Go Shops: A Ticket to Ride Past a Target Board’s
Revlon Duties?*
This Note discusses and describes the recent use of “go shop” clauses in
corporate merger agreements, particularly agreements involving private-equity
buyers. The Note serves two major functions: (1) to fully describe the characteristics of a go shop by comparing the provision to other deal-protection
measures and providing real-world examples from numerous high-dollar deals
and (2) to highlight the possible legal pitfalls that may arise from using a go
shop in light of recent Delaware jurisprudence.
In a corporate merger, the parties negotiate the terms of the deal and
eventually sign a merger agreement. The board of directors is charged with the
responsibility of ensuring that the deal is beneficial to shareholders. As such,
the board of the target company—the company being acquired—must test the
market in some way to ensure that the offered price is adequate. Failing to do
this will comprise a breach of the board’s fiduciary duties. Recently, the explosion of private-equity deals—deals made by private funds to purchase
corporations outright—has shortened the fuse on many merger offers, putting
pressure on target boards to make quick decisions. Additionally, the managements of target companies are often involved on the buyer’s side of the deal and
in bringing these deals to the target board. Thus, in situations such as these,
target boards have sought a mechanism to take the reins of the company away
from management and to acquire the flexibility to sign the agreement while ensuring the offered price is adequate. Go shops provide this flexibility and have
thus become particularly popular in the context of private-equity deals.
However, the particular legal ramifications of a go shop have yet to be directly
tested in the Delaware courts. This Note seeks to fill that void by fully describing go shops as they have recently been utilized and forecasting how the
Delaware courts will likely analyze such provisions.
* I am eternally grateful to my wife, Emily, for her unwavering support, unending patience,
and enduring tolerance of my total lack of direction. I would additionally like to thank my parents,
Suzanne and Robert, for providing a sterling example of character and integrity to serve as my
lodestar. Many, many thanks to my older sister, Suzie, for blazing all the trails; to Professor
Elizabeth Chestney for teaching the unteachable; to Professors William Barnett II and Walter Block
of Loyola University New Orleans for introducing me to Austrian Economics and making
economics part of my everyday understanding; to Professor Joseph Cialone II for introducing me to
the world of go shops and guiding me on this project; and to all the members of the Texas Law
Review Volume 86, particularly the Notes Office, for briefly exploring the world of corporate law
with me.
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“Every market phenomenon can be traced back to definite choices of
the members of the market society.”
—Ludwig von Mises1
I.
Introduction
The use of the “go shop”2 in corporate transactions3 has recently gained
prominence.4 Increasingly, target corporations’ boards of directors have inserted the go shop into merger agreements, ultimately reversing the
conventional wisdom that once a deal was signed the parties agreed to deal
exclusively with each other and refrain from looking for other partners.5
However, if, as von Mises suggests, the phenomenon of including a go shop
in merger agreements is a definite choice by the target board as a member of
1. LUDWIG VON MISES, HUMAN ACTION: A TREATISE ON ECONOMICS 258 (Henry Regnery Co.
3d rev. ed. 1966) (1949).
2. In a merger agreement between an acquiring corporation and a target corporation, the go
shop is a particular section of the agreement permitting the target corporation to solicit superior bids
in order to obtain a better deal and break the original agreement. See infra notes 56–59 and
accompanying text. The overwhelming majority of go shops have a finite duration lasting between
fifteen and fifty-five days during which the board may solicit bids: the “solicitation period.” See
infra notes 54–56 and accompanying text. Additionally, many other deal protections, particularly
the “break-up fee,” are reduced if a superior bid is obtained during the go shop’s solicitation period.
See infra note 57 and accompanying text. Part II further describes the go shop.
3. For the purposes of this Note, it is necessary to describe the general process by which a
merger or purchase of a public corporation progresses. In general, an acquiring party makes an
offer to the target corporation’s board of directors to purchase a majority or the entirety of the target
corporation’s stock. Such an offer may be either unsolicited or solicited by the board as part of a
strategy to sell the company. Multiple acquiring parties may make competing offers to the target
board, and the target board decides which offer to accept. The agreement signed by the acquiring
company and target board is a merger agreement, and it contains all the terms and conditions
necessary for the deal to close and the change in control to occur. See DEL. CODE ANN. tit. 8,
§ 251(b) (Supp. 2006) (“The board of directors of each corporation which desires to merge or
consolidate shall adopt a resolution approving an agreement of merger or consolidation and
declaring its advisability.”). However, the ultimate decision to sell the company rests with the
target corporation’s shareholders. See id. § 251(c) (requiring a majority vote of shareholders for the
approval of a merger). Thus, after the merger agreement is signed, the matter of selling the
company must be put to a shareholder vote. Id. To summarize and simplify, the three major steps
of a corporate merger are as follows: (1) an offer is made to the target board, (2) the target board
decides whether to sign the merger agreement, and (3) the signed agreement demonstrating the
proposed merger is put to a vote of the shareholders for approval.
4. See infra section II(B)(2).
5. Often, merger agreements contain a “no shop” clause, forbidding a target board from
soliciting new offers. Peter Allan Atkins & Blaine V. Fogg, Auction Law and Practice in
Unsolicited Takeovers (and in Other Corporate Control Transfer Cases), in THE BATTLE FOR
CORPORATE CONTROL: SHAREHOLDER RIGHTS, STAKEHOLDER INTERESTS, AND MANAGERIAL
RESPONSIBILITIES 183, 209–10 (Arnold W. Sametz with James L. Bicksler eds., 1991) [hereinafter
THE BATTLE FOR CORPORATE CONTROL]. However, a merger agreement with such a clause is still
subject to an interloping bidder because the agreement must likely contain a “fiduciary out”
provision, allowing the board to accept a subsequently offered higher price. See Omnicare, Inc. v.
NCS Healthcare, Inc., 818 A.2d 914, 936 (Del. 2003) (“To the extent that a [merger] contract, or a
provision thereof, purports to require a board to act or not act in such a fashion as to limit the
exercise of fiduciary duties, it is invalid and unenforceable.” (internal quotation marks omitted)).
The no shop, fiduciary out, and other deal-protection devices are further described in Part II.
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the market, are the grounds on which that choice is made acceptable in light
of Revlon?6 On the one hand, are target boards merely employing contractual jargon to provide an end run around their Revlon duties?7 Or are boards
reacting to the growing tide of management-friendly private-equity
purchases8 by seizing control of the corporate-sale process to ensure the
initial bid was a fair price?
In Delaware, decisions by corporate boards are generally protected by
the “business judgment rule.”9 However, when a change of corporate control
is inevitable, Delaware courts apply an enhanced scrutiny to determine
whether the target board’s decisions and actions were reasonable.10 In
particular, the target board must seek out the best value reasonably available
for its shareholders.11 This standard does not preclude, however, target
boards from signing merger agreements containing terms protecting the
deal.12 Indeed, the Delaware courts distinguish between protections that
“draw bidders into the battle [and] benefit shareholders” and those that “end
an active auction and . . . operate to the shareholders’ detriment.”13
This Note examines whether a target board’s utilization of a go shop as
linguistically enshrining14 the solicitation of bidders to the battle will per se
satisfy that board’s Revlon duties. It will be shown that a go shop’s implementation alone will not satisfy the fiduciary duties because of the Delaware
courts’ oft-stated refusal to lay down blanket rules and give credence to such
formalistic arguments. Additionally, a board that implements a go shop and
subsequently fails to utilize the period by soliciting bids in good faith risks
breaching its duty of loyalty based on the recent articulation of that duty in
Stone v. Ritter.15
6. Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986).
7. When the sale of a Delaware corporation is inevitable, that corporation’s board of directors is
charged with obtaining the best value reasonably available for its shareholders. See id. at 184 n.16
(“[The board is] charged with the duty of selling the company at the highest price attainable for the
stockholders’ benefit.”).
8. See infra notes 128–34 and accompanying text.
9. See infra note 178 and accompanying text.
10. Revlon, 506 A.2d at 184.
11. Id.
12. In re Toys “R” Us, Inc. S’holder Litig., 877 A.2d 975, 1000–01 (Del. Ch. 2005); see also
Barkan v. Amsted Indus., Inc., 567 A.2d 1279, 1286 (Del. 1989) (“[T]here is no single blueprint
that a board must follow to fulfill its [Revlon] duties.”).
13. Revlon, 506 A.2d at 183; see also Michael G. Hatch, Clearly Defining Preclusive Corporate
Lock-ups: A Bright-Line Test for Lock-up Provisions in Delaware, 75 WASH. L. REV. 1267, 1278
(2000) (describing the Delaware courts’ critical inquiry as distinguishing between those deal
protections that preclude further bidding and those that encourage further bidding).
14. See Martin Sikora, Merger Pacts Sanction “Go-Shop” Sprees, MERGERS & ACQUISITIONS,
Oct. 2006, at 12, 12 (“[A]n increasing number of deal contracts enshrine the ‘market check’ by
including a ‘go-shop’ clause, which essentially endorses a far-reaching search for the best offer
available.”).
15. 911 A.2d 362 (Del. 2006).
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In Part II, the terms in a merger agreement are generally discussed.
First, this Note examines commonly used, preexisting deal protections and
their characteristics. Secondly, the go shop and its benefits are described.
Additionally, illustrations of recent implementations of the go shop are
described. Finally, Part II discusses legal and market factors leading to the
development of the go shop and concludes with a summary of the criticisms
that have been voiced regarding the go shop’s use.
Part III sets forth the current fiduciary-duty jurisprudence in Delaware
and recent decisions that will affect consideration of the go shop. It also explains the Supreme Court of Delaware’s current articulation of the duty of
loyalty and good faith in Stone v. Ritter. Then, Chancellor Chandler’s comments regarding the unlikelihood of implementing any blanket rules
regarding merger agreements in Louisiana Municipal Police Employees’
Retirement System v. Crawford 16 are dissected. Finally, the recent cases In
re SS & C Technologies, Inc., Shareholders Litigation17 and In re Netsmart
Technologies, Inc. Shareholders Litigation18 demonstrate the Delaware
courts’ awareness of the possible conflicts of interest related to
management’s involvement with a going-private transaction.
Part IV analyzes the implications for a board employing a go shop in
light of the recent Delaware jurisprudence. Simply inserting a go shop in the
merger agreement will not satisfy a board’s Revlon duties because the
Delaware courts refuse to adopt blanket rules in such an analysis; arguments
of form will be unpersuasive. Delaware courts are additionally aware of
management’s enthusiasm for going-private transactions, transactions in
which the go shop is most commonly used. A board faced with such a situation will thus have the duty to actively solicit additional nonmanagement bids
in good faith or risk breaching its newly expanded duty of loyalty.
II.
Terms in the Merger Agreement
Deal protections are terms in the merger agreement intended to reduce
the risk that an interloper—a bidder not a party to the merger agreement—
will “jump the deal”19 by making an unsolicited bid after the merger agreement is signed.20 In addition to protecting a particular transaction,21 deal
16. 918 A.2d 1172 (Del. Ch. 2007).
17. 911 A.2d 816 (Del. Ch. 2006).
18. 924 A.2d 171 (Del. Ch. 2007).
19. “Deal jumping” refers to the practice of a party outside the merger agreement bidding to
purchase a target corporation, thus stealing the deal from the original acquirer. See Hatch, supra
note 13, at 1271 (“[C]ompetitors . . . may attempt to jump the deal by making unsolicited bids for
the target corporation.”).
20. See Brian C. Brantley, Note, Deal Protection or Deal Preclusion? A Business Judgment
Rule Approach to M&A Lockups, 81 TEXAS L. REV. 345, 346 (2002) (using the term “lockup” to
refer to a deal protection and describing the threat of a deal jumper as prompting the use of such
deal protections). See generally Hatch, supra note 13, at 1271–72 (discussing the threat of deal
jumping to the parties of a negotiated merger).
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protections assure potential acquirers that they will not become a stalking
horse.22 They also guard confidential information of the target company that
may be provided to potential acquirers.23 Traditionally, the deal-protection
tools in a drafter’s tool kit have consisted of “lockups,”24 confidentiality
agreements,25 “force the vote” clauses,26 break-up fees,27 and no shops.28
However, in the spirit of Tim “The Tool Man” Taylor,29 agreement craftsmen
continue to seek the next Binford 610030 of deal protections, as the recent use
of the go shop demonstrates. But how does a go shop differ from its dealprotection predecessors? And what legal and market factors led to the development of the go shop? This Part—after briefly describing the conventional
deal protections—seeks to answer these questions by describing the go
shop’s general characteristics and placing its utilization in the context of current legal and market trends.
A. Deal Protections Preexisting the Go Shop
Merger agreements employ myriad devices to protect the deal, attract
bidders, and guard confidential information.31 Such deal protections include
the lockup, confidentiality agreement, force the vote, break-up fee, and no
shop. This list, however, is by no means exhaustive.
