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From No-shops to Go-shops: An Analysis of Recent

Delaware Case Law Clarity or Heightened Ambiguity?

By:

Allison M. Siavage Georgia State University College of Law

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I. Introduction

A. Overview

In 2007, Delaware courts addressed the issue of the validity certain deal protection

measures in a number of cases involving transactions for the sale of a controlling interest. The

Court has not provided a bright-line test for what types of provisions are permissible, indeed, it is

not clear whether the recent opinions will serve to heighten the ambiguity of the law in this area

or to provide more clarity as to the enforceability of deal protection provisions. An analysis of

the leading cases, in conjunction with the recent decisions, brings to light several principles the

court emphasizes in evaluating whether directors have fulfilled their fiduciary duties in

transactions involving the sale of a controlling interest.

The following discussion will analyze the tension between the competing interests of

shareholders and directors, with a focus on the evolution of Delaware law as it relates to no-shop

and go-shop provisions. The first section is a discussion of Delaware law in the area of directors’

duties in a sale of a controlling interest. The second section is a brief overview of deal protection

measures generally, followed by a description of no-talk, no-shop, window-shop, and go-shop

provisions. The third section is a description of the law related to no-shop and go-shop

provisions, beginning with a discussion of the seminal no-shop case, followed by an in-depth

look at three recent Delaware cases. The fourth section analyzes the progression of the law

through a discussion of the implications of the recent cases and principles derived therefrom.

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II. Director’s Duty in a Sale

A. Business Judgment Rule and Enhanced Scrutiny

Delaware Corporate Law recognizes that the management of the business of a Delaware

company is entrusted to its directors, who are the authorized representatives of the shareholders.1

The Business Judgment Rule applies under normal circumstances, creating a strong presumption

in favor of the directors that they have acted in the best interest of the corporation.2 In situations

where directors have an interest in a transaction, the Delaware courts take a more active role in

evaluating the reasonableness of the board’s actions, using an enhanced scrutiny approach, to

determine whether the those decisions were in line with the directors’ fiduciary duties.3

B. Fiduciary Duty in the Change of Control Context

1. Rational for Enhanced Scrutiny

The Delaware Supreme Court noted in Paramount Communications, Inc. v. QVC

Network, Inc. (“QVC”), that in a change of control context, where the majority of voting shares

are acquired by a single entity or by a group acting together, there is a diminution in voting

power of those who become minority stockholders as a result of the transaction.4 The Court

remarked:

“In the absence of devices protecting the minority stockholders, stockholder votes are likely to become mere formalities where there is a majority stockholder…Absent effective protective provisions, minority stockholders must rely for protection solely on the fiduciary duties owed to them by directors and the majority stockholders.”5

1 8 Del.C. §131(a). 2 Aronson v. Lewis, 473 A.2d 805, 811 (Del. 1984). 3 Weinberger v. UOP, Inc., 457 A.2d 701, 710-711 (Del. 1983). 4 Paramount Communications, Inc. v. QVC Network, Inc., 637 A.2d 34, 42 (Del. 1994). 5 Id.

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Thus, the law provides a layer of protection for minority shareholders in a change of control

context by taking a closer look at the board’s actions in order to ensure the directors acted in

accordance with their fiduciary duties.6 The Delaware Supreme Court identified the key features

of the enhanced scrutiny test in QVC:

“(a) a judicial determination regarding the adequacy of the decision-making process employed by the directors, including the information on which the directors based their decision; and (b) a judicial examination of the reasonableness of the directors’ action in light of the circumstances then existing. The directors have the burden of proving that they were adequately informed and acted reasonably.”7

2. Shift in Fiduciary Duty in a Sale of Control Context

It is well settled under Delaware law that the directors’ general duty to act in the best

interest of the corporation shifts once a sale of control becomes imminent, or the company is “in

play”.8 The Delaware Supreme Court, in Revlon v. MacAndrews, held that “the directors’ role

changed from defenders of the corporate bastion to auctioneers charged with getting the best

price for the stockholder at a sale of the company.”9 In the context of a sale of control, the

directors have one primary objective and that is to secure the transaction that offers the best

value reasonably available to the shareholders.10

3. Activities the Give Rise to a Revlon Duty

After the establishment of this shift in fiduciary duty in the Revlon case, the Delaware

courts, in a number of rulings, clarified at what point that duty is instituted. The law today is that

there are two situations which may give rise to Revlon duties: (1) where a company has initiated

6 Id. at 42-43. 7 Id. at 45. 8 Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d. 173, 182 (Del. 1986). 9 Id. 10 QVC, 637 A.2d at 44, See Also Barkan, 567 A.2d 1279, 1286 (Del. 1989) (“The board must act in a neutral manner to encourage the highest possible price for shareholders.”); Revlon, 506 A.2d at 182; Mills v. Macmillan, Inc., 559 A.2d 1261, 1288 (Del. 1989) (“In a sale of corporate control the responsibility of the directors is to get the highest value reasonably attainable for the shareholders.”).

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an active bidding process seeking to sell itself or to effect a business reorganization involving a

clear break-up of the company; and (2) where, in response to a bidder’s offer, a target abandons

its long-term corporate strategy and seeks and alternative transaction involving the break-up of

the company.11 Both a change in control and a break-up are not required and either will suffice to

cause both the implication of the duty on the directors to seek the best value reasonably available

to the shareholders and closer judicial scrutiny of the board’s actions during the negotiation and

bidding process.12 However, a stock for stock merger between two public companies will not

necessarily constitute a break-up or change in control and thus will not necessarily trigger Revlon

duties.13

4. What is Required of Directors to Satisfy Their Revlon Duty?

Directors must always act in accordance with their fundamental duties of care, loyalty

and good faith, even in the change of control context, as there is “no single blueprint: that a

board must follow to fulfill its duties.”14 As the Delaware Supreme Court noted in Mills, “A

stereotypical approach to the sale and acquisition of corporate control is not to be expected in the

face of the evolving techniques and financing devices employed in today’s corporate

environment.”15 When there are bidders competing for control of a corporation in an active

bidding process, the directors are not permitted to use any defensive mechanisms to thwart an

auction or to favor one bidder over another.16 Additionally, when the board is contemplating and

negotiating a single offer and does not avail itself of information in order to judge the adequacy

of the offer, the fairness concerns demand that the board canvas the market to determine whether

11 QVC, 637 A.2d at 47. 12 Id. at 48. 13 Id. 14 Barkan v. Amsted Industries, Inc. 567 A.2d 1279, 1286 (Del. 1989). 15 Mills, 229 A.2d at 1288. 16 Revlon, 506 A.2d at 184.

