not reasonable to conclude that because there was little interest from potential strategic
buyers in years prior to 2005 that it was not necessary to canvass the market again in 2006.135
The Court held that, while the reliance on a post-signing market check without active
solicitation, or a window-shop period, may be sufficient in the large-cap company context,
130
Id. at 195.
Id.
132
Id. at 196.
133
Id. at 186.
134
Id. at 196.
135
Id.
131
{00010994 v2}21
Netsmart, a micro-cap company, was required to do more to fulfill their Revlon duty.136 The
Court noted that Netsmart and its advisors could have put together materials, tailored to larger
companies in the healthcare IT space, describing the advantages of a business combination.137
Additionally, the Court believed that management’s decision to pursue solely the private
equity option was motivated by a desire to remain on board and get their “second bite at the
apple”.138 Thus, the Court found that the reliance by the Special Committee upon the sporadic
and informal efforts of Conway and William Blair in previous years and a passive window-shop
provision, as opposed to an active canvass of the market, was not sufficient to satisfy the board’s
Revlon duties.139
Even though the Chancery Court determined that the plaintiffs had demonstrated a
likelihood of success on the merits of their Revlon claim, it did not issue an injunction on that
basis out of concern that an injunction would result in Netsmart losing its only bidder.140 The
Court did issue a preliminary injunction based upon the plaintiffs’ disclosure claim and
mandated that Netsmart disclose to the stockholders the necessary information omitted from the
proxy statement before Netsmart could proceed with a Merger vote.141
2. Go-shop
a. In re Lear Corp. Shareholder Litigation
The Delaware Chancery Court, in In re Lear Corp. Stockholder Litigation, held that the
directors of Lear Corp. did not breach their Revlon duties even though the directors did not
conduct a pre-signing auction, but chose instead to engage in a 45-day closed go-shop period.142
136
Id.
Id. at 197.
138
Id. at 198.
139
Id. at 197.
140
Id.
141
Id. at 210.
142
In re Lear Corporation Shareholder Litigation, 926 A.2d 94, 96 (Del.Ch. 2007).
137
{00010994 v2}22
Lear Corporation, one of the largest automotive interior systems suppliers, was traded on
the NYSE and was among the 150 largest companies in the U.S.143 Lear experienced financial
troubles in 2005 and 2006, due in large part to depressed auto sales among North American
automotive manufacturers.144 In early 2006, Carl Icahn bought a large portion of Lear stock on
the market, which had the effect of increasing the value of Lear’s stock.145 Later in the year,
Icahn purchased $200 million of Lear’s stock in a secondary offering through a private
placement, which gave him a total of 24% of the shares.146 The fact that the Lear board had
recently removed its poison pill, combined with the investment by Icahn, led the market to
believe that the company would likely be sold in the near future.147
In early 2007, Icahn recommended to Lear’s CEO, Rossiter, that it should pursue a going
private transaction.148 A week later, Rossiter told the rest of the board and they formed a Special
Committee, which authorized Rossiter to negotiate merger terms with Icahn.149 The Special
Committee did not take an active role in due diligence or the negotiations, leaving Rossiter to
take the lead.150
Icahn made an initial bid to acquire Lear at $35 per share and expressed his intention to
retain senior management.151 In this bid, Icahn agreed to a go-shop period during which Lear
would actively solicit higher bids, but he demanded a termination fee plus reimbursement of up
to $20 million in expenses if his bid was topped during the go-shop period.152 The Special
Committee rejected the bid, after deciding that the price was too low, and several exchanges of
143
Id.
Id. at 98.
145
Id.
146
Id.
147
Id.
148
Id.
149
Id.
150
Id .at 102.
151
Id at 103.
152
Id.