1. Lockup.—Lockups are a method by which an acquiring company can
obtain the right to purchase or obtain some asset or other valuable consideration in the event that the proposed merger is unsuccessful, due to an
21. This is a goal that, alone, would be counter to obtaining the best value reasonably available
and thus causing a target board to fail its Revlon duties. See Dennis J. Block, Public Company
M&A: Recent Developments in Corporate Control, Protective Mechanisms and Other Deal
Protection Techniques, in CONTESTS FOR CORPORATE CONTROL 2007, at 7, 89–90 (PLI Corporate
Law & Practice, Course Handbook Series No. B-1584, 2007) (stating that a target board’s
protection of a favored transaction, alone, will not be a compelling justification for the use of a dealprotection device when Revlon is triggered).
22. Id. at 89. Deal protections, to a degree, can be justified in light of the target board’s Revlon
duties because such protections attract bidders. See Revlon, Inc. v. MacAndrews & Forbes
Holdings, Inc., 506 A.2d 173, 183 (Del. 1986) (explaining that lockups are valid in circumstances
where they are attractive to potential bidders, thus “draw[ing] bidders into battle”).
23. Block, supra note 21, at 90.
24. See infra section II(A)(1).
25. See infra section II(A)(2).
26. See infra section II(A)(3).
27. See infra section II(A)(4).
28. See infra section II(A)(5).
29. See Wikipedia, Home Improvement, http://en.wikipedia.org/wiki/Home_Improvement (last
modified Jan. 27, 2008) (describing the leading character on the television series Home
Improvement and his penchant for “more power!”).
30. See id. (explaining the running gag on the television series Home Improvement as naming
each new and improved power tool the “Binford 6100”).
31. See Block, supra note 21, at 89–90 (describing the three general goals of deal protections).
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interloping bidder or otherwise.32 Based on the particular property interest to
which the acquiring company obtains a right, three forms of lockup exist: the
“stock lockup,” the “asset lockup,” and the “voting rights lockup.”33 A stock
lockup grants the acquirer the right to purchase a fixed amount of the target
corporation’s shares in the event that the acquisition is terminated,
particularly in the event that a subsequent bidder is successful in jumping the
deal.34 An asset lockup gives the right to purchase certain assets of the target
corporation to the acquirer, generally at the fair market price of those
assets.35 Finally, a voting rights lockup is an agreement in which the target
corporation’s shareholders agree to vote in favor of the merger.36
2. Confidentiality Agreement.—Confidentiality agreements make the
target corporation’s nonpublic information available so the inquirer may
make an informed bid and conduct due diligence; simultaneously, these
agreements restrict the use to which the acquirer may put such information.37
In general, target boards use confidentiality agreements to condition this
32. See PETER V. LETSOU, CASES AND MATERIALS ON CORPORATE MERGERS AND
ACQUISITIONS 620 (2006) (describing three main types of lockups that (1) create an option to
purchase some amount of shares of the target, (2) grant the right to purchase certain assets of the
target, and (3) provide a voting agreement with some of the target’s shareholders).
33. See generally id. at 620–30 (providing examples of these three types of lockups).
34. Id. at 623. Effectively, a stock lockup provides a one-time payment to the unsuccessful
acquirer from the successful deal jumper equal to the product of (x) the difference between the
successful bid and the initial bid and (y) the amount of shares subject to the option. Id.
35. Id. at 625. The assets subject to an asset lockup may include the most attractive and
significant assets of the target company. Such a lockup is termed a crown-jewel lockup. Id.; see
also Hatch, supra note 13, at 1274 (describing a “crown jewel” deal protection as an agreement
where the target grants the acquirer the right to purchase a “particularly desirable” asset at a
prearranged price).
36. LETSOU, supra note 32, at 626. The voting agreement, though an agreement between the
shareholders and the acquiring company, is generally approved in the merger agreement because the
acquirer must obtain the target board’s prior approval or risk waiting the required three years before
acquiring the target. See DEL. CODE ANN. tit. 8, § 203(a)(1) (2001) (requiring an “interested
stockholder” to wait three years before engaging in a business combination with a corporation,
unless the corporation’s board has approved either the business combination or the transaction,
which causes the acquirer to become an interested stockholder); LETSOU, supra note 32, at 630,
629–30 (“[W]ith [the target corporation] as a party to the voting agreements (and with the prior
approval of the voting agreements by [the target’s] directors), the special restrictions . . . of
[Delaware Code] § 203 were effectively waived.”). An interested stockholder is an “owner” of 15%
or more of the outstanding voting shares of the corporation. § 203(c)(5)(i). An owner of stock
includes a party that has acquired the right to vote stock pursuant to an agreement. Id.
§ 203(c)(9)(ii)(B). Thus, an acquirer that seeks a voting rights lockup of 15% or more of the
target’s outstanding shares is an interested stockholder and must seek the target board’s prior
approval to avoid the three-year waiting period. Approving a voting rights lockup in the merger
agreement combined with a force the vote, see infra notes 40–42 and accompanying text, may
violate the target board’s duty to obtain the best value reasonably available due to the effective
result that the board could not prevent shareholder approval of the merger if a superior bid were to
materialize prior to the vote, even if the bidding prior to signing the merger agreement was very
competitive, see, e.g., Omnicare, Inc. v. NCS Healthcare, Inc., 818 A.2d 914, 937–38 (Del. 2003).
37. Heath Price Tarbert, Merger Breakup Fees: A Critical Challenge to Anglo-American
Corporate Law, 34 LAW & POL’Y INT’L BUS. 627, 634 (2003).
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access on the negotiation with the board rather than approaching the
shareholders directly through a tender offer.38 Such collective bargaining on
behalf of the target’s shareholders is generally regarded as an acceptable
utilization of the board’s representational role vis-à-vis the shareholders.39
3. Force the Vote.—A force the vote clause does exactly that; the target
board commits to putting the proposed merger to a shareholder vote despite
any subsequent event causing the deal to be less attractive.40 Section 146 of
the Delaware Code expressly permits a target board to make such an
agreement.41 However, the existence of § 146 does not bless all uses of the
force the vote; the target board’s utilization of this agreement is still
subject—in the context of a corporate sale—to obtaining the best value
reasonably available for the stockholders.42
4. Break-Up Fee.—A break-up fee is a dollar amount that the target
corporation agrees to pay the acquirer in the event of the deal’s “breakup,”
generally resulting from a subsequent superior bid.43 Break-up fees serve the
dual purposes of inhibiting a deal jumper’s ability to top the bid and of compensating the initial acquirer for its investment in the lost transaction.44
Essentially, a break-up fee is a minimum incremental increase for additional
bids to acquire the target. The amount of the break-up fee is generally either
38. Id.
39. See Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946, 959 (Del. 1985) (analogizing the
corporate structure of a shareholders’ election of directors to a democracy—the “corporate
democracy”—and describing the directors as the shareholders’ “elected representatives”); Robert B.
Thompson & D. Gordon Smith, Toward a New Theory of the Shareholder Role: “Sacred Space” in
Corporate Takeovers, 80 TEXAS L. REV. 261, 281 (2001) (discussing the Delaware Supreme
Court’s recognition of the directors’ important role as representatives of the shareholders).
40. Block, supra note 21, at 106. For example, after signing a merger agreement with a
potential acquirer, a deal jumper may arrive on the scene with a more attractive bid. Thus, the
original acquirer’s offer is less attractive. With a force the vote, the board is still required to submit
the less attractive proposed merger to a shareholder vote. Shareholders, however, must be informed
of the subsequent offer before voting on the original agreement. See id. (“[D]irectors must still
provide full disclosure of the information necessary for the shareholders to decide the merger’s
fate.”).
41. Delaware Code title 8, § 146 provides: “A corporation may agree to submit a matter to a
vote of its stockholders whether or not the board of directors determines at any time subsequent to
approving such matter that such matter is no longer advisable and recommends that the stockholders
reject or vote against the matter.” DEL. CODE ANN. tit. 8, § 146 (Supp. 2006).
42. See, e.g., Omnicare, Inc. v. NCS Healthcare, Inc., 818 A.2d 914, 937 (Del. 2003) (“Taking
action that is otherwise legally possible, however, does not ipso facto comport with the fiduciary
responsibilities of directors in all circumstances.”).
43. See LETSOU, supra note 32, at 616–18 (illustrating a break-up fee and describing such fees
as a specified sum paid to the acquirer if the agreement is terminated); Hatch, supra note 13, at 1275
(“In the event the target terminates the merger, this provision requires the target to pay the
acquirer . . . .”).
44. See LETSOU, supra note 32, at 620, 619–20 (describing the purposes of the break-up fee as
“making it more difficult for competing acquirers to top the initial acquirer’s offer” and
compensating the initial acquirer for its initial investment).
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a percentage of the deal value,45 a reimbursement for out-of-pocket expenses
of the acquirer, or some combination of the two.46 Commentators have indicated that a break-up fee of 3% of the deal value is the norm for most merger
agreements;47 however, recent statements by the Delaware Court of Chancery
have called such a bright-line rule into question.48
5. No Shop.—No shops restrict the ability of a target board to
communicate with third parties about the merger.49 The extent of the
communication limitation varies from the very restrictive “no talk”50 to the
less restrictive “window shop.”51 Generally, no shops contain a fiduciary out
provision, allowing the target board to provide information, negotiate with
third parties, and accept an overriding offer if “doing so is necessary to avoid
45. For the purposes of this Note, “deal value” is the total price the acquirer will pay for the
target corporation. The total price is the sum of (1) the product of (x) the offered price per share and
(y) the total amount of shares outstanding and (2) the value of the target’s existing debt to be
assumed by the acquirer, unless otherwise indicated that the assumed debt is not included.
46. See LETSOU, supra note 32, at 619 (discussing termination-fee amounts).
47. See, e.g., id. (“[Break-up] fees are almost always set at approximately 3 percent of the
transaction value.”); Block, supra note 21, at 111 n.348, 110–11 (reporting the median break-up fee
as 2.6% to 3% and noting that the Delaware Court of Chancery described a 3% break-up fee as
“modest and reasonable” in In re Pennaco Energy, Inc. Shareholders Litigation, 787 A.2d 691, 707
(Del. Ch. 2001)).
48. See, e.g., In re Netsmart Techs., Inc. S’holders Litig., 924 A.2d 171, 197 (Del. Ch. 2007)
(“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.”); La. Mun. Police Employees’ Ret. Sys. v. Crawford, 918 A.2d 1171,
1181 n.10 (Del. Ch. 2007) (noting that the inquiry regarding the reasonableness of deal protections
is “by its very nature fact intensive” and that any “attempt to build a bright line rule” is made “upon
treacherous foundations”).
49. See LETSOU, supra note 32, at 612–13 (describing a no shop as an agreement by which a
target corporation agrees to refrain from discussions, negotiations, or other activities that may result
in an interloping bid); Block, supra note 21, at 91 (explaining a no shop as restricting a
corporation’s ability to encourage, solicit, or negotiate with third parties); Kimberly J. Burgess,
Note, Gaining Perspective: Directors’ Duties in the Context of “No-Shop” and “No-Talk”
Provisions in Merger Agreements, 2001 COLUM. BUS. L. REV. 431, 433, 432–33 (“[No shops] are
designed to restrict the flow of information to alternative bidders about the target’s potential
availability for an alternative transaction . . . .”).
50. A no talk provision not only bars a target from soliciting or encouraging additional offers, it
also restricts the target’s ability to furnish information to a third party and to negotiate with a third
party. Block, supra note 21, at 91. The Delaware courts have generally been critical of a no talk’s
restrictions on a target board’s ability to obtain the best value reasonably available. See, e.g.,
Paramount Commc’ns, Inc. v. QVC Network Inc., 637 A.2d 34, 48 (Del. 1994) (stating that a strict
no shop—essentially a no talk—is invalid to the extent it is inconsistent with a board’s Revlon
duties, though declining to set a bright-line rule that such no talks are per se invalid by limiting the
court’s decision to the specific facts in the case); see also Block, supra note 21, at 97 (“Delaware
courts have been less receptive to the very restrictive ‘no-talk’ provision.”); Burgess, supra note 49,
at 434 (“[A] no-talk clause . . . is effectively a ‘willful blindness’ that is inconsistent with [the target
board’s] continuing fiduciary obligations . . . .”).
51. Window shop provisions prohibit a target board from soliciting additional offers, but such
provisions generally contain a fiduciary out permitting consideration of unsolicited offers,
negotiation with third parties, and provision of information to interested third parties. See Block,
supra note 21, at 91 (describing the window shop).
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violating the board’s fiduciary duties.”52 This traditional and reactive fulfillment of fiduciary duties limits the target board to an implicit and inert
postsigning market check53: the board must rely on unsolicited offerors coming forward in order to ensure that it has achieved the best value reasonably
available for shareholders.
B. The Go Shop
The no shop’s reactive approach to fiduciary-duty fulfillment has not
been a comfortable one-size-fits-all method for target boards seeking to satisfy Revlon’s requirements. As a result, boards have increasingly included—
subject to an acquirer’s acquiescence—go shops in the merger agreement to
provide a degree of postsigning flexibility in light of an ever-changing legal
and market landscape. This subpart describes the general characteristics of a
go shop and portrays the go shop in action with illustrations of several recent,
high-dollar mergers. Additionally, current trends in the law and the market
are utilized to elucidate the impetus for the go shop’s methodology of proactive fiduciary fulfillment and to highlight potential pitfalls for targets using
the go shop. Finally, current critiques of the go shop are presented to further
flavor the issues inherent in using this particular deal protection. Part IV of
this Note will ultimately address how a Delaware court will likely address
these issues.
