Sullivan & Cromwell Discusses last week’s new development in Delaware on “Don’t Ask, Don’t Waive” Standstills

In a preliminary injunction opinion issued on May 21, 2013, the Delaware Court of Chancery (VC Glasscock) found that the board of directors of NetSpend Holdings Inc., comprised of four directors representing private equity-affiliated stockholders that owned over 45% of NetSpend’s shares, three independent directors and the CEO, likely failed to satisfy their so-called “Revlon” duties to attempt to secure the best value reasonably attainable when agreeing to sell the company to Total Systems Services, Inc. (“TSYS”) in an all-cash $1.4 billion transaction. Specifically, the Court concluded that while the single-bidder sale process was not unreasonable per se it likely was unreasonable in the context of a fairness opinion the Court characterized as “weak” and a merger agreement that contained standard deal protection provisions, including a prohibition on waiving “Don’t Ask, Don’t Waive” standstills in confidentiality agreements with bidders that had previously been interested in a minority investment in the company.

However, despite finding a probability of success that the NetSpend directors had breached their duty of care, the Court declined to enjoin the transaction, concluding as in In re El Paso Corp. Shareholder Litigation that the risk of losing the only available deal outweighed the harm from the flawed sale process because no rival bidders had emerged notwithstanding a longer-than-anticipated time between signing and closing the TSYS transaction and the fact that the “Don’t Ask, Don’t Waive” provisions had been waived shortly after oral argument on the plaintiff’s preliminary injunction motion.

The Court’s NetSpend opinion has the following implications for directors of Delaware corporations:

  • Although there is “no single blueprint” directors must follow to maximize value in a change of control transaction, when directors elect to forgo a market check, either before or after the deal is signed, they should be “particularly scrupulous” about designing a sale process that ensures they are fully informed so that they can conclude that they have maximized value. Valuation analyses and fairness opinions from advisors and any actual or perceived barriers to the free flow of information to the board assume greater significance in such circumstances.
  • While Delaware law remains unsettled with respect to “Don’t Ask, Don’t Waive” standstills, NetSpend (as the first written opinion on the merits to address “Don’t Ask, Don’t Waive” standstills) reiterates Chancellor Strine’s view in In re decided in December 2012 that “Don’t Ask, Don’t Waive” standstills are not per se impermissible, that they will be evaluated in the context of their use and that a board must understand the import to the sale process of agreeing with a successful bidder not to waive standstills with other bidders. NetSpend also makes clear that in the context of a single-bidder process without a market check, they are unlikely to survive scrutiny absent a strong justification for their use.
  • As we have noted in other recent publications, “Delaware courts remain hesitant to enjoin M&A transactions altogether, even where they find ‘troubling’ process concerns, where there is no challenging bidder and shareholders are not precluded from voting down the only transaction at hand.” NetSpend is consistent with this trend.

The full memo, published by Sullivan & Cromwell on May 28, 2013, is availble here and is entitled Koehler v. NetSpend Holdings Inc.: Delaware Court of Chancery Finds Board Likely Breached Duty of Care for Failing to Waive “Don’t Ask, Don’t Waive” Standstills and Relying on Fairness Opinion the Court Characterized as “Weak” in Single-Bidder Sale With No Market Check; Court Declines to Enjoin Transaction on Balance of the Equities