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higher bids could be elicited.17 On the other hand, if the directors have reliable information upon

which to judge the fairness of the transaction, they may not be required to do a market canvass.18

“The need for adequate information is central to the enlightened evaluation of a transaction that a

board must make.”19

The board is not limited to considering only the amount of cash involved in a particular

bid, when evaluating whether a transaction gets the most for the shareholders.20 The directors

must analyze the entire situation and evaluate the consideration being offered, the deal structure,

and other relevant terms in order to obtain the best value reasonably available to the

shareholders.21

The standard by which the court judges the action of the board, in the context of a sale of

control, is one of reasonableness.22 The board must act reasonably to avail itself of all relevant

information and refrain from taking any action which may forestall the bidding process or

discourage potential third-party bidders.23 The Delaware courts recognize that there are many

ways a board can go about maximizing value and, thus, only require that the directors’ actions be

in the “range of reasonableness”, and the court will not hold a board liable for failing to make the

best decision, so long as it was reasonable given the circumstances.24

III. Deal Protection Measures

A. The Tension: Protecting the Deal and Fiduciary Duties

Over the course of a negotiation of a merger or acquisition, the acquiring company

becomes increasingly more invested in the transaction in terms of both management focus and 17 Barkan, 567 A.2d at 1287. 18 Id. 19 Id. 20 Mills, 559 A.2d at 1282. 21 Id. 22 Barkan, 567 A.2d at 1289. 23Id. at 1287. 24 Id. at 1289.

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economics. Although each company has a vested interest in closing the deal, the acquiring

company is particularly wary of becoming a “stalking horse” for other potential buyers. 25 On

the other hand, the goal of the target board may be to maintain a certain level of flexibility in the

current negotiations in order to be free to consider alterative deals that offer better value.26

Historically, purchasers were more cautious to enter, as third-party bidders, into deals that were

already in negotiations with others, but the recent trend reveals that purchasers have become

much more aggressive in the post-hostile takeover era of the 1980’s. 27 Thus, it has become more

of a necessity to incorporate contractual protections for the deal at the consummation of the

negotiation.28

As deal protection measures have become more commonplace, the Delaware courts have

increasingly protected the interests of shareholders in the context of a sale of the company. 29 As

discussed in the above section, while directors always owe fiduciary duties of loyalty, care, and

good faith to the corporation, in the context of a sale of control where the directors derive a

benefit from the transaction, the court looks at the fairness of the deal with enhanced scrutiny

and the board no longer receives the benefit of the Business Judgment Rule.30 Again, once a

company is on the auction block, the directors’ fiduciary duty to the shareholders can only be

fulfilled by selling the company to the highest bidder.31 Negotiated deal protection measures are

25 Simon M. Lorne, Acquisitions and Mergers: Negotiated and Contested Transactions, §3:61, 3-218, 3-219 (West Group 2002) 26 Diane Holt Frankel, Fiduciary Duties in Considering Deal Lockups: What’s a Board to Do?, in, Negotiating Business Acquisitions, vol. 1, § K, 1, 1 (ABA 2007) 27 Id. 28 Lorne, Acquisitions and Mergers: Negotiated and Contested Transactions at 3-219. 29 Id. 30 Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 361 (Del. 1993) 31 Revlon, 506 A.2d at 183.

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not permissible if they have the effect of precluding other bidders before a thorough auction has

been conducted.32

Thus, there is a tension between protecting the deal from third-party infiltration and the

directors’ fiduciary duty to the shareholders to get the best price for the company. Directors of

both companies must work together to find a balance between protecting the deal from other

bidders and not discouraging other bidders completely. In a sale of a controlling interest, the

minority shareholders have only the fiduciary duties of the directors to protect them. The Court

held in QVC, “Measures such as break-up fees, no-shop provisions and lock-up clauses in

documentation for the ‘favored transaction’ are not permissible if they have the effect of

precluding other bidders before a thorough auction has been conducted, thereby operating to the

detriment of the stockholders.”33 Thus, the Court does not permit “draconian” protection

measures that have the effect of discouraging a potential bidder due to the high cost of breaking

up the current negotiation, as that prevents the shareholders from benefiting from the value of a

potentially higher bid. 34

B. Description of Specific Measures

While this discussion focuses on the development of the law as it relates specifically to

the no-shop clauses, it is important to note that merger negotiations often involve a combination

of several different types of protection measures. Transactions involving the sale of a controlling

interest typically involve a combination of various protective provisions, such as lock-ups and

break-up fees, which the court considers as a whole when determining whether they are a barrier

to competition for the deal. Since the Delaware courts generally analyze the reasonableness of

the protective measures as a whole, a discussion of one specific mechanism, in isolation, is

32 Id. at 182. 33 QVC, 637 A.2d at 49. 34 Id.

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somewhat challenging. However, it is worthwhile to examine the decisions surrounding this

provision to illustrate a progression in practice from the no-talk, to the no-shop, to the window-

shop, to the go-shop provision.35

1. No-talk Provisions

No-talk provisions, a total prohibition no-shop variation, generally prohibit the seller

from talking to other prospective buyers, regardless of whether the other prospective buyer is

solicited by the seller or not.36 The Delaware courts generally view these provisions as overly

restrictive and prevent the seller’s Board from fulfilling their fiduciary duty to be informed of all

material information reasonably available.37

2. No-shop Provisions

No-shop provisions typically provide that a target may not seek, encourage, solicit or

provide information to or negotiate with other bidders.38 Generally, to be enforceable, a no shop

clause must include a fiduciary-out provision, which generally provides that the directors are

permitted to take certain actions in order to satisfy their fiduciary duty.39 In large public company

transactions, the conventional wisdom among practitioners is that the no-shop provision is in line

with the board’s fiduciary duty to obtain the highest value for the company because the market

creates an active bidding environment without the need for the company to actively solicit bids.40

35 Koppes, Richard, The Role of Outside Counsel, (Atlanta, Ga., March 17, 2008) 36 Frankel, Fiduciary Duties in Considering Deal Lockups: What’s a Board to Do? at 4. 37 Phelps Dodge Corp. v. Cyprus Amax Minerals Co., 1999 WL 1054255, 2 (Del.Ch. 1999). 38 David A. Katz, Takeover Law and Practice 2007, in, Negotiating Business Acquisitions, vol. 2, § O, 1, 58 (ABA 2007) 39 Phelps, 1999 WL 1054255 at 2. 40 Guhan Subramanian, Go-Shops vs. No-Shops in Private Equity Deals: Evidence and Implications, 63 Bus. Law. 729, 734 (May 2008).