1. Characteristics of the Go Shop.—The go shop’s main entrée is its
provision of a right to the target board to actively solicit additional bids. This
right is generally accompanied by a few side dishes of reduced deal protections and the possibility of heartburn-inducing restrictions and limitations.
The buffet does not stay open all night, however, and the solicitation right
often closes after a period of time ranging from fifteen to fifty-five days following the agreement’s signing.54 After that time, the go shop reverts to a
more traditional no shop with a fiduciary out;55 though, negotiations with an
additional acquirer that began during the fifteen to fifty-five days are generally permitted to continue.56 Thus, a go shop bifurcates the time between an
52. Id. For a discussion of the development and justification of fiduciary outs, see generally
William T. Allen, Understanding Fiduciary Outs: The What and the Why of an Anomalous
Concept, 55 BUS. LAW. 653 (2000).
53. Netsmart Techs., Inc., 924 A.2d at 197.
54. Franci J. Blassberg & Stefan P. Stauder, Shop ‘til You Drop (pt. 1), THEDEAL.COM, Dec.
11, 2006, available at FACTIVA, Document No. DLDL000020061211e2cb00008 [hereinafter
Blassberg & Stauder (pt. 1)].
55. See, e.g., Hosp. Corp. of Am., Agreement and Plan of Merger (Form 8-K), § 7.4(a), (c)
(filed July 24, 2006) [hereinafter Hosp. Corp. of Am. Merger Agreement] (defining the “no-shop
period start date” and providing for a fiduciary out term during the no shop period).
56. Blassberg & Stauder (pt. 1), supra note 54. It should be noted, however, that disputes do
arise regarding whether a new bid was successfully made during the solicitation period; particularly,
this situation may occur when the interloping bidder makes an initial offer during the solicitation
period and a subsequent increased offer outside the solicitation period is accepted by the target
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agreement’s signing and shareholder approval into a solicitation period and a
no-solicitation period.
The go shop’s bifurcation of the postsigning, preapproval period permits
parties to tailor the extent of the deal’s protections to the time that has
elapsed since the agreement’s signing; as the merger moves closer to shareholder approval, the agreement’s defenses increase. A typical example of
adjustments to the deal’s protections in a go shop agreement involves a reduced break-up fee if a bid emerges during the solicitation period and an
increased break-up fee for bids after the solicitation period.57 Thus, the minimum increment required to bid on the company is reduced during the
solicitation period—at least in theory—to encourage additional offerors to
make a bid earlier rather than later. This early-bird special58 is not limited to
the break-up fee; rather, it is only limited by the creativity of the negotiating
parties and the target board’s fiduciary duties. Likely, the bifurcation can
and will be applied to other deal protections, such as an asset lockup or force
the vote, to generally increase the agreement’s defenses.59 For example, a
merger agreement with a go shop may provide that the target board must
submit the agreement to shareholder vote—i.e., force the vote—if no additional offers materialize during the solicitation period. Thus, the expiration
of the go shop’s solicitation period can essentially function as a triggering
event for a myriad of deal protections.
Go shops, however, are not immune to certain restrictions, and initial
bidders may seek to play a role in the solicitation process. Some go shops
have placed restrictions on the pool of potential buyers a target may solicit.60
Such restrictions include a numerical cap on the number of parties solicited
and a proscription of solicitations made to certain types of buyers—such as
barring the target from soliciting competing bids from private-equity firms.61
board. Merger agreements might address this issue by carefully defining when the interloping
bidder has made a bid during the solicitation period and how long that bidder qualifies to continue
to amend that bid so that the final amount does not fall outside the benefits of the solicitation period.
57. See, e.g., Triad Hosps., Inc., Agreement and Plan of Merger (Form 8-K), § 1.1 (filed Feb. 4,
2007) [hereinafter Triad Hosps., Inc. Merger Agreement] (providing for a break-up fee—defined as
the “Go Shop Termination Fee”—of $20 million if a bid emerges during the solicitation period and
$120 million if a bid emerges after the solicitation period—defined as the “Termination Fee”).
58. See Francesco Guerrera, “Early Bird” Factor Is Thwarting “Go Shop” Clause, FIN. TIMES
(London), Nov. 5, 2006, at 20 (describing the first bidder’s common success in ultimately acquiring
the company as the “early bird” factor).
59. The target board will still be required to walk a fine line between protections that encourage
bidders to join the battle and protections that preclude bidders. See Revlon, Inc. v. MacAndrews &
Forbes Holdings, Inc., 506 A.2d 173, 183 (Del. 1986) (stating that lockups that draw bidders benefit
shareholders, while lockups that foreclose further bidding harm shareholders). However, increased
protections after the solicitation period will arguably make the deal more valuable to the initial
bidder, thus tacking towards the best value reasonably available. Still, the length of the solicitation
period will factor into the equation, and an agreement with a relatively short solicitation period
combined with preclusively large post-solicitation-period protections will likely smash against the
rocks of Revlon’s requirements.
60. Blassberg & Stauder (pt. 1), supra note 54.
61. Id.
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In addition to these restrictions, initial bidders may insist upon matching or
topping rights in order to reserve the ability to cut back into the deal’s dance
after an interloping bidder’s interjection.62 Such rights save the last dance for
the initial bidder, if it so chooses.63 A target may also be required to keep the
initial bidder abreast of information regarding additional bids; this requirement limits the target board’s negotiation leverage in seeking a topping bid
from the initial bidder.64 Notably, at the time of this Note’s writing, the only
go shop successful in attracting an additional bidder during the solicitation
period lacked all of these restrictions.65
Both target boards and acquirers obtain benefits from a go shop. The
target board benefits from the ability to proactively fulfill its fiduciary duties;
notably, this ability allows the board to take the reins from management that
has decided to steer the company towards a sale with a particular purchaser
while neglecting to so inform the board.66 Additionally, the board can efficiently run on parallel tracks, auctioning the company to additional bidders
and working with the initial buyer towards closing.67 Finally, the target
board is generally on the hook for a lower break-up fee for any better deal
found during the solicitation period.68
An acquirer benefits from a go shop, as well. Because of the efficiency
afforded the target board, a go shop helps the acquirer close the deal more
quickly.69 Additionally, the use of a go shop generally dissuades a target
62. Id.; see also Doug Warner & Christopher Machera, Surveying the Go-Private Landscape,
Feb.
26,
2007,
available
at
FACTIVA,
Document
No.
THEDEAL.COM,
DLDL000020070226e32q00014 (reporting that 78% of private-equity deals contain matching
rights).
63. See, e.g., Lear Corp., Agreement and Plan of Merger (Form 8-K/A), § 5.2(e)(ii) (filed Feb.
9, 2007) [hereinafter Lear Corp. Merger Agreement] (providing topping rights to the bidder, Icahn
Partners LP); Hosp. Corp. of Am. Merger Agreement, supra note 55, § 7.4(d)(ii) (providing
matching rights to Bain Capital LLC).
64. See Blassberg & Stauder (pt. 1), supra note 54 (stating that nearly all of the agreements
reviewed by the authors provided the right to the initial bidder to be informed of the target’s receipt
of alternative bids).
65. See Triad Hosps., Inc. Merger Agreement, supra note 57, § 7.4 (failing to require the target
to immediately disclose competing bidders’ identities to the initial bidder or to consider a matching
or topping bid by the initial bidder); Theo Francis, Community Health to Acquire Rival Triad,
WALL ST. J., Mar. 20, 2007, at A3 (reporting the success of Community Health Systems Inc.’s bid
to acquire Triad Hospitals, Inc. over the initial, private-equity bidder).
66. See infra notes 135–42 and accompanying text.
67. Franci J. Blassberg & Stefan P. Stauder, Shop till You Drop (pt. 2), THEDEAL.COM, Dec.
12, 2006, available at FACTIVA, Document No. DLDL000020061212e2cc0000a [hereinafter
Blassberg & Stauder (pt. 2)].
68. This is assuming, of course, the break-up fee is reduced during the solicitation period.
Some break-up fees are not bifurcated in this way. See, e.g., Maytag Corp., Agreement and Plan of
Merger (Form 8-K), § 6.07(b) (filed May 23, 2005) [hereinafter Maytag Corp. Merger Agreement]
(providing a break-up fee of $40 million regardless of whether the successful second bid was during
the solicitation period or after such period).
69. Jared A. Favole, Private-Equity Bidders Allowing Target Cos to “Go Shop,” DOW JONES
NEWSWIRES,
Sept.
20,
2006,
available
at
FACTIVA,
Document
No.
1134
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[Vol. 86:1123
board from demanding a full-blown presigning auction; thus, the unpredictability and increased cost of such an auction are avoided when an acquirer
agrees to a go shop.70 Finally, the go shop ensures the acquirer receives at
least some compensation for its expenses incurred in making the initial bid.71
The acquirer receives nothing for its troubles if it loses a presigning auction,
but the acquirer that signs an agreement with a go shop will receive a consolation prize if its offer is outbid.72 Because of these myriad benefits, many
recent transactions have included a go shop in the merger agreement, as discussed in the following section.
2. Deals Using the Go Shop.—The go shop has been illustrated in
several recent billion-dollar deals. Such deals include the proposed sale of
Maytag Corp. (Maytag) to Ripplewood Holdings LLC (Ripplewood), the sale
of Freescale Semiconductor, Inc. (Freescale) to The Blackstone Group
(Blackstone) and other private-equity firms, the sale of Hospital Corp. of
America (HCA) to Bain Capital LLC (Bain Capital) and a consortium of
private-equity firms, the sale of Lear Corp. (Lear) to Carl Icahn’s American
Real Estate Partners LP (Icahn), the proposed sale of TXU Corp. (TXU) to a
combination of private-equity firms, including Texas Pacific Group (Texas
Pacific) and Kohlberg Kravis Roberts & Co. (KKR), and the proposed sale of
Triad Hospitals, Inc. (Triad) to a group of private-equity purchasers,
including CCMP Capital Advisors, LLC (CCMP) and Goldman Sachs & Co.
(Goldman Sachs). These outright sales of large public companies have
brought the go shop into prominence and made it the topic of much debate.
On August 22, 2005, Ripplewood’s attempt to purchase Maytag was
thwarted by an interloping bid from Whirlpool Corp. (Whirlpool), which was
ultimately successful at merging the two appliance manufacturers.73
Ripplewood initially offered $1.125 billion (not including the assumption of
$975 million in debt) to acquire Maytag, or a cash offer for $14 per share.74
The agreement included a go shop allowing Maytag’s board to solicit additional offers for thirty days.75 However, the break-up fee was $40 million
(about 3.5% of deal value) regardless of when a competing bid was
FF00000020060920e29k0002b (noting that the go shop approach appeals to private-equity sponsors
because it is often “faster”).
70. See Guerrera, supra note 58 (stating that go shops were seen as a method for private-equity
buyers to avoid crowded and costly auctions for targets).
71. See Favole, supra note 69 (noting that the go shop approach appeals to private-equity
sponsors because it “assure[s] them that they will get something”).
72. See Blassberg & Stauder (pt. 2), supra note 67 (“[A] lost presigning auction leaves a
prospective buyer empty-handed. Losing a transaction as a result of a post-signing auction . . .
leaves the initial purchaser with a consolation prize . . . .”).
73. Favole, supra note 69.
74. Press Release, Maytag Corp., Maytag Corporation to Be Acquired by Ripplewood for $14
per Share in Cash (May 19, 2005), available at http://www.sec.gov/Archives/edgar/data/63541/000
095015705000408/ex99-1.htm.
75. Maytag Corp. Merger Agreement, supra note 68, § 5.02.
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received.76 Additionally, Maytag was required to inform Ripplewood if a
competing offer was made.77 During the solicitation period, Maytag contacted more than 100 potential buyers.78 After the solicitation period
expired—at which point the go shop converted to a no shop with a fiduciary
out79—Whirlpool provided a superior offer of $1.7 billion (not including
$975 million in assumed debt) in cash and stock to purchase Maytag.80 Although the competing bid was not made during the solicitation period, the go
shop “was instrumental in a bidding contest that led to the $1.7 billion
merger of . . . Whirlpool Corp. and Maytag Corp., which was not the original
bidder.”81
Blackstone led a consortium of private-equity firms—including The
Carlyle Group (Carlyle), Permira Funds, and Texas Pacific—in a “club
deal”82 to purchase Freescale on September 16, 2006.83 Prior to signing the
merger agreement, Blackstone’s club successfully outbid another club led by
KKR with an offer to purchase Freescale for $17.6 billion.84 However,
Blackstone’s offer was not higher than KKR’s.85 Freescale’s board
considered KKR’s bid less attractive because KKR did not have financing
fully arranged, and KKR’s recent acquisition of another semiconductor
manufacturer implicated regulatory concerns.86 Blackstone’s merger agreement contained a go shop permitting a fifty-day solicitation period.87 The
break-up fee, however, was only reduced if a competing offer was received
within eleven days of signing.88 The full break-up fee was on the smaller
side, requiring payment of $300 million (1.7%) in the event the deal was
76. Id. § 6.07(b).
77. Id. § 5.02(e).
78. Andrew Ross Sorkin, Looking for More Money, After Reaching a Deal, N.Y. TIMES, Mar.
26, 2006, § 3, at 4.