144
{00010994 v2}23
counter-offers between the parties followed.153 After this back and forth, Icahn eventually
offered $36 per share, agreed to pay a reverse break-up fee if he breached the merger terms and
agreed to be more flexible in negotiating the terms of the go-shop and the termination fee.154 In a
board meeting to consider the proposal, JP Morgan represented to the board that Icahn’s offer
was attractive in light of the industry and the market.155 The Lear board also debated the benefits
of an auction, but the board was concerned that an auction would disrupt the company’s business
and customer relationships and result in losing the Icahn offer.156 Thus, they decided that the goshop structure would (i) secure a firm commitment from Icahn; (ii) avoid the risk that he would
withdraw his bid in an auction; and (iii) serve as the best method of maximizing the value to the
shareholders.157 The board proceeded to negotiate the terms of the Icahn offer and they agreed on
the following: a 45-day closed go-shop period, a decreased termination fee during the go-shop
period, Icahn would have the opportunity to match a superior proposal (“matching rights”), a
fiduciary-out there permitted the board to accept an unsolicited superior proposal even after the
go-shop period, and Icahn’s agreement to vote his share in favor of a superior proposal obtained
in the go-shop period.158 Immediately after the announcement of the Merger Agreement, JP
Morgan actively solicited expressions of interest from third-parties, contacting a total of 41
potential buyers, including 24 financial sponsors and 17 strategic acquirers. Only 8 out of the 41
firms decided to conduct initial due diligence, but at the end of the go-shop period none of the
buyers that were solicited had made even a preliminary bid.159
153
Id.
Id.
155
Id. at 104.
156
Id.
157
Id.
158
Id.
159
Id. at 106.
154
{00010994 v2}24
The plaintiff shareholders sued, seeking a preliminary injunction against the merger,
claiming that the Lear board violated their fiduciary duty by failing to take reasonable steps to
secure the highest price reasonably available to the Lear shareholders.160
The Chancery Court ultimately found that the Lear board of directors did not breach its
Revlon duties, as it “retained for itself broad leeway to shop the company after signing, and
negotiated deal protection measures that did not prevent an unreasonable barrier to any secondarriving bidder”161 However, in dicta, the Court criticized the 45-day closed go-shop because it
“essentially required the bidder to get the whole shebang done within a 45 day window”.162 The
Court pointed out that, in order to take advantage of the lower termination fee, a superior bidder
would have had to complete all the following actions in 45 days: conduct due diligence, present a
topping bid with a draft merger agreement, have the Lear board decide to declare the new bid a
superior proposal, wait 10 days for Icahn to exercise his match right, have the Lear board accept
the bid, terminate its agreement with Icahn, and enter into a merger agreement.163 After
criticizing this closed go-shop, the Court said that the requirement of a higher termination fee
that would be payable by a topping bidder after the go-shop period, would not likely chill the
bidding process.164 Thus, the Court ultimately found the board’s decision to proceed with a post
market check using the go-shop, a reasonable break up fee and a special voting agreement by
Icahn to support any unmatched superior proposal sufficient to satisfy their Revlon duties.165
Generally, in this case, the Court viewed the entirety of the board’s actions as reasonable
and in good-faith.166 The board actively negotiated with Icahn with regard to the deal protection
160
Id. at 110.
Id. at 122.
162
Id. at 119.
163
Id.
164
Id. at 120.
165
Id.
166
Id. at 118-121.
161
{00010994 v2}25
measures and made an informed decision not to conduct a full auction, after conducted a limited
pre-signing market check that yielded no serious bids.167
Even though in dicta the Court expressed some concern over whether the reduced
termination fee during the go-shop period was illusory, ultimately, it was the entirety of the
board’s conduct that the Court found to be reasonable, and thus, sufficing of its Revlon duties.168
b. In re The Topps Company Shareholders Litigation
The Delaware Chancery Court decided another case dealing with a go-shop provision in
2007, In re The Topps Co. Shareholders Litigation.169 The Court held that the Topps board did
not breach its Revlon duty by deciding to forgo a public auction in favor of a 40-day open goshop period. However, the Court held that the plaintiffs would likely prevail on their claim for
breach of Revlon duty based upon the directors’ refusal to negotiate with a competing bidder in
good faith.170
The Topps Company, Inc. manufactured baseball cards, other cards, and distributed
Bazooka bubble gum.171 Arthur Shorin, the son of one of the founders of the company, was the
Chairman and CEO, and his son-in-law Scott Silverstein was the President and COO.172 In 2005,
Topps attempted to auction a division of its business under pressure from its shareholders, but a
serious bid was never made.173 Shorin and board members friendly to him had become
concerned that they would be voted off the board, when Michael Eisner came in with an offer to
be “helpful”.174 Eisner made a bid for the company, offering $9.24 per share in a proposal that
167
Id.
Id.
169
In re The Topps Company Shareholders Litigation, 926 A.2d 58 (Del.Ch. 2007).
170
Id. at 58.
171
Id. at 60.
172
Id.
173
Id.
174
Id. at 61.
