An Incentive-Compatible Alternative to “Don’t Ask Don’t Waive” Standstills

In a recent essay forthcoming in the Delaware Journal of Corporate Law (available on SSRN), we argue that the current controversy over “Don’t Ask, Don’t Waive” standstills in M&A practice highlights the need to apply mechanism design to change-of-control transactions.[1]  Mechanism design is a Nobel Prize-winning theory based on incentive compatibility, whereby algorithmic procedures render it in the parties’ interests to be forthcoming, or truthful about their “bottom lines,” rather than relying exclusively on ex-post enforcement.

A.  The Tension Between Deal Certainty and Value Maximization in M&A Transactions

In M&A auctions, the board’s duty to maximize … Read more

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Editor's Tweet: NYU's Professor Steven J. Brams discusses An Incentive-Compatible Alternative to “Don’t Ask Don’t Waive” Standstills

Do Impending Delaware Law Changes Mean a Seismic Shift for Cash Tender Offers in Business Combinations?

Delaware appears almost certain to adopt changes that would become effective August 1 to the Delaware General Corporation Law (DGCL) which would change the process for back-end mergers after a tender offer closes.

Under this change,  a Buyer of over 50 percent (instead of the current threshold of over 90 percent) of shares of the Target will be able to effect a short-form merger without the burdensome and lengthy process of a further proxy solicitation and stockholder vote, which, by definition, the Buyer always wins.

Such DGCL amendments represent the most significant shift in the balance between usage of a … Read more

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Editor's Tweet: Will impending Delaware law changes mean a seismic shift for cash tender offers in business combinations?

How VCs Induce Entrepreneurial Teams to Sell Startups

Venture capitalists (VCs) play a significant role in the financing of high-risk, technology-based business ventures. VC exits usually take one of three forms: an initial public offering (IPO) of a portfolio company’s shares, followed by the sale of the VC’s shares into the public market; a “trade sale” of the company to another firm; or dissolution and liquidation of the company.

Of these three types of exits, IPOs have received the most scrutiny. This attention is not surprising. IPO exits tend to involve the largest and most visible VC-backed firms. And, perhaps just as importantly, the IPO process triggers public-disclosure … Read more

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Editor's Tweet: Professor Jesse Fried of Harvard Law School discusses how VCs induce eintrepreneurial teams to sell startups

Gibson Dunn Discusses Proposed Amendments to DGCL Section 251 Increasing Attractiveness of Tender Offer Structure

The Delaware State bar recently proposed an amendment to Section 251 of the Delaware General Corporation Law (DGCL) to add new subparagraph (h) that would greatly enhance the appeal of the tender offer over a one-step merger structure.

Currently, bidders can usually consummate an acquisition more quickly as a tender offer compared to a one-step merger.  If, however, the bidder is unable to reach the 90% threshold necessary to effect a short form merger, the bidder must prepare, file and mail to stockholders an information statement on Schedule 14C (which is subject to SEC review and comment) before a back-end … Read more

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Editor's Tweet: Gibson Dunn Discusses Proposed Amendments to DGCL Section 251 Increasing Attractiveness of Tender Offer Structure

Wachtell Lipton Discusses Proposed Amendments to Delaware Law that Would Facilitate Tender Offer Structures

The Delaware bar has recently proposed an amendment to the Delaware General Corporation Law that is likely to facilitate the use of tender offer structures, especially in private equity deals.  The new proposed Section 251(h), which is expected to be approved by the legislature and governor with an effective date of August 1, would permit inclusion of a provision in a merger agreement eliminating the need for a stockholder meeting to approve a second-step merger following a tender offer, so long as the buyer acquires sufficient shares in the tender offer to approve the merger (i.e., 50% of the outstanding … Read more

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Editor's Tweet: Wachtell Lipton Discusses Proposed Amendments to Delaware Law that Would Facilitate Tender Offer Structures

Delaware Supreme Court Reverses Chancery and Gives Collateral Estoppel Effect to California Federal Court’s Dismissal of Derivative Claims

In its widely followed Allergan decision, the Delaware Court of Chancery declined to apply collateral estoppel to dismiss a Delaware derivative complaint even though a California federal court dismissed (with prejudice) essentially the same complaint brought by different stockholders. The Court of Chancery had reasoned that there was no privity between the derivative stockholders because, until a stockholder survives a motion to dismiss based on failure to make demand, the stockholder is not acting on behalf of the corporation. Moreover, the Court of Chancery found that the California plaintiffs were inadequate representatives because they filed suit before seeking corporate books … Read more

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Editor's Tweet: Delaware Supreme Court Reverses Chancery and Gives Collateral Estoppel Effect to California Federal Court's Dismissal of Derivative Claims