79. Maytag Corp. Merger Agreement, supra note 68, § 5.02(b)–(d).
80. Press Release, Whirlpool Corp. & Maytag Corp., Whirlpool Corporation and Maytag
Corporation Sign Definitive Merger Agreement (Aug. 22, 2005), available at http://www.sec.gov/
Archives/edgar/data/63541/000089882205001087/aug228kpr.txt.
81. Sikora, supra note 14, at 13 (emphasis omitted).
82. A club deal is a transaction in which multiple private-equity firms combine to purchase the
target. See Steve Rosenbush, Private Equity Slugfest, BUS. WK., Feb. 13, 2007, http://www.busi
nessweek.com/print/bwdaily/dnflash/content/feb2007/db20070212_956645.htm (describing club
deals as deals “in which several private equity firms work as partners to make a big acquisition”).
83. Press Release, Freescale Semiconductor, Inc., Freescale Semiconductor Reaches Agreement
with Private Equity Consortium in $17.6 Billion Transaction (Sept. 15, 2006), available at
http://www.sec.gov/Archives/edgar/data/1272547/000119312506191975/dex991.htm.
84. Andrew Ross Sorkin & Laurie J. Flynn, Blackstone Alliance to Buy Chip Maker for $17.6
Billion, N.Y. TIMES, Sept. 16, 2006, at C3.
85. Andrew Ross Sorkin & Barnaby J. Feder, Freescale Considers Rival Bids, N.Y. TIMES,
Sept. 12, 2006, at C1.
86. Sorkin & Flynn, supra note 84.
87. Freescale Semiconductor, Inc., Agreement and Plan of Merger (Form 8-K/A), § 6.5(a) (filed
Sept. 15, 2006).
88. Id. § 1.1.
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terminated.89 Additionally, Freescale was required to inform Blackstone of
all material terms in any competing offer the target received.90 Ultimately,
no competing bids emerged, and the Blackstone-led group successfully purchased Freescale.
Another private-equity club—this time with Bain Capital, KKR, and
Merrill Lynch Global Private Equity (Merrill Lynch) as members—perfected
a multibillion-dollar acquisition while including a go shop in the merger
agreement. Bain Capital and the rest of the club purchased HCA, a healthcare-services company, for $21.3 billion (not including $11.7 billion in assumed debt).91 According to the agreement’s terms, a competing offer
received during the fifty-day solicitation period92 would be subject to a reduced $300-million (1.4%) break-up fee,93 rather than the full $500-million
(2.3%) charge.94 The attractiveness of the reduced break-up fee, however,
may have been offset by the restrictions placed on the go shop: Bain Capital
retained the right to top any competing bid HCA received.95 Further, within
twenty-four hours of the solicitation period’s end, HCA was required to inform Bain Capital of all the material terms of any offer received.96 Indeed,
these restrictions, as well as other characteristics of the agreement, prompted
the filing of a shareholder class action against HCA in the Delaware Court of
Chancery.97 Chancellor Chandler granted a stay of the proceeding in favor of
a parallel Tennessee action and denied a motion to reargue the claim.98
Carl Icahn incorporated a forty-five-day solicitation period with the go
shop in his merger agreement to acquire Lear.99 No bids emerged during
those forty-five days to challenge Icahn’s offer of $2.8 billion (not including
$2.5 billion in assumed debt) to purchase the auto-parts manufacturer.100 The
break-up fee during the solicitation period in Icahn’s merger agreement was
$73.5 million (2.6%) plus reimbursement of up to $6 million in expenses related to making the offer.101 Outside of the solicitation period, the break-up
89. See id. (defining the full break-up fee as the “Company Termination Fee”).
90. Id. § 6.5(c).
91. Andrew Ross Sorkin, Big Private Hospital Chain May Be Close to Record Sale, N.Y.
TIMES, July 24, 2006, at A15.
92. Hosp. Corp. of Am. Merger Agreement, supra note 55, § 7.4(a), (c).
93. See id. § 1.1 (defining the reduced break-up fee as the “Go Shop Termination Fee”).
94. See id. (labeling the full break-up fee the “Termination Fee”).
95. Id. § 7.4(d)(ii).
96. Id. § 7.4(c).
97. Consolidated Amended Complaint at 11–12, In re HCA Inc. S’holders Litig., No. 2307-N,
2006 Del. Ch. LEXIS 197 (Del. Ch. Nov. 20, 2006) (No. 2307-N).
98. In re HCA Inc. S’holders Litig., No. 2307-N, 2006 Del. Ch. LEXIS 197, at *1–2 (Del. Ch.
Nov. 20, 2006).
99. Lear Corp. Merger Agreement, supra note 63, §§ 5.2, 8.11(aa).
100. Terry Kosdrosky, UPDATE: Lear Counteroffer Period Ends, but Talks Continue, DOW
JONES NEWSWIRES, Mar. 27, 2007, available at FACTIVA, Document No.
DJ00000020070327e33r0006u.
101. Lear Corp. Merger Agreement, supra note 63, § 7.4(c).
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fee was $85.2 million (3.4%) with up to $15 million in expense
reimbursements.102 Further, as with HCA’s merger-agreement restrictions,
restrictions in Icahn’s merger agreement provided a topping right103 and a
right to receive a copy of any alternative offers Lear received.104
At the time the deal was announced, KKR and Texas Pacific’s proposed
acquisition of TXU for $32 billion (not including $13 billion in assumed
debt) was the largest buyout of its kind in history.105 The break-up fee was
again staggered based on the fifty-day solicitation period,106 requiring payment of $375 million (1.2%) for a competing offer received during the period
and $1 billion (3.1%) for an offer received after the period.107 This deal also
required the target to disclose the material terms of any alternative bid
received108 and granted a topping right to the acquirer.109
In the only deal to date in which an alternative bidder stepped forward
during a go shop’s solicitation period, Community Health Systems, Inc.
(CHS) crashed CCMP and Goldman Sachs’s proposed acquisition of
Triad.110 CCMP and Goldman Sachs proposed to purchase Triad for $4.7
billion (not including $1.7 billion of assumed debt).111 The original merger
agreement contained a go shop with a forty-day solicitation period.112 Conspicuously absent from the agreement were any restrictions providing
topping rights or disclosure of information regarding alternative bidders that
emerged during the solicitation period. Indeed, the agreement specified that
Triad was not required to provide the material terms of any subsequent offer
made during the period113 and that Triad was not required to reveal the identity of a party making such an alternative offer.114 The agreement provided
for a $120-million (2.6%) break-up fee for offers received after the solicitation period and a $20-million (0.4%) break-up fee with reimbursement of up
to $20 million in expenses for offers received during the solicitation
period.115 The result of this go shop was a subsequent bid from CHS of $5.1
102. Id. § 7.4(d).
103. Id. § 5.2(e)(ii).
104. Id. § 5.2(d).
105. Rebecca Smith, Susan Warren & Dennis K. Berman, In TXU Deal, Texas Regulator Has
Few Levers to Pull, WALL ST. J., Feb. 27, 2007, at A3.
106. TXU Corp., Agreement and Plan of Merger (Form 8-K), § 6.2(a) (filed Feb. 26, 2007).
107. Id. § 8.5(b).
108. Id. § 6.2(e)(ii)(A).
109. Id. § 6.2(e)(ii)(B).
110. David Shabelman, Topps Not a Done Deal for Eisner Group, THEDEAL.COM, Apr. 16,
2007, available at FACTIVA, Document No. DLDL000020070416e34g00015.
111. Press Release, Triad Hosps., Inc., Triad Enters into Merger Agreement with CCMP
Capital Advisors and GS Capital Partners (Feb. 5, 2007), available at http://www.sec.gov/Archives/
edgar/data/1074771/000119312507020341/dex991.htm.
112. Triad Hosps., Inc. Merger Agreement, supra note 57, § 7.4(a).
113. Id. § 7.4(d).
114. Id. § 7.4(c).
115. Id. § 1.1.
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billion (not including the $1.7 billion assumption of debt); thus, the shareholders received an additional $3.75 per share due to Triad’s
solicitousness.116
3. Development of the Go Shop.—Increased regulatory and judicial
scrutiny of corporate boards of directors combined with fast-paced market
developments have caused boards faced with the sale of a corporation to become uncomfortable with the traditional “wishin’ and hopin’”117 approach to
obtaining the best value reasonably available. To relieve this discomfort,
boards have increasingly become involved in actively overseeing corporations generally;118 the go shop manifests such active involvement in the
context of the corporation’s sale.
Target boards have additionally found themselves in an expanding
thicket of possible legal liability. Sarbanes-Oxley119 has increased the
board’s oversight duties and subjected directors to additional penalties.120
Additionally, boards have continually sought a predictable path to satisfying
their duties under Revlon. However, the Delaware Supreme Court’s decision
in Omnicare121 made it clear that a board cannot rest easy believing it has
satisfied its Revlon requirement until the fat lady has sung—that is, until the
shareholders have voted.122 Target boards have reacted to this increased
postsigning scrutiny by employing the go shop in order to take a more active
role in the postsigning activity. Because go shops provide legal protection to
the board of directors from allegations of neglecting profitable business
approaches, “it’s possible [go shops] will become more prevalent as boards
remain cautious in the face of increasing shareholder activism and heightened regulations.”123
116. Francis, supra note 65.
117. As discussed supra notes 49–53 and accompanying text, the no shop’s inert postsigning
market check causes target boards to keep “wishin’ and hopin’ and thinkin’ and prayin’,” DUSTY
SPRINGFIELD, Wishin’ and Hopin’, on A GIRL CALLED DUSTY (Philips Records 1964), that they
have obtained the best value reasonably available or alternatively that an interloping bidder will step
forward on its own accord.
118. See Kaja Whitehouse, Move Over, CEO: Here Come the Directors, WALL ST. J., Oct. 9,
2006, at R1 (describing the increasing involvement of directors in the operations of a corporation).
119. Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, 116 Stat. 745 (codified in scattered
sections of 11, 15, 18, 28, and 29 U.S.C.).
120. COMM. ON CAPITAL MKTS. REGULATION, INTERIM REPORT OF THE COMMITTEE ON
CAPITAL MARKETS REGULATION 90 (2006), available at http://www.capmktsreg.org/pdfs/11.30
Committee_Interim_ReportREV2.pdf.
121. Omnicare, Inc. v. NCS Healthcare, Inc., 818 A.2d 914 (Del. 2003).
122. See Burgess, supra note 49, at 468 (“The board of directors, when acting within their
fiduciary duty of care, has a continuing duty during the time between the signing of the merger
agreement and the stockholder vote to avail itself of information regarding potentially superior
proposals.”).
123. Sikora, supra note 14, at 12 (quoting Daniel Tiemann, nationwide operations leader for
KPMG Transactions Services program).
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1139
Further, a board’s actions are very much a product of the market
environment in which the board operates. Target boards have been forced to
respond to growing merger-and-acquisition activity driven by a particular
type of buyer, the private-equity firm, and complicated by management’s
amicability to such buyers.124 In 2006, the total value of completed U.S.
deals was $1.308 trillion, up from $905 billion in 2005.125 Of that $1.3
trillion, private equity was responsible for $414.6 billion,126 a marked
increase from the then-record-breaking 2005 level of $176 billion.127
The increased prominence of private-equity firms undoubtedly has
affected the nature of the deal-making landscape.128 Additionally, the use of
the go shop directly correlates to whether a private-equity firm is involved in
the transaction: in 2006, private-equity firms were a party in all but one
agreement containing a go shop.129 Such firms provide a relatively liquid
market for very large assets—entire public corporations or divisions—
permitting formerly difficult transfers of resources to occur more quickly and
more valuably for the often-cash-strapped seller.130 As the cost of debt has
been reduced with increasingly “covenant lite” financing,131 private-equity
firms are able to utilize the resulting increased supply of such debt when performing leveraged buyouts (LBOs)132 to take corporations private.133 Almost
124. See Donald J. Gogel, What’s So Great About Private Equity, WALL ST. J., Nov. 27, 2006,
at A13 (“Today more than ever, it is easy for private-equity firms to attract world-class managers,
offering both management freedom and innovative, stock-based compensation plans.”).
125. THOMSON FIN., MERGERS & ACQUISITIONS REVIEW 3 (4th quarter 2006).
126. Id. at 1.
127. THOMSON FIN., MERGERS & ACQUISITIONS REVIEW 6 (4th quarter 2005).
128. Private-equity firms themselves recognize their growing importance and have created the
Private Equity Council in an effort to increase the public’s and the government’s awareness of the
benefits they provide. Danielle Fugazy, Private Equity Lobbying Group Gives the Market a Voice,
MERGERS & ACQUISITIONS, Mar. 2007, at 54, 54.