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3. Window-shop Provisions

Window-shop clauses are similar to no-shop provisions, but they permit a target to give

confidential information to an unsolicited offeror and to consider those unsolicited bids.41 Thus,

the company may not actively solicit bids, but if another buyer expresses interest and requests

information, the company is permitted to provide information and negotiate with the potential

bidder.42

4. Go-shop Provisions

Go-shop provisions permit the target to actively solicit offers for a limited period of time,

typically 30-50 days, after signing the acquisition agreement.43 During the go-shop period, the

target solicits proposals from and enters into talks with other potential bidders.44 The target also

exchanges information with the prospective bidders, and often any confidential information that

is exchanged with these bidders must also be shared with the initial bidder.45

Oftentimes, go-shop provisions involve a “bifurcated” or reduced break-up fee if the

agreement is terminated and the company sells to another bidder.46 In fact, 67% percent of the

transactions involving go-shop provisions in 2006 included a bifurcated termination fee, while

every 2007 go-shop transaction included a bifurcated termination fee.47 Termination fees during

the period are typically between one to two-thirds less that the full termination fee.48 The

bifurcated termination fee ensures that the initial bidder receives some compensation for the

expense it incurred in making the initial bid and negotiating the agreement, as opposed to the

41 Phelps, 1999 WL 1054255 at 2. 42 Id. 43 Mark Morton and Roxanne Houtman, Go-Shops: Market Check Magic or Mirage?, in, Negotiating Business Acquisitions, vol. 1, § L, 1, 2 (ABA 2007). 44 Id. 45 Id. 46 Katz, Takeover Law and Practice 2007, at, 43 47 Morton and Houtman, Go-Shops: Market Check Magic or Mirage? at 2. 48 Id. at 5

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pre-signing auction that takes place in a no-shop context.49 If a higher offer is made within the

go-shop period, the target board, in most cases, provides the initial bidder with a “match right”, a

promise to negotiate with the initial bidder for a period of 3-5 days in order to determine whether

the initial bidder will match the terms of the topping bid.50 If the topping bidder wins the auction,

typically, the target board will pay the initial bidder the reduced break-up fee.51

The agreements provide for different steps that a higher bidder must take in order to

obtain the lower termination fee during the go-shop period.52 For example, an “open go-shop” is

one that only requires the target board to conclude before the end of the go-shop period that the

higher bidder has presented a proposal that is reasonably likely to lead to a superior proposal in

order to board terminate the initial proposal.53 In an open go-shop, the target has the whole go-

shop period to solicit competing proposals. On the contrary, a “closed go-shop” requires that,

before the end of the stated period, (1) the higher bidder must execute a confidentiality

agreement, resolve all due diligence issues, and prepare and submit the higher bid and form of

merger agreement, and (2) the target board must determine that the higher bidder has submitted a

superior proposal, then wait for the initial bidder to exercise their match right if applicable,

accept the higher bid, approve the merger agreement and terminate the initial agreement.54 Thus,

the closed go-shop mandates that much of the deal with the higher bidder be completed before

the end of the period.

49 Joseph L. Morrel, Student Author, Go Shops: A Ticket to Ride Past a Target Board’s Revlon Duties?, 86 Tex. L. Rev. 1123, 1123 (2008). 50 Subramanian, 63 Bus. Law. at 735. 51 Id. 52 Morton and Houtman, Go-Shops: Market Check Magic or Mirage? at 5. 53 Id. 54 Id.

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In recent years, there has been a surge of private-equity transactions, which has put a

significant amount of pressure on the target board to act quickly in making a decision.55 Go-shop

provisions have proven to be very useful in this context. Private equity deal volume has

increased at a rate of 45% per year during 2001 through 2007.56 Currently, there is fierce

competition among private equity firms to gain deal exclusivity in the form of a one-on-one

negotiation.57 The empirical evidence suggests that approximately 84% of deals involving U.S.

public companies larger than $50M in value between January 2006 and September 2007

involving go-shop provisions have been in private equity transactions.58 There are several

reasons that a go-shop is more attractive than a no-shop in a private equity transaction.59 For one,

the private equity firm has difficulty differentiating itself from other private equity firms, who

most likely all use the same valuation model and discount rates.60 Thus, the private equity firm

values exclusivity more than a strategic buyer, who may be able to offer more synergies and

competitive advantages.61 Furthermore, the publicity of losing a deal in a post-signing auction

would be more detrimental to a strategic buyer’s reputation than to a private equity firm.62 In

deals involving a “pure go-shop”, one that has absolutely no pre-signing market canvass, the

empirical evidence suggests that target boards and shareholders generally benefit from go-shops,

as they yield an average of a 5% higher return.63

Go-shops are also particularly favored in the management buy-out through private equity

transaction, where an active bidding process during the negotiation of the deal is inherently

55 Morrel, 86 Tex. L. Rev. at 1127. 56 Subramanian, 63 Bus. Law. at 732. 57 Id. at 734. 58 Id. at 741-742. 59 Id. at 742. 60 Id. 61 Id. 62 Id. 63 Id. at 730.

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difficult due to the involvement of management.64 Target boards tend to prefer go-shops in these

situations, in order to take the control of the deal away from management, who in many cases

may be attempting to steer the deal in the direction of one purchaser.65 Thus, the go-shop gives

the board more flexibility to sign the agreement while simultaneously ensuring that the offer

price is adequate.66 Additionally, companies may choose not to engage in an auction or a pre-

signing market check for many other business reasons such as: (1) the risk that the result may be

bids that were lower than expected or no bids at all, causing the value of the company to

decrease as a result, or (2) a desire to retain employees or customers.67 Thus, the go-shop

provision presents a good alternative to the auction or pre-signing market check in the

management buy-out situation.

IV. Progression of the Law Relating to No-shop and Go-shop Provisions

A. Landmark Cases

1. No-talk Provisions

Beginning in 1999 with the decision in Phelps v. Cyprus, the Delaware courts have

criticized “no-talk” provisions because of their likelihood to limit the director’s ability to avail

themselves of all information available to them and make an informed decision about the fairness

of the deal.68 In Phelps, the Court held that a straight no-talk provision, with no fiduciary-out

clause, acted to prevent the target company from considering information about alternative

transactions and that this type of provision was likely to be unenforceable even in a non-Revlon

setting.69 While the directors are permitted to negotiate provisions in merger agreements that

64 Morton and Houtman, Go-Shops: Market Check Magic or Mirage? at 2. 65 Morrel, 86 Tex. L. Rev. at 1123. 66 Id. 67 Morton and Houtman, Go-Shops: Market Check Magic or Mirage? at 6. 68 Phelps, 1999 WL 1054255 at 2. 69 Id. at 1.

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restrict their ability to negotiate with other parties, that decision must be an informed one and

must not foreclose all opportunity to discuss alternatives.70 The Chancery Court noted in Ace

Limited v. Capital Re Corporation, “No-talk provisions are troubling precisely because they

prevent a Board from meeting its duty to make an informed judgment with respect to even

considering whether to negotiate with a third-party.”71

2. No-shop Provisions

a. Paramount Communications, Inc. v. QVC Network, Inc.

The Delaware Supreme Court, in a landmark decision in QVC, set out major principals

intended to guide the behavior of directors of Delaware corporations in transactions involving a

change of control.72

In the late 1980’s Paramount was interested in a strategic expansion through a possible

acquisition or merger with another company in the entertainment, communications, or media

industry.73 Paramount entered into negotiations with Viacom in April of 1993, with more serious

negotiations taking place in July.74 Viacom initially offered a package of cash and stock,

comprised primarily of Class B nonvoting stock, with a market value of $61 per share.