M&A Litigation: More and More Dysfunctional

Empirical scholars of corporate law are uncovering a rapidly changing and depressing pattern in M&A litigation. This new research dates from a series of articles in 2012 by Professors John Armour, Bernard Black and Brian Cheffins, which announced that Delaware was “losing” its cases, as plaintiff’s attorneys migrated to other jurisdictions where they could expect lower dismissal rates and/or higher fee awards.[1] This year, a newer study by Professors Matthew Cain and Steven Davidoff covers 1,117 merger transactions between 2005 and 2011 and reports more surprising and complex findings. [2]  But the key question has not been faced by these … Read more

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Editor's Tweet: Professor John Coffee of Columbia Law School discusses M&A Litigation and its increasing dysfunctional

Qualitative Disclosure & Financial Projects: Overshadowed Lessons from In re

Chancellor Strine’s December 17, 2012 bench ruling in In re Inc. Shareholder Litigation attracted immediate attention from M&A practitioners and scholars regarding the Chancellor’s comments on so-called “Don’t Ask, Don’t Waive” standstill provisions.[1]  That attention, however, overshadowed the Chancellor’s equally important guidance regarding the materiality—and, therefore, need to disclose to shareholders—of qualitative facts surrounding fairness opinions prepared by a target’s financial advisor.  This post attempts to highlight that guidance, now that some of the proverbially dust kicked up by the Chancellor’s commentary on “Don’t Ask, Don’t Waive” standstills has begun to settle.

Background to the Dispute

Beginning … Read more

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Editor's Tweet: S&C Krishna Veeraraghavan and Jason Tyler discuss overshadowed lessons from In re

Gibson Dunn discusses recent Delaware Chancery ruling rejecting settlement of M&A litigation

On February 28, 2013, Chancellor Leo E. Strine, Jr. of the Delaware Chancery Court issued a rare bench ruling rejecting a disclosure-only, negotiated settlement of an M&A stockholder lawsuit.  The decision, in In re Transatlantic Holdings Inc. Shareholders Litigation, Case No. 6574-CS, signals that the Chancery Court will carefully scrutinize the terms of negotiated settlements to ensure that named stockholder plaintiffs are adequate class representatives and that the additional disclosures provided some benefit to the purported stockholder class.  At the same time, the decision represents an unmistakable warning to plaintiffs’ firms that they cannot continue to count on paydays Read more

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Editor's Tweet: Gibson Dunn discusses recent Delaware Chancery ruling rejecting settlement of M&A litigation

Recent Delaware Developments: Three Cases with Surprising Outcomes that Reinforce Traditional Fiduciary Principles

In three relatively low profile decisions issued by the Delaware Court of Chancery in February 2013, the court reached seemingly atypical results given the issued involved and the procedural postures of the respective cases.  The first decision was on February 6 in In re Puda Coal, Inc. Stockholders Litigation, C.A. No. 6476-CS (TRANSCRIPT).  There, Chancellor Strine denied from the bench a motion to dismiss a claim alleging that the defendant directors had breached their duty of loyalty by failing to monitor the company’s officers.  This result is noteworthy in that such so-called Caremark claims have been characterized by the … Read more

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Editor's Tweet: S&C's Krishna Veeraraghavan & Jason S. Tyler discuss three recent Delaware cases with suprising outcomes

Why the Out-Of-Delaware Trend in Merger Litigation May Not Be So Bad

The recent discovery that corporate law litigation very often takes place in courts outside of Delaware has rattled the academic consensus that Delaware won the corporate law “race” by providing a well-managed forum staffed with expert judges willing to decide complex deal cases quickly.  In an apparent affront to this settled understanding, recent research shows that more cases are filed against Delaware corporations in other states than in Delaware itself.[1]  As a forum for corporate litigation, in other words, Delaware no longer dominates.

Shaken from their settled understandings, commentators have sounded the alarm that fewer cases decided in Delaware … Read more

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Editor's Tweet: Professor Sean J. Griffith of Fordham Law discusses why the out-of-Delaware trend in merger litigation may not be so bad

No-Shops & Fiduciary Outs: A Survey of 2012 Public Merger Agreements

One of the fundamental tenets of corporate law is that boards of directors owe fiduciary duties to the corporation and its stockholders. In the context of a sale of the corporation, these duties may require a board of directors to pursue multiple transactions in an effort to ensure that the corporation’s stockholders receive the highest price reasonably available for their shares. However, once a merger agreement has been signed, the board of directors of the target corporation typically becomes subject to contractual commitments not to pursue alternative transactions and to recommend the transaction to its stockholders. The potential tension between … Read more

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Editor's Tweet: Gibson Dunn releases a survey of 2012 Public Merger Agreements, including an examination of many provisions at the center of negotiations.