129. Blassberg & Stauder (pt. 1), supra note 54.
130. See Dennis K. Berman, Buyout Shops: Sharks Serving Vital Function, WALL ST. J., Mar.
13, 2007, at C1 (describing the value of the liquidity provided by private-equity firms). Essentially,
attempting to sell an entire corporation runs into the same problems as that of a seller of a custom
house: The more specialized and expensive the asset, the harder it is to find a buyer. Private-equity
firms have carved a niche in the market for corporations and can purchase an otherwise illiquid
asset in its totality.
131. See Serena Ng, Easy Money? Banks Get Lenient on Loans, WALL ST. J., Apr. 7, 2006, at
C1 (“The number of covenants built into such loans is falling . . . .”). Covenants are restrictions on
the debtor’s use of the borrowed funds that are imposed by the creditor. Id.
132. An LBO is an acquisition financed by loans; repayment ultimately becomes the obligation
of the target corporation. ROBERT W. HAMILTON & JONATHAN R. MACEY, CASES AND
MATERIALS ON CORPORATIONS 981 (9th ed. 2005). See generally Oliver E. Williamson, Mergers,
Acquisitions, and Leveraged Buyouts: An Efficiency Assessment, in CORPORATE LAW AND
ECONOMIC ANALYSIS 1, 11–16 (Lucian Arye Bebchuk ed., 1990).
133. See Robert W. Hamilton, Corporate Mergers and Acquisitions, in THE GUIDE TO
AMERICAN LAW 66, 74 (Supp. 1990) (“An essential attribute of the ability of . . . takeover firms to
raise immense amounts of capital is that these loans are in effect secured by the assets and cash flow
of the target corporation itself.”).
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invariably, the current management remains in place after a corporation has
gone private in deals such as these.134
The prospect of going private has reversed the conventional wisdom
that corporate takeovers involve a conflict between management seeking to
prevent a sale and remain entrenched, on the one hand, and shareholders
wishing to sell the company, on the other.135 The ability of management to
both remain entrenched and sell the company challenges the basic premise of
the market for corporate control: that an underperforming management will
be axed by a purchaser of the undervalued corporation.136 Instead, being
public itself is claimed as stymieing the corporation’s value, and the benefits
of going private are recited to justify these transactions.137 Such benefits include permitting the corporation to have a long-term focus by avoiding the
“tyranny of quarterly earnings,”138 increasing the flexibility of the
corporation’s decision-making process,139 and reducing the agency problem
by giving management more of an equity stake in the newly private entity.140
With all of these benefits to management, however, target boards must take
increasing precautions to ensure management is not giving the store away at
the shareholders’ expense.141 Indeed, failing to mind management’s enthusiasm for going private and failing to independently consider whether the
company should be sold will attract the criticism of the Delaware courts;
thus, reliance on the terms of a go shop to compensate for an uninformed
134. See Dennis K. Berman, Fine Line of Selling, Selling Out, the Firm, WALL ST. J., Jan. 30,
2007, at C1 (“These transactions stand to be lucrative for top managers, who typically keep their
jobs and are awarded new equity along the way.”).
135. See HAMILTON & MACEY, supra note 132, at 973 (“[S]hareholders prefer to sell their
shares to would-be acquirers at attractive prices . . . , while management prefers to retain lucrative
positions as managers of the enterprise.”).
136. See id. at 1023 (analyzing the validity of takeover defenses in light of “the premise that
takeovers occur primarily to weed out less efficient managers”). A private-equity buyer will not
likely seek to retain a poorly performing management. However, the fact that many private-equity
firms retain management while purchasing the corporation suggests that the quality of management
is not the only factor affecting a corporation’s value, thereby permitting less reliance on the market
for corporate control to keep management in line.
137. See, e.g., Gogel, supra note 124 (arguing private companies benefit from better
governance, more stable shareholders, increased management talent, and more-efficient capital
structures); Andrew Ross Sorkin, A Growing Aversion to Ticker Symbols, N.Y. TIMES, Jan. 28,
2007, § 3, at 6 (describing the benefits of being private as avoiding compliance overkill and having
less risk aversion).
138. As the chairman and CEO of Blackstone, Steve Schwarzman, put it, “Actually, [low
returns are] all a bit of an artifact of being a public company. And in some cases, what we find is
that the same people managing the businesses, when freed of the tyranny of quarterly earnings
and . . . other types of restrictions that go with being a public company, know exactly what to do to
create more value.” The Charlie Rose Show: A Discussion with Two Powerful Men in Private
Equity (PBS television broadcast May 1, 2006) (emphasis added).
139. Gogel, supra note 124.
140. Id.
141. Cf. Berman, supra note 134 (discussing how some management has been soliciting
private-equity buyers without the knowledge of their boards).
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decision is a significant pitfall for unwary boards faced with the prospect of
going private.142
4. Criticism of the Go Shop.—Critiques of the go shop’s use focus
primarily on two issues: a general distrust of private-equity purchasers143 and
a belief that target boards are accepting inadequate initial offers that nearly
always go unchallenged.144 These arguments further emphasize the importance of a target board making an initial informed decision to accept an offer
and soliciting additional bidders in good faith.
The distrust of private-equity firms manifests itself in the actions of
both individual shareholders and government agencies. As the Delaware
Court of Chancery has recently recognized inherent differences in a transaction with a private-equity buyer as opposed to a strategic buyer,145 so too
have shareholders. Shareholders have increasingly questioned the added
value of a sale to a private-equity firm that effects little change save privatizing the corporation.146 If going private results in little or no change to the
corporation’s operations,147 shareholders question what is barring management from generating—as a public company—the increased value that
142. See In re Netsmart Techs., Inc. S’holders Litig., 924 A.2d 171, 177 (Del. Ch. 2007)
(criticizing the board’s decision to pursue only private-equity buyers); In re SS & C Techs., Inc.,
S’holders Litig., 911 A.2d 816, 817–18 (Del. Ch. 2006) (questioning the likelihood of a competing
bid and whether the board adequately reflected on the decision to sell the company).
143. Private-equity firms, however, are aware of this public perception and are attempting to
inform the public—and Congress—of private equity’s benefits through the Private Equity Council.
Fugazy, supra note 128, at 54–55.
144. See Guerrera, supra note 58 (claiming the first private-equity firm “through the door” is
nearly always successful in obtaining the target company).
145. See, e.g., supra note 142. A strategic buyer is, essentially, a nonfinancial buyer: strategic
buyers are not purely in the business of applying capital to assets perceived to be undervalued;
instead, they generate revenue from sale of goods (or services), and they may attempt to increase
their market share by acquiring a competitor or to enter a new market by acquiring a target in that
industry.
See H. Peter Nesvold, Going Private or Going for Gold: The Professional
Responsibilities of the In-House Counsel During a Management Buyout, 11 GEO. J. LEGAL ETHICS
689, 691–92 (1998) (“A strategic buyer is generally interested in acquisitions that improve financial
returns by strengthening its competitive position, primarily through increased market share and cost
reductions.” (internal quotation marks omitted)). Such an acquisition subsumes the target’s
corporate identity into that of the acquirer, see, e.g., Bryce Klempner et al., Note, Case Study:
Selling Neiman Marcus, 12 HARV. NEGOT. L. REV. 235, 238 n.13 (2007) (describing Neiman
Marcus Group’s reticence to entertain offers from strategic buyers lacking “the right image”),
whereas private-equity purchasers intend only to operate, and improve the operations of, the
acquired company until such time as the acquired company—as a mere asset—can be sold for a
gain, see Nesvold, supra, at 692 (describing financial investors, or private-equity financial
purchasers, as purchasing a company and subsequently selling the company for a profit).
146. See, e.g., Alan Murray, Private Equity’s Successes Stir Up a Backlash that May Be
Misdirected, WALL ST. J., Jan. 31, 2007, at A9 (“Some large shareholders of Clear Channel
Communications . . . now say they won’t vote for a management-led buyout of that company . . . .”
(emphasis omitted)).
147. See supra note 136 and accompanying text.
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justifies the company’s sale.148 As private-equity deals increasingly involve
go shops, go shops are questioned as part of an underlying deal that does not
provide the best value reasonably available for shareholders.
Government agencies have also grown concerned. Like a light attracts
moths, the increased dollar value of private-equity deals has drawn the regulatory attention of the FTC in reviewing both particular deals sought by
private-equity firms and the private-equity industry in general.149 Recently,
the FTC began reviewing the regulatory effects of private-equity firms’
purchases relative to their portfolios; as the firms have “more fingers in more
pies,” the FTC has considered removing some pies from the firms’
windowsills.150 For example, Carlyle purchased Kinder Morgan, a gaspipeline company, but already owned a 50% stake in Magellan Midstream, a
related energy firm.151 The FTC decided to review the purchase to determine
if Carlyle’s increased presence in the energy industry would hamper
competition.152 As a result of the regulatory probe, Carlyle was forced to
relinquish operational control of Magellan as well as some seats on
Magellan’s board.153
In addition to the increased regulatory review of independent
transactions, the FTC has initiated an investigation of antitrust concerns
surrounding the entire private-equity industry due to an increased use of club
deals.154 Club deals have become more prominent in private-equity
transactions, representing 91% of transactions valued over $5 billion.155 This
clubbiness, it is claimed, evidences an anticompetitive gentleman’s
148. See Murray, supra note 146 (“If managers can create so much wealth for private owners,
why can’t they do the same for public shareholders?”). When a private-equity firm intends to keep
the current management and make few changes to the business, but the corporation is still perceived
as undervalued, shareholders question why management has not yet provided the increased value
and from where such value should come. This belief has hampered the usual rubber stamp of
shareholder approval of board decisions, though nearly all deals still, eventually, get the go ahead
from the stockholders.
149. See, e.g., Dennis K. Berman & Henny Sender, Probe Brings “Club Deals” to Fore, WALL
ST. J., Oct. 11, 2006, at C1 (reporting the beginning of a new inquiry by the Justice Department into
the practices of private-equity firms); Rob Cox, Lauren Silva & Dwight Cass, Private Equity’s Bad
Omen, WALL ST. J., Jan. 30, 2007, at C16 (discussing the FTC’s tussle with the Carlyle Group over
its purchase of Kinder Morgan in light of Carlyle’s preexisting involvement with Magellan
Midstream).
150. See Cox, Silva & Cass, supra note 149 (“As LBO houses get bigger, they will have more
fingers in more pies, and regulators will be watching them as closely as the giant conglomerates.”
(emphasis added)).
151. Id.
152. Id.
153. Id.
154. See Block, supra note 21, at 17 (“Another sign that club deals are having a . . . growing
impact is the recent investigation by the United States Justice Department into whether club deals
constitute anticompetitive behavior.”); Berman & Sender, supra note 149 (reporting an inquiry by
the Justice Department’s Antitrust Division into several private-equity firms’ increased use of club
deals).
155. Warner & Machera, supra note 62.
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agreement among private-equity firms to not jump each other’s deals.156
While the FTC’s conclusions are unavailable, challengers to particular corporate transactions with private-equity buyers claim this gentleman’s agreement
makes any attempt at postsigning solicitation of additional bidders—that is,
the go shop—completely ineffective as a means to obtain the best value reasonably available.157 However, as Chief Justice Steele recently remarked, the
difficulty with this claim is showing that the gentleman’s agreement actually
caused an otherwise-willing additional bidder to withhold its bid, thus
harming shareholders.158 As an alternative to the courts, a more effective
means of limiting private-equity clubs (if one believed limiting such clubs
was beneficial159), has been the seller’s proscription of any clubs in the bidding process.160
Critics also assert that go shops permit target boards to justify
uninformed decisions and accept inadequate initial bids that go unchallenged
by any meaningful auction.161 It has been noted that generally “most
offerors’ opening bids are significantly lower than the best prices those
offerors are prepared to pay.”162 A higher bid cannot be obtained because
private-equity buyers use go shops to prevent a meaningful presigning
156. See Guerrera, supra note 58 (“If private equity groups have a gentlemen’s agreement not
to crash each other’s bids[,] . . . then how can shareholders be sure that they are not selling their
companies on the cheap?”). However, private-equity firms have not only demonstrated an increased
willingness to bid with each other in club deals but an increased willingness to bid against each
other as well. See Favole, supra note 69 (“[P]rivate-equity companies are more active in the market
of late and seem more willing to outbid each other . . . .”); Rosenbush, supra note 82 (“According to
market researcher Dealogic, there were multiple bids for 29% of the private equity buyouts last
year, up from just 4% in 2005.”).
157. See, e.g., Guerrera, supra note 58 (claiming the go shop is merely an optical illusion to
pacify shareholders in light of the gentlemen’s agreement among private-equity buyers).
158. Interview by Charles Henry Still with Myron Steele, Chief Justice, Del. Supreme Court
(Jan. 31, 2007) [hereinafter Steele Interview].