Negotiations broke down shortly thereafter that because Paramount wanted at least $70 per

share.75 At that time, the CEO of Paramount learned that QVC was interested in making an offer,

but he told QVC’s CEO that Paramount was not for sale.76 In August, negotiations between

Paramount and Viacom resumed and on September 12, 1993, the Paramount Board unanimously

approved the a merger agreement, (the “Original Merger Agreement’), whereby Paramount

70 In re IXC Communications, Inc. Shareholder Litigation, 1999 WL 1009174, 6 (Del.Ch. 1999). 71 Ace Limited Capital Re Corporation, 747 A.2d. 95, 104 (Del.Ch. 1999). 72 QVC, 637 A.2d. at 34. 73 Id. at 38. 74 Id. 75 Id. 76 Id.

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would merge into Viacom with each share of Paramount common stock being converted into 0

.10 shares of Viacom Class A voting stock, 0.90 shares of Viacom Class B nonvoting stock, and

$9.10 in cash.77

The Original Merger Agreement also contained several deal protection measures,

including a no-shop provision, a termination fee, and a stock option agreement.78 The No-Shop

Provision provided that the Paramount Board would not solicit, encourage, discuss, negotiate, or

endorse any competing transaction unless: (a) a third party “makes an unsolicited written, bona

fide proposal, which is not subject to any material contingencies relating to financing”; and (b)

the Paramount Board determines that discussions or negotiations with the third-party are

necessary for the Paramount Board to comply with its fiduciary duties.79 The Termination Fee

was set at $100 million and would be triggered if the Paramount board terminated the Original

Merger Agreement for a competing transaction or if it recommended a competing transaction to

the shareholders.80 Finally, the Stock Option Agreement gave Viacom an option to purchase

19.9% of Paramount’s outstanding common stock at a price of $69.14 per share if any of the

triggering events of the termination fee occurred.

The Original Merger Agreement was signed and the merger was announced on

September 12, 1993. QVC made a competing bid in a letter to Paramount, offering $80 per share,

which consisted of 0.893 shares of QVC common stock and $30 in cash.81 The letter also

requested a meeting with the Paramount Board to discuss the details of the proposed

transaction.82 However, the Board was advised that the Original Merger Agreement prohibited

77 Id. at 39. 78 Id. 79 Id. 80 Id. 81 Id. 82 Id.

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them from talking to QVC unless certain conditions were met, but even after QVC provided

them with evidence of financing the discussions proceeded extremely slowly.83

On October 21, 1993, QVC filed suit in Delaware Court of Chancery and announced an

$80 per share cash tender offer, conditioned upon the invalidation of the Stock Option

Agreement, for 51% of Paramount’s outstanding shares.84 Within hours of this announcement,

Viacom entered into discussions with Paramount to negotiate a revised transaction. 85Viacom

and Paramount executed an Amended Merger Agreement on October 24, 1993, which included

an increase in the price per share and the voting stock consideration to competitive with the QVC

offer.86 The Paramount Board, however, did not use its leverage in the negotiation to bargain for

the removal of the deal protection measures.87 Both the Viacom and the QVC tender offers were

launched in late October only two days apart.88 QVC then met with the Paramount board

proposing guidelines for fair bidding process, which were rejected by the Paramount Board

because they conflicted with their contractual obligations under the Amended Merger Agreement

with Viacom.89 A bidding war followed, ultimately resulting in QVC offering $90 per share.90

The Paramount Board met to consider the QVC offer and determined that the bid was overly

conditional, but they did not communicate with QVC regarding those conditions because they

believed they were prevented from doing so because of the No-Shop Provision.91

QVC and certain stockholders of Paramount sued in the Court of Chancery seeking

preliminary and permanent injunction relief against Paramount, members of the Paramount

83 Id. at 40. 84 Id. 85 Id. 86 Id. 87 Id. 88 Id. at 41. 89 Id. 90 Id. 91 Id.

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Board, and Viacom.92 On November 24, 1993, the Court of Chancery issued its decision in favor

of QVC and the plaintiff stockholders, granting the injunction.93 A request for an expedited

interlocutory appeal was granted and the Supreme Court affirmed the decision of the Chancery

court on December 9th, 1993.94

The Supreme Court began its analysis with an explanation of the heightened scrutiny the

court must engage in when there is, as there was in this case, the approval of a transaction

resulting in a change of control, and the adoption of defensive measures in response to a threat of

corporate control.95 As discussed in the second section above, the court explained that since

Revlon, Delaware courts have made it clear that a director’s obligation is to seek the best value

reasonably available to stockholders when a corporation “initiates an active bidding process

seeking to sell itself or to effect a business combination involving a clear break-up of the

company” or where “in response to a bidder’s offer, a target seeks an alternative transaction

involving a break-up” of the corporate entity.96 The court went on to say that the need for

information is essential in order for the directors to make an informed decision when evaluating

a transaction.97

The Court held that under the facts of this case, the Paramount Board had a duty to: (1)

be diligent in examining the Viacom and QVC offers, (2) act in good faith, (3) obtain, and act

with due care on, all material information reasonably available, including information necessary

to compare the two offers, and (4) negotiate actively and in good faith with both Viacom and

QVC.98 Even though the court recognized that, under Barkan, there are many methods a board

92 Id. at 35. 93 Id. 94 Id. 95 Id. at 42. 96 Id. at 47-48. 97 Id. at 48. 98 Id.

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can employ to fulfill its obligation to seek the best value reasonably available to the stockholders,

the court held that the Paramount Board’s process was not in the range of reasonableness.99

Citing Barkan, the Court explained further, “Where a board has no reasonable basis upon which

to judge the adequacy of a contemplated transaction, a no-shop restriction gives rise to the

inference that the board seeks to forestall competing bids.”100 The Board did not give sufficient

attention to the potential consequences of the defensive measures that Viacom demanded.101 The

Court found that the Paramount Board should have known that the No-shop Provision, when

combined with the Stock Option and Termination fee, made it more difficult for a potential

competing bid to succeed and were, therefore, operating to impede the realization of the best

value available to the company.102

Moreover, the Court held that the No-shop Provision was invalid and unenforceable

because it prevented the directors from fulfilling the fiduciary duty to the company and its

shareholders.103 The No-shop Provision itself cannot define or limit the fiduciary duties of

directors, meaning the directors of Paramount were not free to contract away their fiduciary

obligation to the company.104

In sum, the Court held that the directors breached their fiduciary duty by agreeing to and

failing to amend the draconian deal protection provisions in their agreement with Viacom.105

99 Id. at 49. 100 Id. 101 Id. 102 Id. 103 Id. at 48. 104 Id. at 51. 105 Id.

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B. Recent Delaware Cases

1. Window-shop

a. In re Netsmart Technologies, Inc. Shareholders Litigation

The Court of Chancery, in recent decision in the case In re Netsmart, held that a special

committee could not rely upon efforts to solicit interested parties in prior years and upon a

passive “window shop” provision in a Merger Agreement, as opposed to an active canvass of the

market, to satisfy its Revlon duties.106

Netsmart was a leader in the behavioral healthcare information technology market and

provided enterprise software solutions to healthcare organizations.107 Netsmart was a public

company, incorporated in 1992, that experienced significant growth, through both sales and

strategic acquisitions, to eventually become the largest company it its market niche in 2006.108

The company’s management had become concerned that it was outgrowing its market in the late

1990’s and discussed what could be done to address that concern.109 One option the company

considered at that time was finding a larger healthcare IT software firm to acquire Netsmart and

add its software to their larger line of products.110 One member of the board, Conway, had had

sporadic and isolated discussions with a handful of larger companies over the course of seven

years, ending in 2005.111 In 2003, Netsmart engaged William Blair as an investment banker in

connection with the acquisition of their largest competitor CMHC, a deal which consummated in

106 In re Netsmart Technologies, Inc. Shareholders Litigation, 924 A.2d 171, 196-199 (Del.Ch. 2007). 107 Id. at 177. 108 Id. 109 Id. at 179. 110 Id. 111 Id.