168
{00010994 v2}26
also envisioned the retention of existing management, including the son-in-law.175 At this time,
there was a clear schism in the board between those that favored a going private transaction with
Eisner and those that favored a public auction.176 Ultimately, the Topps board approved the
Merger Agreement with Eisner in a divided vote.177
The Merger Agreement included a 40-day go-shop period that allowed Topps to shop the
deal for 40-days after signing and gave the company the right to accept a Superior Proposal after
that, subject only to Eisner’s termination fee and match right.178 Topps was authorized to solicit
alternative bids and to freely discuss a potential transaction with any potential buyer. When the
40-days was up, Topps was required to cease all talks with any potential bidders unless the
bidder had already submitted a Superior Proposal or the Topps board determined that the bidder
was an Excluded Party, which was defined as a potential bidder that the board considered
reasonably likely to make a Superior Proposal.179 If the bidder fulfilled either if these
requirements, then Topps could continue talks with them after the go-shop period, an “open” goshop provision.180 Topps was also permitted to consider unsolicited bids after the expiration of
the go-shop period if it constituted a Superior Proposal or was reasonably likely to lead to one.181
The termination fee was 3% if Topps terminated during the go-shop period in order to accept a
Superior Proposal and 4.6% if Topps terminated after the go-shop period.182
175
Id.
Id.
177
Id.
178
Id.
179
Id. at 65.
180
Id.
181
Id.
182
Id.
176
{00010994 v2}27
Shortly before the approval of the Merger Agreement, Topps chief competitor, The
Upper Deck Company, displayed a willingness to make a bid, but Topps signed the Merger
Agreement with Eisner without responding to Upper Deck.183
After the Merger Agreement was approved, Lehman Brothers, Topps’ investment banker,
began the go-shop process and contacted more than 100 potential buyers, both strategic and
financial.184 Upper Deck was the only serious bidder that engaged during the period.185 Topps
and Upper Deck executed a Confidentiality Agreement that included a Standstill Provision,
which prohibited Upper Deck from making any public disclosures during the negotiation.186 At
the end of the go-shop period, Upper Deck had made a non-binding bid to pay $10.75 per share
in a merger, without a financing contingency.187 The Topps board met and voted that Upper
Deck had failed to submit a Superior Proposal, due to the non-binding nature of the bid, and that
Upper Deck should not be treated as an Excluded Party, which would have permitted Topps to
continue negotiations with them.188 Subsequently, Upper Deck requested relief from the
Standstill Agreement in order to launch a tender offer for Topps’ share, but Topps refused to do
so.189
A group of shareholders and Upper Deck filed suit seeking preliminary injunction of the
merger with Eisner.190 The shareholders alleged, among other things, that the Topps board
breached their Revlon duties by choosing to forgo a public auction in favor of a go-shop
provision that was ineffective and by refusing to negotiate with Upper Deck in good faith.191
183
Id. at 62.
Id.
185
Id.
186
Id.
187
Id.
188
Id. at 72.
189
Id. at 62.
190
Id.
191
Id. at 63.
184
{00010994 v2}28
Upper Deck claimed, among other things, that the Topps board breached its fiduciary duty by
misusing the Standstill Agreement to prevent them from communicating with the Topps
shareholders and presenting them with an opportunity to sell their shares for a higher price.
192
The plaintiffs claimed that the majority directors were motivated by a desire to ensure that the
Shorin family would continue in the leadership of the company, which caused them to favor the
Eisner transaction over the Upper Deck deal in violation of their Revlon duties.193
The Court held that the directors did not breach their Revlon duty by deciding to engage
in the private equity transaction with a go-shop period instead of a public auction.194
Additionally, the Court rejected the plaintiff’s claim that the go-shop period itself was
ineffective, finding that the board had left itself “reasonable room for an effective post-signing
market check” by negotiating a merger agreement that included a go-shop provision that allowed
the board to negotiate with competing bidders that it identified during a 40-day period as having
submitted or being reasonably likely to submit a Superior Proposal.195 The Court added:
“The 40-day Go-shop Period and this later right [the right to entertain an
unsolicited bid] work together, as they allowed interested bidders to talk to Topps
and obtain information during the Go-shop Period with the knowledge that if they
needed more time to decide whether to make a bid, they could lob in an
unsolicited Superior Proposal after the Period expired and resume the process.”196
However, the Court granted the Plaintiff’s injunction because it found that the Topps
board did not determine in good faith whether the Upper Deck proposal was a Superior Proposal
or reasonably likely to lead to one.197 The board’s refusal to set aside the Standstill Provision,
preventing Upper Deck from making a tender offer, further demonstrated that the board failed to
192
Id.