159. Indeed, club deals are not all bad. The benefits of permitting club deals have been
described as follows:
[Club deals] allow private equity firms to take part in a greater number of transactions,
to better allocate the risk involved with a single transaction between all of the firms in
the club, to leverage the industry expertise and relationships of other club members,
and to reduce the price pressures resulting from auctions.
Block, supra note 21, at 17.
160. See, e.g., Randall Smith & Kathryn Kranhold, GE Sets Private-Equity Limits, WALL ST. J.,
Jan. 9, 2007, at A3 (reporting that General Electric Co.’s restrictions placed on bids for its plastics
business limit the formation of clubs of private-equity buyers).
161. See Guerrera, supra note 58 (claiming the first private-equity firm “through the door” is
nearly always successful in obtaining the target company and that go shops may not effectively
protect the shareholders’ interests).
162. Elliott J. Weiss, The Board of Directors, Management, and Corporate Takeovers:
Opportunities and Pitfalls, in THE BATTLE FOR CORPORATE CONTROL, supra note 5, at 35, 58. But
see Rosenbush, supra note 82 (“The buyout firms understand that they need to make an offer at the
upper end of their limit, essentially paying a premium to avoid the competition of a full-blown
auction . . . .”).
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auction.163 In addition, the go shop’s solicitation period is “an impossibly
short time to put together a deal,”164 particularly for a strategic buyer.165
Finally, when challenged as breaching its duty to obtain the best value
reasonably available, the target board must only point to the go shop’s language to escape liability.166
The import of these arguments comes not from the claim that go shops
should categorically be void; rather, these critiques emphasize issues boards
may easily overlook when using a go shop. A board approached with an offer from a private-equity purchaser, particularly a purchaser preselected by
management, may fail to sufficiently consider whether or not the company
should even be sold because of a dependence on the go shop’s permitted
postsigning market check. Additionally, a board may incorrectly rely on the
language of the go shop as satisfying its duty to obtain the best value reasonably available instead of taking action in good faith to solicit bids during
the designated time frame. In Part IV, these issues are further examined in
light of the board’s fiduciary duties and recent decisions of the Delaware
courts, which are set forth in Part III.
III. The Target Board’s Fiduciary Duties
Fiduciary duties are imposed on a board of directors in recognition that
the shareholders—the owners of the corporation—must delegate the responsibility of managing the corporation’s business and affairs to the board;167
163. See Guerrera, supra note 58 (observing that no counterbids by private-equity groups have
materialized during a go shop period).
164. Vince Galloro, HCA Clears Second Hurdle, MODERN HEALTHCARE, Sept. 18, 2006, at 14,
14.
165. Stapled financing is an agreement by a lender to provide the necessary funds to the
successful bidder on prearranged terms. Kevin Miller, In Defense of Stapled Finance, BOARDROOM
BRIEFING, Fall 2006, at 44, 44, available at http://www.directorsandboards.com/BBFall06.pdf. The
existence of stapled financing may make putting a bid together, at least the financing portion of it,
easier for competing bidders. On the other hand, such stapled financing raises concerns regarding
whether the particular bank will treat the bidders equally or whether the bank will bar a bidder that
wishes to use a different source for financing.
166. See Jessica Hall, MergerTalk: Shopping for a Higher Offer Can Be Futile, REUTERS
NEWS, Sept. 21, 2006, available at FACTIVA, Document No. LBA0000020060921e29l00265
(quoting Allen Michel, a professor at Boston University’s School of Management, as stating “[a]
seller might dictate the terms and say, ‘I want a “go shop” deal to protect myself in future
lawsuits’”); Lauren Silva, Rob Cox & Robert Cyran, So Blackstone Won, Right?, WALL ST. J., Feb.
8, 2007, at C18 (“[Investors] see [go shops] as a form of legal cover for independent directors
worried they will be perceived as favoring managers buying out the companies they run on the
cheap.”). However, this defense—in which the target board defines a standard in its agreement and
claims it has met the related legal standard, often of the same name—will likely be unpersuasive for
the court, running into the same Humpty-Dumpty problem as the defendant in Crawford trying to
define “change of control” for its executive-compensation agreements differently from “change in
control” in triggering Revlon. See La. Mun. Police Employees’ Ret. Sys. v. Crawford, 918 A.2d
1172, 1180 n.6 (Del. Ch. 2007).
167. See Aronson v. Lewis, 473 A.2d 805, 811 (Del. 1984) (“The existence and exercise of [the
directors’ power to direct the management of the business and affairs of the corporation] carries
with it certain fundamental fiduciary obligations . . . .”).
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thus, the board is elected to represent the shareholders’ interests as owners of
the corporation. As the shareholders’ fiduciaries, the board is subject to the
duties of care and loyalty.168 In the context of selling the corporation, these
duties require the board to seek the best value reasonably available for the
shareholders.169 However, the duty of loyalty was recently expanded by the
Supreme Court of Delaware in Stone v. Ritter.170 The court explained that
directors breach the duty of loyalty when they “fail to act in the face of a
known duty to act, thereby demonstrating a conscious disregard for their
responsibilities.”171 Additionally, in Crawford, the Delaware Court of
Chancery considered arguments that a board’s terminology “means just what
[it] choose[s] [the words] to mean.”172 The court also chose to reemphasize
its refusal to apply blanket rules in considering the reasonableness of a
board’s actions, thus eschewing arguments of form in favor of considerations
of substance and circumstances surrounding a particular agreement.173
Finally, Delaware courts have demonstrated a suspicion of the situation in
which a management, eager to take a public corporation private, places a
company on the auction block and preselects a buyer without the board’s
knowledge. This suspicion is demonstrated in the decisions In re Netsmart
and In re SS & C.
This Part first describes the general fiduciary duties of a board of
directors in the context of selling the corporation. Then it describes the
recent Delaware cases Stone v. Ritter, Crawford, In re Netsmart, and In re SS
& C to provide a complete picture of where the Delaware courts have focused their analysis of directors’ actions. Such analysis is key to the ultimate
prediction of the likely judicial review of a go shop in Delaware, explained in
Part IV.
A. Fiduciary Duties in General
The board’s fiduciary duties of care and loyalty arise from title 8,
§ 141(a) of the Delaware Code: “The business and affairs of every corporation organized under this chapter shall be managed by or under the direction
of a board of directors . . . .”174 The duty of loyalty demands that a director
168. Mills Acquisition Co. v. Macmillan, Inc., 559 A.2d 1261, 1280 (Del. 1989).
169. Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173, 184 n.16 (Del.
1986).
170. Stone v. Ritter, 911 A.2d 362, 370 (Del. 2006).
171. Id.
172. La. Mun. Police Employees’ Ret. Sys. v. Crawford, 918 A.2d 1172, 1179, n.6 (Del Ch.
2007).
173. See id. at 1181–82, 1181 & n.10 (refusing to apply a bright-line rule in considering
whether a 3% break-up fee is reasonable).
174. DEL. CODE ANN. tit. 8, § 141(a) (2001); see also Mills Acquisition Co. v. Macmillan, Inc.,
559 A.2d 1261, 1280 (Del. 1989) (stating that in performing its role as manager of the business and
affairs of a corporation, “the directors owe fiduciary duties of care and loyalty to the corporation
and its shareholders”); Revlon, 506 A.2d at 179 (same); Aronson v. Lewis, 473 A.2d 805, 811 (Del.
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place the interests of shareholders over her own self-interest;175 however, as
demonstrated further below, this duty has recently been expanded beyond
mere conflicts of interest.176 The duty of care requires directors “to inform
themselves, prior to making a business decision, of all material information
reasonably available to them.”177 Generally, the business judgment rule
shields directors’ decisions from close scrutiny by providing a presumption
that the directors acted on an informed basis in the absence of an abuse of
discretion.178 This rule is derived from the court’s unwillingness to substitute
its own judgment for that of the board.179 However, when the sale or breakup
of a company is inevitable, the court will not apply the business judgment
rule’s presumption.180
The duties of the board in selling the corporation were initially set forth
in Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc. and have since been
referred to as a board’s Revlon duties.181 When the sale or breakup of the
corporation is inevitable, the board’s fiduciary duties manifest themselves in
a specific charge “to secure the best value reasonably available for the
stockholders.”182 Revlon duties apply (1) when the corporation initiates the
process of selling itself, (2) when the company responds to an unsolicited
offer with an alternative transaction involving the corporation’s breakup, and
(3) when “approval of a transaction results in a ‘sale or change of
control.’”183 However, an outright auction of the company is not required to
1984) (“The existence and exercise of this power [to manage] carries with it certain fundamental
fiduciary obligations to the corporation and its shareholders.”).
175. See Ivanhoe Partners v. Newmont Mining Corp., 535 A.2d 1334, 1345 (Del. 1987)
(“[D]irectors must eschew any conflict between duty and self-interest.”); Guth v. Loft, Inc., 5 A.2d
503, 510 (Del. 1939) (“The rule that requires an undivided and unselfish loyalty to the corporation
demands that there shall be no conflict between duty and self-interest.”).
176. See infra section III(B)(1).
177. Paramount Commc’ns, Inc. v. QVC Network Inc., 637 A.2d 34, 44 (Del. 1994) (quoting
Aronson, 473 A.2d at 812).
178. Aronson, 473 A.2d at 812.
179. See Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946, 954 (Del. 1985).
180. See In re Toys “R” Us, Inc. S’holder Litig., 877 A.2d 975, 1000 (Del. Ch. 2005)
(“[D]irectors subject to Revlon duties [are subject] to a heightened standard of reasonableness
review, rather than the laxer standard of rationality review applicable under the business judgment
rule.”).
181. See, e.g., Omnicare, Inc. v. NCS Healthcare, Inc., 818 A.2d 914, 928 (Del. 2003).
182. QVC Network, Inc., 637 A.2d at 44; accord Mills Acquisition Co. v. Macmillan, Inc., 559
A.2d 1261, 1288 (Del. 1989) (“[I]n a sale of corporate control the responsibility of the directors is to
get the highest value reasonably attainable for the shareholders.”); Revlon, Inc. v. MacAndrews &
Forbes Holdings, Inc., 506 A.2d 173, 182 (Del. 1986) (stating that in the sale-of-control context, the
directors are “charged with getting the best price for the stockholders at a sale of the company”).
183. In re Santa Fe Pac. Corp. S’holder Litig., 669 A.2d 59, 71 (Del. 1995) (quoting Arnold v.
Soc’y for Sav. Bancorp., Inc., 650 A.2d 1270, 1290 (Del. 1994)). Some mergers do not involve a
change of control and thus the Revlon duties do not apply. A change in control does not occur in a
merger employing mainly a stock-for-stock exchange in which the corporation’s ownership remains
“‘in a large, fluid, changeable and changing market.’” Id. (quoting Arnold, 650 A.2d at 1290). For
an analysis of how Delaware courts specifically decide when Revlon duties apply, see generally
Wells M. Engledow, Structuring Corporate Board Action to Meet the Ever-Decreasing Scope of
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satisfy the Revlon duties.184 Instead, the courts will examine the reasonableness of the board’s actions and decisions based on the circumstances facing
the board at the time.185 Additionally, the “best value” is not limited to
merely the dollar value of an offer; a board may consider additional factors,
such as the feasibility of the offer, the source of the offeror’s financing, the
regulatory concerns surrounding the offer, and the likelihood of closing the
deal with the offeror.186 Thus, Delaware courts will analyze whether a board
Revlon Duties, 63 ALB. L. REV. 505, 528–34 (1999). A board may also reasonably decide not to
sell the corporation and defend it from a takeover. See, e.g., Unocal Corp. v. Mesa Petroleum Co.,
493 A.2d 946, 953 (Del. 1985) (illustrating a target company’s decision to defend against any sale
of the corporation). The standard by which the board’s conduct will be judged in defending the
corporation was articulated in Unocal Corp. as requiring (1) a reasonable belief on the part of a
board that a takeover posed a danger to the corporation and (2) a reasonable relationship between
the threat posed and the defensive tactics employed. Id. at 955–56.
184. See Barkan v. Amsted Indus., Inc., 567 A.2d 1279, 1286 (Del. 1989) (“[T]here is no single
blueprint that a board must follow to fulfill its duties [under Revlon].”); Mills Acquisition Co., 559
A.2d at 1286 (“Directors are not required by Delaware law to conduct an auction according to some
standard formula . . . .”).