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2005.112 From late 2003 through 2005, William Blair dropped Netsmart’s name when it made

cold calls on corporations in the healthcare industry.113

After the acquisition of CMHC in 2005, a few private equity firms had begun expressing

interest in Netsmart.114 The board met in May of 2006, to discuss three options for the company:

(1) continuing to build as a public company; (2) finding and selling the company to a strategic

buyer; and (3) taking the company private by selling to a financial buyer.115 The presentation

focused largely on the benefits of a private equity transaction.116 It emphasized the upside to

management, saying that they would get “another bite at the apple”, meaning that management

would profit from the sale of their equity in the going private transaction, would be kept on to

manage the company, and would likely be granted options from the private equity buyer.117 The

presentation dismissed the option of finding and selling the company to a strategic buyer,

claiming that they had pursued that route and there was not any interest, referring to the informal

and sporadic conversations that Conway had over the last seven years.118

Having not canvassed the market for a strategic buyer, the company reached out to seven

private equity firms for an offer, four of which responded positively: Vista, Francisco, Cressey,

and Insight.119 The board formed a Special Committee to negotiate the transaction, though the

committee was largely guided by management, the interested directors, and the investment

banking firm.120 The Special Committee decided to offer the two highest bidders the opportunity

to conduct further due diligence in contemplation of a higher bid in late August of 2006. This

112 Id. 113 Id. 114 Id. at 180. 115 Id. at 181. 116 Id. 117 Id. 118 Id. 119 Id. at 187. 120 Id. at 194.

{00010994 v2}20

decision was based upon the belief that as long as the Merger Agreement had a fiduciary-out and

did not contain preclusive deal protections, other buyers with an interest would make a topping

bid after the public announcement.121 After the second round of due diligence, both bidders’

offers went down, but Insight, who had not been invited to the second due diligence round, was

still interested.122

Insight conducted further due diligence, and, at the end of October 2006, Insight and

Netsmart agreed to a merger at a price of $16.50 per share.123 The Special Committee, in

negotiations with Insight, sought the opportunity to actively shop Netsmart though a “go-shop”

clause after the Merger Agreement was publicly announced.124 Insight, however, refused and the

Special Committee agreed to a “window shop” provision, which allowed Netsmart to consider

only unsolicited bids that met a standard definition of a superior proposal.125 The parties also

negotiated a 1% reverse termination fee if Insight failed to close by exercise of its financing-out

and a 3% termination fee for Insight if Netsmart terminated the deal in favor of a superior

proposal.126

After the announcement of the Merger Agreement in November 2006, several

shareholders filed suit, seeking an injunction.127 The Plaintiffs alleged that the directors failed to

undertake efforts to secure the highest price realistically achievable and, thus, breached their

Revlon duties.128 The Plaintiffs claimed that the board lacked a reasonable basis for its decision

not to take steps to explore whether strategic buyers might be interested in Netsmart. 129 The

121 Id. at 188. 122 Id. at 189. 123 Id. at 190. 124 Id. 125 Id. 126 Id. 127 Id. at 191. 128 Id. 129 Id. at 193.

{00010994 v2}21

Court held that the Special Committee and the Netsmart board did not have a reasonable basis to

conclude that the Insight deal was the best one because they failed to take any reasonable steps to

explore whether strategic buyers might be interested in Netsmart.”130 In discussing Barkan, the

Court remarked:

“When directors posses a body of reliable evidence with which to evaluate the fairness of a transaction, they may approve that transaction without conducting an active survey of the market. The corollary to this is clear: when they do not possess reliable evidence of the market value of the entity as a whole, the lack of an active sales effort is strongly suggestive of a Revlon breach.”131

The Court was particularly troubled by the assertions by Conway and William Blair that

they had pursued the opportunity of a strategic merger with a larger company, but no interest was

expressed, and therefore it was not worthy pursuit. 132 The Court viewed the discussions by

Conway and William Blair as “erratic, unfocused, and temporally-disparate”, and, thus,

insufficient to constitute a reasonable evaluation of this option.133 The Court remarked: “the mere

fact that some healthcare IT players had not responded to less authoritative overtures in years

long-past does not mean that they might not have taken a look at Netsmart in 2006.”134 The

company was in a different position after its acquisition of its largest competitor in 2005, thus it

was not reasonable to conclude that because there was little interest from potential strategic

buyers in years prior to 2005 that it was not necessary to canvass the market again in 2006.135

The Court held that, while the reliance on a post-signing market check without active

solicitation, or a window-shop period, may be sufficient in the large-cap company context,

130 Id. at 195. 131 Id. 132 Id. at 196. 133 Id. at 186. 134 Id. at 196. 135 Id.

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Netsmart, a micro-cap company, was required to do more to fulfill their Revlon duty.136 The

Court noted that Netsmart and its advisors could have put together materials, tailored to larger

companies in the healthcare IT space, describing the advantages of a business combination.137

Additionally, the Court believed that management’s decision to pursue solely the private

equity option was motivated by a desire to remain on board and get their “second bite at the

apple”.138 Thus, the Court found that the reliance by the Special Committee upon the sporadic

and informal efforts of Conway and William Blair in previous years and a passive window-shop

provision, as opposed to an active canvass of the market, was not sufficient to satisfy the board’s

Revlon duties.139

Even though the Chancery Court determined that the plaintiffs had demonstrated a

likelihood of success on the merits of their Revlon claim, it did not issue an injunction on that

basis out of concern that an injunction would result in Netsmart losing its only bidder.140 The

Court did issue a preliminary injunction based upon the plaintiffs’ disclosure claim and

mandated that Netsmart disclose to the stockholders the necessary information omitted from the

proxy statement before Netsmart could proceed with a Merger vote.141

2. Go-shop

a. In re Lear Corp. Shareholder Litigation

The Delaware Chancery Court, in In re Lear Corp. Stockholder Litigation, held that the

directors of Lear Corp. did not breach their Revlon duties even though the directors did not

conduct a pre-signing auction, but chose instead to engage in a 45-day closed go-shop period.142

136 Id. 137 Id. at 197. 138 Id. at 198. 139 Id. at 197. 140 Id. 141 Id. at 210. 142 In re Lear Corporation Shareholder Litigation, 926 A.2d 94, 96 (Del.Ch. 2007).