Id. at 82.
194
Id. at 87.
195
Id.
196
Id.
197
Id. at 89.
193
{00010994 v2}29
pursue the highest price reasonably attainable for the shareholders.198 The Court held that the
Topps’ board did breach the Revlon duty by biasing the process against Upper Deck and toward
the Eisner transaction, which was more likely to keep current management in place.199
V. Analysis of the Law
A. No-shop, Window-shop, Go-shop: Guidelines for Directors
The recent Delaware decisions have not provided directors and practitioners with an
absolute guaranteed course of action that fulfills the Revlon duty in a sale of control transaction.
The refusal of the court to adopt a black letter standard for violation of fiduciary duty is a
positive development for shareholders.200 These recent decisions indicate that Delaware courts
consider all the facts and arguments in these cases to make an informed and balanced decision
regarding the good faith of the fiduciaries involved.201 The drawback for practitioners is that
there is not a formulaic paradigm that dictates the proper advice to the fiduciaries in these
circumstances.
While there are no magic words that an attorney can use to ensure the ironclad
enforceability of a no-shop or go-shop provision under Delaware law, there are some basic
underlying principals that can be extracted from this line of cases. Since the circumstances
surrounding each transaction for the sale of control are unique, the courts, in an attempt to
protect the shareholders, evaluate the entirety of the circumstances in order to determine whether
the directors acted reasonably to maximize the value to the shareholders. Hence, what the
198
Id.
Id. at 90.
200
Mark Lebovitch with Laura Gundersheim, “Novel Issues” or a Return to Core Principles? Analyzing the
Common Link Between the Delaware Chancery Court’s Recent Rulings in Option Backdating and Transactional
Cases, 4 N.Y.U.J.L. & Bus 505, 528 (2008).
201
Id.
199
{00010994 v2}30
Delaware courts consider reasonable varies with the circumstances of each deal. According to
the Delaware Supreme Court in Barkan, there is ‘no single blueprint’ that the board must follow
in order to maximize the value to the shareholders.202 The Court in Netsmart further clarifies that
idea by commenting: “The ‘no single blueprint’ mantra is not a one way principle.203 The mere
fact that a technique was used in different market circumstances by another board and approved
by the court does not mean that it is reasonable in other circumstances that involve very different
market dynamics.”204 In their recent decisions, the Chancery Court in Delaware has provided
some guidance to directors in this area, by outlining important principals and identifying actions
which result in the breach of fiduciary duty.
1. Duty of Loyalty and Active Canvass of the Market
If the situation is one where the directors chose a type of transaction or a particular
acquirer that results in their continued employment over another course of action which does not
necessarily guarantee the same result, the courts are skeptical of that decision, as was seen in
Netsmart, Lear, and Topps.205 In Netsmart, the Court viewed the passive window-shop and the
sporadic discussions as being insufficient to overcome the presumption of self-dealing.206
Without a market canvass, in certain types of transactions, the board cannot possibly avail itself
of the information it needs to make an informed decision as to whether the deal is the best value
for the shareholders.207 Although the go-shop allows the board to solicit new offers in pursuing
the best value reasonably available, the board will not yet satisfy its Revlon duties until it
actually utilizes the go-shop in a good-faith attempt to realize superior value.208 Even though the
202
Barkan, 567 A.2d at 1286.
Netsmart, 924 A.2d at 195.
204
Netsmart, 924 A.2d at 197.
205
Netsmart, 924 A.2d at 181; In re Lear, 926 A.2d at 103; In re Topps, 926 A.2d at 89.
206
Netsmart, 924 A.2d at 189.
207
Id.
208
Morrel, 86 Tex. L. Rev. at 1135.
203
{00010994 v2}31
directors in Lear, stood to benefit from the going-private transaction with Icahn, the Court
viewed the board’s actions more favorably because the deal protection measures were not “bidchilling” and the board actively solicited bids during the go-shop period that produced no
competing bids.209 The Court in Topps, was not troubled by the 40-day open go-shop provision
itself in the going private transaction with Eisner because the board actively shopped the deal
during that period. However, the Court did find that the board failed to carry out the go-shop
period in good faith which was a breach of its Revlon duties.210 Thus, a board cannot sit back and
wait for unsolicited bidders to appear, particularly in instances where the board and management
have a personal interest in a particular type of transaction or a particular suitor.