185. QVC Network, Inc., 637 A.2d at 45; Toys “R” Us, 877 A.2d at 1016. This analysis is
illuminated by analogizing a board and a potential acquirer’s negotiations to a round of Texas hold
’em poker. See generally Wikipedia, Texas Hold ’Em, http://en.wikipedia.org/wiki/Texas_hold_em
(last modified Feb. 19, 2008) (describing the rules and terms of Texas hold ’em poker). The board
knows the two cards it has been dealt (i.e., the particular information about its corporation, like its
current operations and business outlook). However, it does not know what the other party is
holding, and it does not know what third parties may emerge as the negotiations progress (as a
poker player does not know what cards may emerge on the “flop,” “turn,” and “river”). In
reviewing a target board’s decisions and actions, the court will attempt to put itself in the seat of the
board as a player at the table, knowing only the two cards the board is holding and the cards on the
table at that point in time. Thus, the court does not look at the board’s decisions after all the cards
have been placed on the table. See QVC Network, Inc., 637 A.2d at 45 (“[A] court . . . should be
deciding whether the directors made a reasonable decision, not a perfect decision.” (emphasis
omitted)). However, if signing is the equivalent of the “show down” (in which the cards are on the
table, the bets are made, and the players compare their hands), then the Delaware Supreme Court’s
decision in Omnicare, Inc. v. NCS Healthcare, Inc. barred a board from ever going “all in” and
committing to a deal with a particular acquirer before the shareholders’ vote. See Omnicare, Inc.,
818 A.2d at 939 (concluding that in the absence of a fiduciary out provision, a combination of a
voting agreement with majority shareholders and a force the vote clause violates the board’s
fiduciary duties, regardless of the extent of bidding before the agreements are signed). That is,
while the court will attempt to analyze the decisions from the board’s chair at the poker table, the
court will not refrain from reviewing an action or decision after the board has signed the agreement.
See Burgess, supra note 49, at 454 (“[T]he Delaware courts have in fact articulated a continuing
duty to consider information about alternative bids after the execution of the merger agreement and
before stockholder approval.” (emphasis added)). More figuratively, a board cannot go all in (sign
an agreement resulting in the de facto sale of the company) before all the cards are on the table
because an additional bidder with an increased offer may emerge from the turn or the river.
However, this reduction of the board’s bargaining power has been sharply criticized. See, e.g.,
Omnicare, Inc., 818 A.2d at 946 (Veasey, C.J., dissenting) (“By . . . requiring that there must
always be a fiduciary out, the universe of potential bidders who could reasonably be expected to
benefit stockholders could shrink or disappear.”); Steele Interview, supra note 158 (“[T]here can’t
possibly be a rule that keeps the board from finalizing a decision on the possibility that a higher
price may shortly trump the previous deal that they’ve cut.”).
186. See Mills Acquisition Co., 559 A.2d at 1282 n.29 (describing the myriad factors a board
may consider); LETSOU, supra note 32, at 702 (explaining that a board may consider an “offer’s
feasibility, financing, legality, and risk of non-consummation, among other things”).
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has satisfied its Revlon duties by looking at all the facts and circumstances,
and recent decisions in Delaware serve as a barometer for how the courts will
regard particular circumstances. Delaware courts have provided direction
surrounding the interplay of good faith with the board’s fulfillment of its fiduciary duties;187 reemphasized their attention to substance and circumstance
over form, thereby eschewing the application of bright-line rules;188 and demonstrated their awareness of the current conflicts in management-led goingprivate transactions.189
B. Recent Cases: Divining the Direction of the Delaware Courts
Delaware courts have recently illuminated elements of the fiduciaryduty analysis. In describing good faith as a requirement for serving the corporation loyally, the Delaware Supreme Court has expanded the application
of the duty of loyalty to incorporate a failure to act in the face of a known
duty to act.190 Further, the court has emphatically restated that it will not lay
down blanket rules regarding a merger agreement’s terms and has thus
scorned formalistic arguments in favor of analyzing the substance of the
agreement and the circumstances then facing the board.191 Finally, the courts
have shown a particular sensitivity to situations involving a managementendorsed going-private transaction, questioning whether the board, and not
the management, sufficiently considered if the company should be sold at
all.192
1. Good Faith.—In Stone v. Ritter, the Supreme Court of Delaware
addressed the academic confusion regarding whether good faith was a new
and separate fiduciary duty apart from the traditional duties of care and
loyalty.193 While the court stated good faith was not a separate fiduciary
187. See infra section III(B)(1).
188. See infra section III(B)(2).
189. See infra section III(B)(3).
190. See Stone v. Ritter, 911 A.2d 362, 370 (Del. 2006) (“Where directors fail to act in the face
of a known duty to act, thereby demonstrating a conscious disregard for their responsibilities, they
breach their duty of loyalty by failing to discharge that fiduciary obligation in good faith.”).
191. See La. Mun. Police Employees’ Ret. Sys. v. Crawford, 918 A.2d 1172, 1181 n.10 (Del.
Ch. 2007) (“The inquiry, by its very nature fact intensive, cannot be reduced to a mathematical
equation.”).
192. See, e.g., In re Netsmart Techs., Inc. S’holders Litig., 924 A.2d 171, 198 (Del. Ch. 2007)
(“[S]trategic buyers might sense that CEOs are more interested in doing private equity deals that
leave them as CEOs than strategic deals that may . . . not.”); In re SS & C Techs, Inc., S’holders
Litig., 911 A.2d 816, 820 (Del. Ch. 2006) (“Another question is whether, given [the CEO’s]
precommitment to a deal with [the private-equity firm], the board of directors was ever in a position
to objectively consider whether or not a sale of the enterprise should take place.” (emphasis added)).
193. Compare Sarah Helene Duggin & Stephen M. Goldman, Restoring Trust in Corporate
Directors: The Disney Standard and the “New” Good Faith, 56 AM. U. L. REV. 211, 213 (2006)
(arguing that the Delaware Supreme Court articulated a theory of “new” good faith in In re Walt
Disney Co. Derivative Litigation, 906 A.2d 27 (Del. 2006)), with E. Norman Veasey with Christine
T. Di Guglielmo, What Happened in Delaware Corporate Law and Governance From 1992–2004?
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duty, it in fact expanded the traditional notion of the duty of loyalty.194 Thus,
where a breach of the duty of loyalty generally consisted of a conflict of
interest, the duty of loyalty can now be breached by “fail[ing] to act in the
face of a known duty to act.”195
Stone’s import derives from its analysis of the duty of loyalty and not—
for the purposes of this Note—from the particular facts and claim it involves;
however, the facts of the case are briefly provided. In Stone v. Ritter,
William Stone, a shareholder of AmSouth Bancorporation (AmSouth),
appealed the dismissal of his derivative action against the company’s directors claiming the directors failed to sufficiently oversee AmSouth’s
operations.196 Stone alleged that the directors did not oversee AmSouth in
good faith by failing to implement a system to notify the board of problems
with the corporation.197 The “problem” was AmSouth’s recent $50 million in
fines and civil penalties related to insufficient compliance with regulatory
requirements.198 The nature of good faith vis-à-vis the duty of loyalty was an
integral portion of the court’s affirming the dismissal;199 if failing to oversee
the corporation in good faith was actually a breach of the duty of loyalty, the
corporation could not exculpate the directors from liability.200
The court restated previous decisions’ descriptions of a board failing to
act in good faith: “A failure to act in good faith may be shown . . . where the
fiduciary intentionally fails to act in the face of a known duty to act,
demonstrating a conscious disregard for his duties.”201 Up to this point,
Delaware courts had not addressed whether failure to act in good faith, alone,
resulted in liability;202 whereas, a breach of a fiduciary duty—such as care or
loyalty—does result in liability.203 The Stone court answered this question in
A Retrospective on Some Key Developments, 153 U. PA. L. REV. 1399, 1442, 1441–42 (2005)
(arguing that it was far from settled that In re Walt Disney Co. Derivative Litigation established a
new liability standard of good faith because “good faith has been in our jurisprudence for a long
time”).
194. See Stone, 911 A.2d at 369–70 (explaining good faith as an element of the duty of loyalty).
195. Id. at 370.
196. Id. at 365, 367 n.12. In particular, Stone unsuccessfully argued that demanding the board
to bring the action on behalf of the corporation was futile based on his claim that directors faced
personal liability for which they could not be exculpated by the corporation. Id. at 366–67.
197. Id. at 364.
198. Id. at 365.
199. Id. at 369–70.
200. Id. at 367; see also DEL. CODE ANN. tit. 8, § 102(b)(7) (2001) (stating that a corporation
can, in its certificate of incorporation, “eliminat[e] . . . the personal liability of a director . . . for
breach of fiduciary duty as a director, provided that such provision shall not eliminate or limit the
liability of a director: (i) For any breach of the director’s duty of loyalty”).
201. Stone, 911 A.2d at 369 (quoting In re Walt Disney Co. Derivative Litig., 906 A.2d 27, 67
(Del. 2006)).
202. See id. at 369 n.29 (noting that a previous case left open the issue of whether failing to act
in good faith is a basis for the imposition of liability and explaining that the issue is first addressed
in the current case).
203. Id. at 370.
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the negative and stated that good faith does not stand alone as a separate fiduciary duty.204 Instead, because a “director cannot act loyally towards the
corporation unless she acts in the good faith belief that her actions are in the
corporation’s best interest,” the court determined that the requirement of
good faith is an element of the fundamental duty of loyalty.205 As such,
failing to act in good faith does not directly result in liability, but it may do
so indirectly as part of the duty of loyalty.206 The duty of loyalty, the court
concluded, encompasses more than conflicts of interest; it includes situations
“[w]here directors fail to act in the face of a known duty to act, thereby demonstrating a conscious disregard for their responsibilities, they breach their
duty of loyalty by failing to discharge that fiduciary obligation in good
faith.”207 However, the court noted that it will not equate a bad outcome with
bad faith in examining whether a director failed to act in good faith.208
2. Substance and Circumstances over Form.—In Crawford, plaintiff
shareholders of Caremark Rx, Inc. (Caremark) sought to enjoin the proposed
merger of Caremark with CVS Corporation (CVS).209 Chancellor Chandler’s
opinion demonstrates that Delaware courts will consider the substance and
circumstances of an agreement over its form—that the courts will not be
bound by a drafter’s self-serving definitions in an agreement’s language.
Such an approach is evident in the chancellor’s note regarding the merger
agreement’s deal protections, his response to arguments concerning whether
the merger’s definition of “change in control” affected the legal standard of
change in control that triggers Revlon duties, and his analysis of whether an
offered special dividend constituted consideration so as to trigger
shareholders’ appraisal rights. Before describing the chancellor’s remarks,
the facts of the case are briefly described.
A proposed merger between Caremark and CVS led to the Crawford
litigation.210 Caremark and CVS negotiated a strategic merger consisting of
an all-stock exchange.211 Express Scripts, Inc. (Express Scripts) sought to
jump the deal by making an unsolicited offer.212 CVS ultimately responded
by suggesting that Caremark authorize a “special dividend” of six dollars per
share, payment of which was conditioned on shareholder approval of the
merger between Caremark and CVS.213 Plaintiffs, which included Express
204.
205.
206.
207.
208.
209.
210.
211.
212.
213.
Id.
Id. (quoting Guttman v. Huang, 823 A.2d 492, 506 n.34 (Del. Ch. 2003)).
Id.
Id.
Id. at 373.
La. Mun. Police Employees’ Ret. Sys. v. Crawford, 918 A.2d 1172, 1184 (Del. Ch. 2007).
Id. at 1178.
Id. at 1178–81.
Id. at 1182–83.
Id. at 1183.
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Scripts, sought to enjoin the shareholder vote.214 The Delaware Court of
Chancery ultimately enjoined the vote for twenty days following the
disclosure of the contingent nature of the investment bankers’ fees and the
existence of the shareholders’ appraisal rights.215
Chancellor Chandler noted the parties’ arguments regarding the
reasonableness of the deal’s protections, although he did not make a decision
on the merits of whether the protections were reasonable.216 The CVS–
Caremark merger agreement contained the relatively typical protections of a
force the vote clause, no shop with a fiduciary out, a topping right, and a
$675-million break-up fee217 (roughly 2.5% of the total deal value, which
includes the $6 per share special dividend offered at the time).218 Caremark
alleged that because these deal protections—namely, the near 3% break-up
fee—were typical and customary, they were reasonable as a matter of law.219
The chancellor chided the parties for contradicting a clear principle in
Delaware law, which states that “a court focuses upon ‘the real world risks
and prospects confronting [directors] when they agreed to the deal
protections.’”220 He went on to declare that creating a blanket rule—here,
that a 3% break-up fee is reasonable—regarding deal protections is too subject to abuse to be workable.221 Essentially, the chancellor recognized that a
blanket rule would unduly rely on an agreement’s particular language and
could easily be drafted around. Thus, such a rule would founder in light of
the court’s principle of considering all the circumstances then facing a board
when determining the reasonableness of the board’s action.
Additionally, Chancellor Chandler’s response to the parties’ contentions
regarding whether Revlon duties were invoked because a change in control
occurred exemplifies his refusal to apply a bright-line rule based on mere
language and not the language’s meaning under the circumstances.222 The
CVS–Caremark merger was a change of control in order to trigger executivecompensation packages, as defined by the merger agreement.223 However,
Caremark argued that the executive-compensation meaning of change of
control was not a change of control sufficient to invoke Revlon duties.224 The
chancellor again recognized that creating a bright-line rule that executive
compensation for changes in control automatically invoked Revlon would
214. Id. at 1184.
215. Id. at 1192.
216. Id. at 1181 n.10.
217. Id. at 1180–81.
218. Id. at 1183.
219. Id. at 1181 n.10.
220. Id. (alteration in original) (quoting In re Toys “R” Us, Inc. S’holder Litig., 877 A.2d 975,
1016 (Del. Ch. 2005)).