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Lear Corporation, one of the largest automotive interior systems suppliers, was traded on

the NYSE and was among the 150 largest companies in the U.S.143 Lear experienced financial

troubles in 2005 and 2006, due in large part to depressed auto sales among North American

automotive manufacturers.144 In early 2006, Carl Icahn bought a large portion of Lear stock on

the market, which had the effect of increasing the value of Lear’s stock.145 Later in the year,

Icahn purchased $200 million of Lear’s stock in a secondary offering through a private

placement, which gave him a total of 24% of the shares.146 The fact that the Lear board had

recently removed its poison pill, combined with the investment by Icahn, led the market to

believe that the company would likely be sold in the near future.147

In early 2007, Icahn recommended to Lear’s CEO, Rossiter, that it should pursue a going

private transaction.148 A week later, Rossiter told the rest of the board and they formed a Special

Committee, which authorized Rossiter to negotiate merger terms with Icahn.149 The Special

Committee did not take an active role in due diligence or the negotiations, leaving Rossiter to

take the lead.150

Icahn made an initial bid to acquire Lear at $35 per share and expressed his intention to

retain senior management.151 In this bid, Icahn agreed to a go-shop period during which Lear

would actively solicit higher bids, but he demanded a termination fee plus reimbursement of up

to $20 million in expenses if his bid was topped during the go-shop period.152 The Special

Committee rejected the bid, after deciding that the price was too low, and several exchanges of

143 Id. 144 Id. at 98. 145 Id. 146 Id. 147 Id. 148 Id. 149 Id. 150 Id .at 102. 151 Id at 103. 152 Id.

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counter-offers between the parties followed.153 After this back and forth, Icahn eventually

offered $36 per share, agreed to pay a reverse break-up fee if he breached the merger terms and

agreed to be more flexible in negotiating the terms of the go-shop and the termination fee.154 In a

board meeting to consider the proposal, JP Morgan represented to the board that Icahn’s offer

was attractive in light of the industry and the market.155 The Lear board also debated the benefits

of an auction, but the board was concerned that an auction would disrupt the company’s business

and customer relationships and result in losing the Icahn offer.156 Thus, they decided that the go-

shop structure would (i) secure a firm commitment from Icahn; (ii) avoid the risk that he would

withdraw his bid in an auction; and (iii) serve as the best method of maximizing the value to the

shareholders.157 The board proceeded to negotiate the terms of the Icahn offer and they agreed on

the following: a 45-day closed go-shop period, a decreased termination fee during the go-shop

period, Icahn would have the opportunity to match a superior proposal (“matching rights”), a

fiduciary-out there permitted the board to accept an unsolicited superior proposal even after the

go-shop period, and Icahn’s agreement to vote his share in favor of a superior proposal obtained

in the go-shop period.158 Immediately after the announcement of the Merger Agreement, JP

Morgan actively solicited expressions of interest from third-parties, contacting a total of 41

potential buyers, including 24 financial sponsors and 17 strategic acquirers. Only 8 out of the 41

firms decided to conduct initial due diligence, but at the end of the go-shop period none of the

buyers that were solicited had made even a preliminary bid.159

153 Id. 154 Id. 155 Id. at 104. 156 Id. 157 Id. 158 Id. 159 Id. at 106.

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The plaintiff shareholders sued, seeking a preliminary injunction against the merger,

claiming that the Lear board violated their fiduciary duty by failing to take reasonable steps to

secure the highest price reasonably available to the Lear shareholders.160

The Chancery Court ultimately found that the Lear board of directors did not breach its

Revlon duties, as it “retained for itself broad leeway to shop the company after signing, and

negotiated deal protection measures that did not prevent an unreasonable barrier to any second-

arriving bidder”161 However, in dicta, the Court criticized the 45-day closed go-shop because it

“essentially required the bidder to get the whole shebang done within a 45 day window”.162 The

Court pointed out that, in order to take advantage of the lower termination fee, a superior bidder

would have had to complete all the following actions in 45 days: conduct due diligence, present a

topping bid with a draft merger agreement, have the Lear board decide to declare the new bid a

superior proposal, wait 10 days for Icahn to exercise his match right, have the Lear board accept

the bid, terminate its agreement with Icahn, and enter into a merger agreement.163 After

criticizing this closed go-shop, the Court said that the requirement of a higher termination fee

that would be payable by a topping bidder after the go-shop period, would not likely chill the

bidding process.164 Thus, the Court ultimately found the board’s decision to proceed with a post

market check using the go-shop, a reasonable break up fee and a special voting agreement by

Icahn to support any unmatched superior proposal sufficient to satisfy their Revlon duties.165

Generally, in this case, the Court viewed the entirety of the board’s actions as reasonable

and in good-faith.166 The board actively negotiated with Icahn with regard to the deal protection

160 Id. at 110. 161 Id. at 122. 162 Id. at 119. 163 Id. 164 Id. at 120. 165 Id. 166 Id. at 118-121.

{00010994 v2}26

measures and made an informed decision not to conduct a full auction, after conducted a limited

pre-signing market check that yielded no serious bids.167

Even though in dicta the Court expressed some concern over whether the reduced

termination fee during the go-shop period was illusory, ultimately, it was the entirety of the

board’s conduct that the Court found to be reasonable, and thus, sufficing of its Revlon duties.168

b. In re The Topps Company Shareholders Litigation

The Delaware Chancery Court decided another case dealing with a go-shop provision in

2007, In re The Topps Co. Shareholders Litigation.169 The Court held that the Topps board did

not breach its Revlon duty by deciding to forgo a public auction in favor of a 40-day open go-

shop period. However, the Court held that the plaintiffs would likely prevail on their claim for

breach of Revlon duty based upon the directors’ refusal to negotiate with a competing bidder in

good faith.170

The Topps Company, Inc. manufactured baseball cards, other cards, and distributed

Bazooka bubble gum.171 Arthur Shorin, the son of one of the founders of the company, was the

Chairman and CEO, and his son-in-law Scott Silverstein was the President and COO.172 In 2005,

Topps attempted to auction a division of its business under pressure from its shareholders, but a

serious bid was never made.173 Shorin and board members friendly to him had become

concerned that they would be voted off the board, when Michael Eisner came in with an offer to

be “helpful”.174 Eisner made a bid for the company, offering $9.24 per share in a proposal that

167 Id. 168 Id. 169 In re The Topps Company Shareholders Litigation, 926 A.2d 58 (Del.Ch. 2007). 170 Id. at 58. 171 Id. at 60. 172 Id. 173 Id. 174 Id. at 61.