2. Active Negotiation of Deal Protection Measures
Directors must also actively negotiate the deal protection measures with a potential suitor
in order to fulfill their Revlon duty.211 In QVC, the Court gravely criticized the board for failing
to re-negotiate the draconian deal protection measures with Viacom when it came back with a
new offer and QVC had leverage.212 On the contrary, the Court praised the board in Lear for its
victories in the negotiation with Icahn.213 Thus, the board must utilize its bargaining power and
carefully consider whether its actions will yield the best value for the shareholders at each step in
the transaction.
3. Weigh the Risks of Various Courses of Action
Also evident from this line of cases is the notion that the board is required to actively
contemplate and weigh the risks involved in various types of transactions, making an informed
209
In re Lear, 924 A.2d at 103.
In re Topps, 924 A.2d at 87.
211
See QVC, 637 A.2d at 51; In re Lear, 926 A.2d at 120.
212
QVC, 636 A.2d at 51.
213
In re Lear, 926 A.2d at 120.
210
{00010994 v2}32
decision based upon a wealth of information.214 The board was harshly criticized by the Court in
Netsmart because it gave little attention to the option of a strategic merger in its meetings.215 On
the other hand, the Court praised the board in Lear for doing their due diligence: obtaining a
report from their financial advisor and weighing the risks and benefits of conducting an auction
versus a post-signing market check.216 Hence, it is permissible to forego a pre-signing auction, if
the circumstances warrant such a decision, but in making the decision to opt for a certain type of
transaction and conduct a post-signing go-shop period, the board must avail itself of all the
available information and diligently deliberate the risks of those courses.
4. Open Go-shop Is Preferred Over a Closed Go-shop
The analyzed decisions also indicate that Delaware courts take a more favorable view of
the open go-shop provision, as opposed to the closed go-shop. However, based upon the
particular facts and circumstances, either can be enforceable. Although the Court in Lear
ultimately held that the board did not breach its fiduciary duty, the Court criticized the 45-day
closed go-shop in dicta.217 The Court said that it would be nearly impossible for another bidder
to take advantage of the lower termination fee during the go-shop period, given the terms, but
since the termination fee outside of the go-shop period was viewed as within the range of
reasonableness, the provision was valid.218 The Court in Topps, viewed the open go-shop
favorably because it allowed the board to negotiate after the end of the period with competing
bidders that it identified during the period as having submitted or being reasonably likely to
submit a Superior Proposal.219
214
In re Netsmart, 926 A.2d at 197; In re Lear, 926 A.2d at 103.
In re Netsmart, 926 A.2d at 197.
216
In re Lear, 926 A.2d at 119.
217
Id. at 120
218
Id.
219
In re Topps, 926 A.2d at 87.
215
{00010994 v2}33
VI. Conclusion
Although Delaware courts have refused to express a bright-line rule as to which deal
protection provisions are permissible and which are overreaching, the recent decisions serve to
illuminate several principals that practitioners and boards should use to guide their conduct in a
sale of control transaction. While a pre-signing auction followed the execution of an agreement
with a no-shop provision and a fiduciary-out clause, is permissible so long as the effect of the
deal protection measures, as a unit, are not bid chilling, the board must negotiate in good faith
with any unsolicited third-parties who present the opportunity for a topping bid.220
Generally, the board must not be passive in its attempt to obtain the highest bidder for the
company.221 While it may be permissible for a large-cap company to provide for a window-shop
period, during which the company can provide confidential information to unsolicited bidders, it
is impermissible for the board to rely on such a provision if it is a micro-cap company.222 Hence
the phrase, “no single blueprint”, meaning the court will look to the individual characteristics of
the company and its industry when it evaluates whether the board’s conduct was within the range
of reasonableness.223
The use of go-shop provisions is on the rise in the private equity sector. In deals
involving private equity buyers and public targets, announced in 2005, only 2% of them included
a go-shop provision, whereas in the deals announced in 2006, 29% include go-shop
provisions.224 The recent line of Delaware cases indicates that the Delaware courts generally
approve of go-shop provisions, so long as the directors proceed in good faith. The board only
220
QVC, 637 A.2d. at 48.