Wachtell Lipton Discusses Rulemaking Petition for Modernization of Section 13 Beneficial Ownership Reporting Rules

NYSE Euronext, the Society of Corporate Secretaries and Governance Professionals and the National Investor Relations Institute have jointly filed a rulemaking petition with the SEC, seeking prompt updating to the reporting rules under Section 13(f) of the Securities Exchange Act of 1934, as well as supporting a more comprehensive study of the beneficial ownership reporting rules under Section 13. The petitioners urge the SEC to shorten the reporting deadline under Rule 13f-1 from 45 days to two business days after the relevant calendar quarter, and also suggests amending Section 13(f) itself to provide for reporting on at least a monthly, … Read more

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Editor's Tweet: Wachtell Discusses a Rulemaking Petition Calling for Modernization of Section 13 Beneficial Ownership Reporting Rules

Seinfeld and Director Compensation: A Decision That Wasn’t About Nothing

As companies prepare for the upcoming proxy season, the recent Delaware decision in the Seinfeld case offers a cautionary note for boards as they consider director equity and incentive awards and the terms of the plans under which they are issued. In the decision, Vice Chancellor Glasscock, while dismissing a number of other plaintiffs’ claims regarding compensation matters, found that the award to directors of time-vesting restricted stock units under the terms of the company’s stockholder approved equity plan was an interested party transaction and therefore subject to review under the stringent entire fairness standard.

Until Seinfeld, boards of … Read more

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Editor's Tweet: David Fox and Daniel Wolf of Kirkland & Ellis discuss the implications of the recent Delaware decision, Seinfeld.

The ICE Acquisition of NYSE Is a Failure for Europe

In 2011, the Deutsche Boerse Group launched an offer on the New York Stock Exchange. Everybody expected that the U.S. authorities would object to this foreign acquisition of the most iconic Stock Exchange in the United States, and arguably in the world. Not only did it not happen, but very quickly the U.S. Department of Justice, quite naturally, concluded that there was no antitrust issue. Incidentally, NASDAQ made a desperate attempt to purchase the NYSE for $11.8 billion and the merger of the two largest cash equity exchanges of the United States was stiffly rejected by the U.S. authorities. Even … Read more

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Editor's Tweet: Georges Ugeux, CEO of Galileo Global Advisors, opines on the ICE acquisition of NYSE

“Don’t Ask, Don’t Waive Standstills” Revisited (Rapidly)

In a second Chancery transcript ruling on the subject in recent weeks, Chancellor Leo E. Strine, Jr. has made clear that Delaware has no per se rule against “Don’t Ask, Don’t Waive” standstill provisions (which prohibit a party subject to a standstill, including a losing bidder in an auction, from requesting a waiver from its standstill obligations). The Chancellor also provided guidance for using such a provision as an “auction gavel” to secure the best price reasonably available to a target company involved in a sales process. Last week’s ruling in In Re is a welcome clarification that will … Read more

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Editor's Tweet: Wachtell Lipton partners opine on Delaware's two recent rulings on "Don't Ask, Don't Waive" provisions ( and Complete Genomics)

Implications of the Chancery Court’s Recent Rulings on “Don’t Ask, Don’t Waive” Provisions for Auction Processes

In two recent rulings, the Chancery Court of the State of Delaware has provided important guidance on how so-called “don’t ask, don’t waive” standstill provisions—which are designed to encourage bidders to provide their best offers during an auction—will be viewed in future litigation.  While the Chancery Court has recognized that “don’t ask, don’t waive” provisions can be appropriate and valuable tools for a board, these two rulings will affect the processes boards establish when conducting an auction process.

“Don’t ask, don’t waive” provisions have become increasingly common in M&A standstill agreements as a way of incentivizing competing bidders to put … Read more

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Editor's Tweet: Gibson Dunn’s Eduardo Gallardo and Aaron Holmes opine on Delaware’s recent rulings in and Complete Genomics.

Re-energizing the IPO Market

In the policy-oriented paper, “Re-energizing the IPO Market,”which will be published in the 2013 Brookings Press book Restructuring to Speed Economic Recovery, I summarize results from a number of my related co-authored papers and address why IPO volume, and especially small company IPO volume, has been so depressed for more than a decade.

From 1980-2000, an annual average of 310 operating companies went public in the U.S. During 2001-2011, on average only 99 operating companies went public. This decline occurred in spite of the doubling of real gross domestic product (GDP) during this 32-year period. The decline … Read more

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Editor's Tweet: Leading expert on IPOs, Professor Jay Ritter (University of Florida) provides a summary of his work on why IPO volume continues to be so low