221. Id.
222. See id. at 1179 n.6.
223. Id.
224. Id.
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merely lead drafters to use different language.225 He compared Caremark’s
argument to “Lewis Carroll’s Humpty Dumpty, who made a similar assertion
when he claimed that ‘[w]hen I use a word . . . it means just what I choose it
to mean—neither more nor less.’”226 These comments again demonstrate
that the Delaware Court of Chancery will consider the actions of the board in
light of the circumstances and will not be limited by formalistic arguments.
Finally, the court’s analysis of whether the $6-per-share special
dividend triggered appraisal rights under Delaware Code title 8, § 262 further
demonstrates this trend of substance and circumstances over form. Appraisal
rights are granted under § 262 when consideration other than stock in a public company is offered.227 Caremark argued that the special dividend was
approved and to be paid by Caremark, not CVS, and thus was not consideration that invoked appraisal rights.228 The court looked past the self-styled
meaning of special dividend to the underlying fact that the payment was conditioned on shareholder approval of the CVS–Caremark merger.229
Therefore, the court concluded that the special dividend was, in fact,
consideration, and the appraisal rights thus applied.230
3. Gone Private: Conflicts Between Boards and Management.—
Currently, like any devout fisherman, management would like nothing more
than to hang a “gone private” sign over the company’s door in order to escape the pressures of a public corporation and enjoy the smoother waters of
private corporate existence.231 However, the board must look past the
exigencies of privatization and consider how the transaction will actually
benefit shareholders;232 the board must determine whether the corporation
should be sold at all, and it must ensure that an overeager management does
not rebuff buyers of a nonprivatizing persuasion—that is, strategic buyers.
Two recent decisions of the Delaware Court of Chancery evidence the
court’s awareness of this conflict between a target board and its management
in the context of going private: In re Netsmart and In re SS & C.
In In re Netsmart, the shareholders of Netsmart challenged the proposed
going-private transaction sponsored by two private-equity firms—Insight
225. Id.
226. Id. (alteration in original) (quoting LEWIS CARROLL, THROUGH THE LOOKING GLASS
(1871)).
227. Id. at 1191.
228. Id.
229. See id. at 1191–92.
230. Id. at 1192.
231. For a discussion of the benefits of going private, see supra notes 137–40 and
accompanying text.
232. Boards are, first and foremost, the representatives of the shareholders. In the context of
selling the company, whether to another company or to itself (in going private), the board keeps the
shareholders’ interests foremost in its decisions by pursuing the best value reasonably available.
See Veasey with Di Guglielmo, supra note 193, at 1413 (“Directors are fiduciaries, duty-bound to
protect and advance the best interests of the corporation.”).
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Venture Partners and Bessemer Venture Partners.233 The merger agreement
did not contain a go shop, despite the board’s efforts to obtain it, and instead
contained a no shop provision.234 Although Vice Chancellor Strine ultimately only enjoined the shareholder vote until the board disclosed
additional information regarding the transaction to its stockholders,235 he
criticized the Netsmart board’s decision to pursue only private-equity buyers
based on its management’s—arguably self-interested—recommendation to
do so236 and the board’s permissiveness of management’s involvement in the
actual bidding process.237
Netsmart’s board pursued a sale of the company and decided to contact
only private-equity buyers after management approached the board to present
the strategic alternatives of selling or remaining in business.238 Unknown to
the board, the company’s CEO had previously discussed the possibility of a
sale with some private-equity firms and an investment banker.239
Management’s proposal consisted of three possibilities: (1) remain a public
company, (2) look for a strategic buyer, or (3) go private with a sale to a
private-equity firm.240 In presenting the status quo option to remain public,
management focused on the continued short-term emphasis of quarterly
profits and costs associated with regulatory compliance.241 Regarding the
search for a strategic buyer, Netsmart had, in the past, unsuccessfully
searched for such a combination. Thus, management’s presentation of this
option stated solely that “[a] strategic sale is a good alternative but we did try
it once before and there was no interest so a reasonable approach would be to
run a parallel track with private equity.”242 The presentation of the third
option, consisting of a sale to a private-equity firm, emphasized the benefits
of going private—mirroring those aforementioned in this Note243—and mentioned the initial interest of such buyers.244 Based on the tenor of this
presentation, the vice chancellor pointed out what the board had failed to
question: that “the directional force of management’s desires was
manifest.”245 Indeed, the court recognized the attractiveness of a privateequity deal for a management team whose members, by and large, would
233.
234.
235.
236.
237.
238.
239.
240.
241.
242.
243.
244.
245.
In re Netsmart Techs., Inc. S’holders Litig., 924 A.2d 171, 175 (Del. Ch. 2007).
Id. at 190.
Id. at 209.
Id. at 183–84.
Id. at 193.
Id. at 181.
Id. at 180.
Id. at 181.
Id.
Id. (quoting Kevin Scalia, Netsmart’s executive vice president).
See supra notes 137–40 and accompanying text.
Netsmart Techs., Inc., 924 A.2d at 181.
Id. at 182.
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keep their jobs after the sale.246 However, the board did not take the deal’s
steering wheel away from management and was thus “steered [by
management] away from any active search for a strategic buyer.”247
In conducting the bidding process, the Netsmart board permitted
management to carry out the majority of the due-diligence requirements—the
board was hardly involved in the due-diligence proceedings.248 Failing to
participate in due diligence did not allow the board to determine whether
management was evenhandedly working with all of the bidders.249 Indeed,
the vice chancellor intimated that such an arrangement—an interested management interacting with all of the bidders—would likely dissuade a possible
strategic buyer from stepping forward with an alternative bid: the strategic
buyer would not wish to work with a hostile management to formulate a bid
that would ultimately leave the management unemployed.250 In addition, the
Netsmart board’s argument that its window shop was sufficient merely because the court had approved a similar term in the past was unpersuasive.251
The court noted Chancellor Chandler’s comments in Crawford,252 stating that
boards cannot “simply rely on notions of blanket rules . . . or ‘some
naturally-occurring . . . combination of deal protection measures.’”253 Thus,
Vice Chancellor Strine considered the fundamental difference between
“actively shop[ping]” with a go shop254 and “implicit[ly]” canvassing the
market with an inert no shop,255 and determined that the latter may not be
appropriate in all situations.256 However, despite the court’s extensive
discussion, the vice chancellor left the final decision to accept the offer in the
hands of informed shareholders by enjoining the shareholder vote until the
board issued additional disclosures.257
In In re SS & C, the parties sought the Delaware Court of Chancery’s
approval of a settlement regarding the shareholder-representative litigation
filed in response to SS & C Technologies, Inc.’s (SS & C) proposed goingprivate transaction with Carlyle.258 The settlement involved only providing
246. Id. at 175.
247. Id.
248. Id. at 188.
249. Id. at 186.
250. Id. at 198–99.
251. Id. at 197.
252. See supra section III(B)(2).
253. Netsmart Techs., Inc., 924 A.2d at 197 n.80 (quoting La. Mun. Police Employees’ Ret.
Sys. v. Crawford, 918 A.2d 1172, 1181 n.10 (Del. Ch. 2007)).
254. Id. at 190.
255. Id. at 197.
256. See id. at 198 (“Simply because many deals in the large-cap arena seem to be going the
private equity buyers’ way these days does not mean that a board can lightly forsake any
exploration of interest by strategic bidders.”).
257. Id. at 209–10.
258. In re SS & C Techs., Inc., S’holders Litig., 911 A.2d 816, 817–18 (Del. Ch. 2006).
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additional disclosures to the shareholders prior to their vote;259 however,
given the circumstances under which the transaction arose, Vice Chancellor
Lamb questioned the reasonableness of such a settlement and disapproved
the settlement for that reason and for untimeliness.260 SS & C’s CEO,
William C. Stone, started soliciting potential acquirers for the company
without the board’s knowledge.261 Additionally, Stone set the necessary
terms of any acquisition: he spoke only with buyers that promised him an
equity stake in the resulting entity and permitted him to keep his job.262 Not
surprisingly, based on the latter requirement, Stone met with six privateequity firms—still without the board’s knowledge—and found Carlyle’s
offer the most amicable.263 At that moment, Stone brought his anointed acquirer forward for the board to consider.264 The resulting agreement did not
contain a go shop.265
In explaining why the settlement was disapproved, Vice Chancellor
Lamb described the issues arising from Stone’s conduct and the board’s failure to curb such conduct.266 First, like Vice Chancellor Strine’s skepticism
that a competing bidder would come forward in light of an involved and interested management,267 Vice Chancellor Lamb questioned the likelihood
that a competing bidder would appear to bid on SS & C given the extent of
Stone’s involvement.268 Secondly, in light of Stone’s actions in bringing a
bidder to the board, the court questioned whether the board adequately reflected on the decision of whether to sell the company at all, or if it instead
improperly deferred to Stone’s personal decision to sell.269 For these reasons,
the vice chancellor disapproved the proposed settlement.270
IV. Implications of Using the Go Shop
The recent Delaware decisions are pertinent to determining whether a
target board met its duty to obtain the best value reasonably available when
259. Id. at 817.
260. See id. at 820–21 (disapproving the settlement for untimeliness due to its filing after the
completion of the merger and for inadequate representation of counsel based on questions regarding
the reasonableness of the settlement’s terms).
261. Id. at 818.
262. Id. In addition, Stone’s conduct was also described in a Wall Street Journal article to
illustrate how interested CEOs have been “canoodling with private-equity firms” behind the backs
of their boards. Berman, supra note 134; see also id. (“Mr. Stone began soliciting offers for the
company, and even hired a set of advisers to set up meetings with six potential buyers.”).
263. SS & C Techs., Inc., 911 A.2d at 818.
264. Id.
265. See SS & C Techs., Inc., Agreement and Plan of Merger (Form 8-K), § 6.04(a) (filed July
28, 2007) (containing a no shop).
266. SS & C Techs., Inc., 911 A.2d at 820–21.
267. In re Netsmart Techs., Inc. S’holders Litig., 924 A.2d 171, 186 (Del. Ch. 2007).
268. SS & C Techs., Inc., 911 A.2d at 820.
269. Id.
270. Id. at 820–21.
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implementing a go shop. The go shop, first and foremost, is a tool that a
board may use in order to obtain the best value reasonably available when
selling the company. Additionally, the tool may be utilized by a board to
take the reins of selling the corporation away from a management eager to go
private. However, like any other craftsman’s tool, the go shop must actually
be wielded by the board.
As demonstrated in In re SS & C and In re Netsmart, the Delaware
courts have been sensitive to the mechanics of management-led going-private
transactions—such transactions are commonly the only situation in which a
go shop appears. A board’s push to receive a go shop demonstrates its
knowledge that the management-endorsed offer may not be the best value
reasonably available. Further, the Delaware courts will likely continue their
increased scrutiny and suspicion of management-led sales to private-equity
buyers.
Where a board has successfully received a go shop, it has obtained the
ability to actively fulfill its fiduciary duties in light of its knowledge that the
initial offer may not be the best value available. Stone v. Ritter’s determination that good faith is a part of the duty of loyalty indicates that a board that
has obtained the ability to actively fulfill its duties but fails to do so breaches
its duty of loyalty. Thus, a failure to act—to utilize the go shop to solicit
bids—in light of the board’s known Revlon duties evidences a lack of good
faith and is thus a violation of the board’s duty of loyalty. The implication is
that a board, by implementing a go shop, must actively solicit additional offers in good faith or be faced with breaching the duty of loyalty and all the
consequences that follow from such a breach.
Finally, arguments that a board has satisfied its Revlon duties merely by
obtaining a go shop are unpersuasive in Delaware. Such arguments of
form—that receiving the right in the agreement to solicit the company to obtain the best value actually fulfills the duty to obtain the best value—have
been demonstrated to be ineffective in Crawford. A board will not be able to
merely point to its obtaining a go shop as satisfaction of its known Revlon
duties. Instead, a Delaware court will look to see the use to which the board
put the go shop. Thus, the court will not create a blanket rule allowing the
inclusion of a go shop to satisfy Revlon duties per se. Instead, the court will
focus on the substance of the agreement—that the board had the right and the
ability to solicit additional offers—and subsequent actions of the board in
utilizing the go shop in light of the circumstances then facing the board.
V.
Conclusion
Target boards should take caution in relying too heavily on the mere
inclusion of a go shop in the merger agreement. While a go shop is an
effective tool to actively fulfill a board’s fiduciary duty to obtain the best
value reasonably available to shareholders when selling the corporation, the
recent decisions in Delaware demonstrate that the board must utilize the go
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shop in good faith; otherwise, the board risks breaching its duty of loyalty.
Indeed, because the go shop provides the right to act in soliciting offers, the
board cannot act loyally to the corporation when it fails to so act given the
limited information on which the decision to sign the agreement is based.
While obtaining the go shop grants the board the ability 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 locate superior value.
—Joseph L. Morrel