{00010994 v2}27

also envisioned the retention of existing management, including the son-in-law.175 At this time,

there was a clear schism in the board between those that favored a going private transaction with

Eisner and those that favored a public auction.176 Ultimately, the Topps board approved the

Merger Agreement with Eisner in a divided vote.177

The Merger Agreement included a 40-day go-shop period that allowed Topps to shop the

deal for 40-days after signing and gave the company the right to accept a Superior Proposal after

that, subject only to Eisner’s termination fee and match right.178 Topps was authorized to solicit

alternative bids and to freely discuss a potential transaction with any potential buyer. When the

40-days was up, Topps was required to cease all talks with any potential bidders unless the

bidder had already submitted a Superior Proposal or the Topps board determined that the bidder

was an Excluded Party, which was defined as a potential bidder that the board considered

reasonably likely to make a Superior Proposal.179 If the bidder fulfilled either if these

requirements, then Topps could continue talks with them after the go-shop period, an “open” go-

shop provision.180 Topps was also permitted to consider unsolicited bids after the expiration of

the go-shop period if it constituted a Superior Proposal or was reasonably likely to lead to one.181

The termination fee was 3% if Topps terminated during the go-shop period in order to accept a

Superior Proposal and 4.6% if Topps terminated after the go-shop period.182

175 Id. 176 Id. 177 Id. 178 Id. 179 Id. at 65. 180 Id. 181 Id. 182 Id.

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Shortly before the approval of the Merger Agreement, Topps chief competitor, The

Upper Deck Company, displayed a willingness to make a bid, but Topps signed the Merger

Agreement with Eisner without responding to Upper Deck.183

After the Merger Agreement was approved, Lehman Brothers, Topps’ investment banker,

began the go-shop process and contacted more than 100 potential buyers, both strategic and

financial.184 Upper Deck was the only serious bidder that engaged during the period.185 Topps

and Upper Deck executed a Confidentiality Agreement that included a Standstill Provision,

which prohibited Upper Deck from making any public disclosures during the negotiation.186 At

the end of the go-shop period, Upper Deck had made a non-binding bid to pay $10.75 per share

in a merger, without a financing contingency.187 The Topps board met and voted that Upper

Deck had failed to submit a Superior Proposal, due to the non-binding nature of the bid, and that

Upper Deck should not be treated as an Excluded Party, which would have permitted Topps to

continue negotiations with them.188 Subsequently, Upper Deck requested relief from the

Standstill Agreement in order to launch a tender offer for Topps’ share, but Topps refused to do

so.189

A group of shareholders and Upper Deck filed suit seeking preliminary injunction of the

merger with Eisner.190 The shareholders alleged, among other things, that the Topps board

breached their Revlon duties by choosing to forgo a public auction in favor of a go-shop

provision that was ineffective and by refusing to negotiate with Upper Deck in good faith.191

183 Id. at 62. 184 Id. 185 Id. 186 Id. 187 Id. 188 Id. at 72. 189 Id. at 62. 190 Id. 191 Id. at 63.

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Upper Deck claimed, among other things, that the Topps board breached its fiduciary duty by

misusing the Standstill Agreement to prevent them from communicating with the Topps

shareholders and presenting them with an opportunity to sell their shares for a higher price. 192

The plaintiffs claimed that the majority directors were motivated by a desire to ensure that the

Shorin family would continue in the leadership of the company, which caused them to favor the

Eisner transaction over the Upper Deck deal in violation of their Revlon duties.193

The Court held that the directors did not breach their Revlon duty by deciding to engage

in the private equity transaction with a go-shop period instead of a public auction.194

Additionally, the Court rejected the plaintiff’s claim that the go-shop period itself was

ineffective, finding that the board had left itself “reasonable room for an effective post-signing

market check” by negotiating a merger agreement that included a go-shop provision that allowed

the board to negotiate with competing bidders that it identified during a 40-day period as having

submitted or being reasonably likely to submit a Superior Proposal.195 The Court added:

“The 40-day Go-shop Period and this later right [the right to entertain an unsolicited bid] work together, as they allowed interested bidders to talk to Topps and obtain information during the Go-shop Period with the knowledge that if they needed more time to decide whether to make a bid, they could lob in an unsolicited Superior Proposal after the Period expired and resume the process.”196

However, the Court granted the Plaintiff’s injunction because it found that the Topps

board did not determine in good faith whether the Upper Deck proposal was a Superior Proposal

or reasonably likely to lead to one.197 The board’s refusal to set aside the Standstill Provision,

preventing Upper Deck from making a tender offer, further demonstrated that the board failed to

192 Id. 193 Id. at 82. 194 Id. at 87. 195 Id. 196 Id. 197 Id. at 89.

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pursue the highest price reasonably attainable for the shareholders.198 The Court held that the

Topps’ board did breach the Revlon duty by biasing the process against Upper Deck and toward

the Eisner transaction, which was more likely to keep current management in place.199

V. Analysis of the Law

A. No-shop, Window-shop, Go-shop: Guidelines for Directors

The recent Delaware decisions have not provided directors and practitioners with an

absolute guaranteed course of action that fulfills the Revlon duty in a sale of control transaction.

The refusal of the court to adopt a black letter standard for violation of fiduciary duty is a

positive development for shareholders.200 These recent decisions indicate that Delaware courts

consider all the facts and arguments in these cases to make an informed and balanced decision

regarding the good faith of the fiduciaries involved.201 The drawback for practitioners is that

there is not a formulaic paradigm that dictates the proper advice to the fiduciaries in these

circumstances.

While there are no magic words that an attorney can use to ensure the ironclad

enforceability of a no-shop or go-shop provision under Delaware law, there are some basic

underlying principals that can be extracted from this line of cases. Since the circumstances

surrounding each transaction for the sale of control are unique, the courts, in an attempt to

protect the shareholders, evaluate the entirety of the circumstances in order to determine whether

the directors acted reasonably to maximize the value to the shareholders. Hence, what the

198 Id. 199 Id. at 90. 200 Mark Lebovitch with Laura Gundersheim, “Novel Issues” or a Return to Core Principles? Analyzing the Common Link Between the Delaware Chancery Court’s Recent Rulings in Option Backdating and Transactional Cases, 4 N.Y.U.J.L. & Bus 505, 528 (2008). 201 Id.

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Delaware courts consider reasonable varies with the circumstances of each deal. According to

the Delaware Supreme Court in Barkan, there is ‘no single blueprint’ that the board must follow

in order to maximize the value to the shareholders.202 The Court in Netsmart further clarifies that

idea by commenting: “The ‘no single blueprint’ mantra is not a one way principle.203 The mere

fact that a technique was used in different market circumstances by another board and approved

by the court does not mean that it is reasonable in other circumstances that involve very different

market dynamics.”204 In their recent decisions, the Chancery Court in Delaware has provided

some guidance to directors in this area, by outlining important principals and identifying actions

which result in the breach of fiduciary duty.