Netsmart, 924 A.2d at 195.
222
Id.
223
Id. at 197.
224
Keith A. Flaum, 2007 Private Equity Buyer/Public Target Study Working Group , in, Negotiating Business
Acquisitions, vol. 2, § P, 1 (ABA 2007).
221
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satisfies its Revlon duties if it actively engages in a post-signing market canvas, acts in the best
interest of the corporation, actively negotiates the deal protection measures, carefully weighs the
risks and rewards of the course of action when compared to other alternatives, and bargains in
good faith with other bidders.225 It is clear from this line of cases that the mere inclusion of a goshop provision in a Merger Agreement is not an Easy Pass through the fiduciary duty toll along
the fast-paced road to closing the deal.
225
See Netsmart, 924 A.2d at 195-197; In re Lear, 926 A.2d at 103-120; In re Topps, 926 A.2d at 87-90; QVC, 637
A.2d. at 48-51.
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TABLE OF AUTHORITIES
CASES Ace Limited Capital Re Corporation, 747 A.2d. 95 (Del.Ch. 1999). ......................................... 13
Aronson v. Lewis, 473 A.2d 805 (Del. 1984).................................................................................. 2
Barkan v. Amsted Industries, Inc. 567 A.2d 1279 (Del. 1989)................................. 4, 5, 16, 21, 31
Cede & Co. v. Technicolor, Inc., 634 A.2d 345 (Del. 1993) .......................................................... 6
In re IXC Communications, Inc. Shareholder Litigation, 1999 WL 1009174 (Del.Ch. 1999). .. 13
In re Lear Corporation Shareholder Litigation, 926 A.2d 94 (Del.Ch. 2007).... 22, 23, 24, 25, 26,
31, 32, 33, 35
In re Netsmart Technologies, Inc. Shareholders Litigation, 924 A.2d 171 (Del.Ch. 2007).. 18, 19,
20, 21, 22, 31, 33, 34, 35
In re The Topps Company Shareholders Litigation, 926 A.2d 58 (Del.Ch. 2007).... 26, 27, 28, 29,
30, 31, 32, 33, 35
Mills v. Macmillan, Inc., 559 A.2d 1261 (Del. 1989)............................................................. 3, 4, 5
Paramount Communications, Inc. v. QVC Network, Inc., 637 A.2d 34 (Del. 1994)... 2, 3, 4, 7, 13,
14, 15, 16, 17, 32, 34, 35
Phelps Dodge corp. v. Cyprus Amax Minerals Co., 1999 WL 1054255, 2 (Del.Ch. 1999). 8, 9, 12
Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d. 173 (Del. 1986)............... 3, 4, 6
Weinberger v. UOP, Inc., 457 A.2d 701 (Del. 1983). .................................................................... 2
OTHER AUTHORITIES David A. Katz, Takeover Law and Practice 2007, in, Negotiating Business Acquisitions, vol. 2, §
O, 1 (ABA 2007)..................................................................................................................... 8, 9
Diane Frankel, Fiduciary Duties in Considering Deal Lockups: What’s a Board to Do?, in ,
Negotiating Business Acquisitions, vol. 1, § K, (ABA 2007)................................................. 6, 8
Guhan Subramanian, Go-Shops vs. No-Shops in Private Equity Deals: Evidence and
Implications, 63 Bus. Law. 729 (May 2008). ................................................................. 8, 10, 11
Joseph L. Morrel, Student Author, Go Shops: A Ticket to Ride Past a Target Board’s Revlon
Duties?, 86 Tex. L. Rev. 1123 (2008). ......................................................................... 11, 12, 31
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Keith A. Flaum, 2007 Private Equity Buyer/Public Target Study Working Group , in,
Negotiating Business Acquisitions, vol. 2, § P, 1 (ABA 2007) ................................................ 34
Koppes, Richard, The Role of Outside Counsel, (Atlanta, Ga., March 17, 2008) .......................... 8
Mark Lebovitch with Laura Gundersheim, “Novel Issues” or a Return to Core Principles?
Analyzing the Common Link Between the Delaware Chancery Court’s Recent Rulings in
Option Backdating and Transactional Cases, 4 N.Y.U.J.L. & Bus 505 (2008)....................... 30
Simon M. Lorne, Acquisitions and Mergers: Negotiated and Contested Transactions, §3:61, 3218 (West Group 2002) .............................................................................................................. 6
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