1. Duty of Loyalty and Active Canvass of the Market

If the situation is one where the directors chose a type of transaction or a particular

acquirer that results in their continued employment over another course of action which does not

necessarily guarantee the same result, the courts are skeptical of that decision, as was seen in

Netsmart, Lear, and Topps.205 In Netsmart, the Court viewed the passive window-shop and the

sporadic discussions as being insufficient to overcome the presumption of self-dealing.206

Without a market canvass, in certain types of transactions, the board cannot possibly avail itself

of the information it needs to make an informed decision as to whether the deal is the best value

for the shareholders.207 Although the go-shop allows the board to solicit new offers in pursuing

the best value reasonably available, the board will not yet satisfy its Revlon duties until it

actually utilizes the go-shop in a good-faith attempt to realize superior value.208 Even though the

202 Barkan, 567 A.2d at 1286. 203 Netsmart, 924 A.2d at 195. 204 Netsmart, 924 A.2d at 197. 205 Netsmart, 924 A.2d at 181; In re Lear, 926 A.2d at 103; In re Topps, 926 A.2d at 89. 206 Netsmart, 924 A.2d at 189. 207 Id. 208 Morrel, 86 Tex. L. Rev. at 1135.

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directors in Lear, stood to benefit from the going-private transaction with Icahn, the Court

viewed the board’s actions more favorably because the deal protection measures were not “bid-

chilling” and the board actively solicited bids during the go-shop period that produced no

competing bids.209 The Court in Topps, was not troubled by the 40-day open go-shop provision

itself in the going private transaction with Eisner because the board actively shopped the deal

during that period. However, the Court did find that the board failed to carry out the go-shop

period in good faith which was a breach of its Revlon duties.210 Thus, a board cannot sit back and

wait for unsolicited bidders to appear, particularly in instances where the board and management

have a personal interest in a particular type of transaction or a particular suitor.

2. Active Negotiation of Deal Protection Measures

Directors must also actively negotiate the deal protection measures with a potential suitor

in order to fulfill their Revlon duty.211 In QVC, the Court gravely criticized the board for failing

to re-negotiate the draconian deal protection measures with Viacom when it came back with a

new offer and QVC had leverage.212 On the contrary, the Court praised the board in Lear for its

victories in the negotiation with Icahn.213 Thus, the board must utilize its bargaining power and

carefully consider whether its actions will yield the best value for the shareholders at each step in

the transaction.

3. Weigh the Risks of Various Courses of Action

Also evident from this line of cases is the notion that the board is required to actively

contemplate and weigh the risks involved in various types of transactions, making an informed

209 In re Lear, 924 A.2d at 103. 210 In re Topps, 924 A.2d at 87. 211 See QVC, 637 A.2d at 51; In re Lear, 926 A.2d at 120. 212 QVC, 636 A.2d at 51. 213 In re Lear, 926 A.2d at 120.

{00010994 v2}33

decision based upon a wealth of information.214 The board was harshly criticized by the Court in

Netsmart because it gave little attention to the option of a strategic merger in its meetings.215 On

the other hand, the Court praised the board in Lear for doing their due diligence: obtaining a

report from their financial advisor and weighing the risks and benefits of conducting an auction

versus a post-signing market check.216 Hence, it is permissible to forego a pre-signing auction, if

the circumstances warrant such a decision, but in making the decision to opt for a certain type of

transaction and conduct a post-signing go-shop period, the board must avail itself of all the

available information and diligently deliberate the risks of those courses.

4. Open Go-shop Is Preferred Over a Closed Go-shop

The analyzed decisions also indicate that Delaware courts take a more favorable view of

the open go-shop provision, as opposed to the closed go-shop. However, based upon the

particular facts and circumstances, either can be enforceable. Although the Court in Lear

ultimately held that the board did not breach its fiduciary duty, the Court criticized the 45-day

closed go-shop in dicta.217 The Court said that it would be nearly impossible for another bidder

to take advantage of the lower termination fee during the go-shop period, given the terms, but

since the termination fee outside of the go-shop period was viewed as within the range of

reasonableness, the provision was valid.218 The Court in Topps, viewed the open go-shop

favorably because it allowed the board to negotiate after the end of the period with competing

bidders that it identified during the period as having submitted or being reasonably likely to

submit a Superior Proposal.219

214 In re Netsmart, 926 A.2d at 197; In re Lear, 926 A.2d at 103. 215 In re Netsmart, 926 A.2d at 197. 216 In re Lear, 926 A.2d at 119. 217 Id. at 120 218 Id. 219 In re Topps, 926 A.2d at 87.

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VI. Conclusion

Although Delaware courts have refused to express a bright-line rule as to which deal

protection provisions are permissible and which are overreaching, the recent decisions serve to

illuminate several principals that practitioners and boards should use to guide their conduct in a

sale of control transaction. While a pre-signing auction followed the execution of an agreement

with a no-shop provision and a fiduciary-out clause, is permissible so long as the effect of the

deal protection measures, as a unit, are not bid chilling, the board must negotiate in good faith

with any unsolicited third-parties who present the opportunity for a topping bid.220

Generally, the board must not be passive in its attempt to obtain the highest bidder for the

company.221 While it may be permissible for a large-cap company to provide for a window-shop

period, during which the company can provide confidential information to unsolicited bidders, it

is impermissible for the board to rely on such a provision if it is a micro-cap company.222 Hence

the phrase, “no single blueprint”, meaning the court will look to the individual characteristics of

the company and its industry when it evaluates whether the board’s conduct was within the range

of reasonableness.223

The use of go-shop provisions is on the rise in the private equity sector. In deals

involving private equity buyers and public targets, announced in 2005, only 2% of them included

a go-shop provision, whereas in the deals announced in 2006, 29% include go-shop

provisions.224 The recent line of Delaware cases indicates that the Delaware courts generally

approve of go-shop provisions, so long as the directors proceed in good faith. The board only

220 QVC, 637 A.2d. at 48. 221 Netsmart, 924 A.2d at 195. 222 Id. 223 Id. at 197. 224 Keith A. Flaum, 2007 Private Equity Buyer/Public Target Study Working Group , in, Negotiating Business Acquisitions, vol. 2, § P, 1 (ABA 2007).

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satisfies its Revlon duties if it actively engages in a post-signing market canvas, acts in the best

interest of the corporation, actively negotiates the deal protection measures, carefully weighs the

risks and rewards of the course of action when compared to other alternatives, and bargains in

good faith with other bidders.225 It is clear from this line of cases that the mere inclusion of a go-

shop provision in a Merger Agreement is not an Easy Pass through the fiduciary duty toll along

the fast-paced road to closing the deal.

225 See Netsmart, 924 A.2d at 195-197; In re Lear, 926 A.2d at 103-120; In re Topps, 926 A.2d at 87-90; QVC, 637 A.2d. at 48-51.

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TABLE OF AUTHORITIES

CASES 

Ace Limited Capital Re Corporation, 747 A.2d. 95 (Del.Ch. 1999). ......................................... 13

Aronson v. Lewis, 473 A.2d 805 (Del. 1984).................................................................................. 2

Barkan v. Amsted Industries, Inc. 567 A.2d 1279 (Del. 1989)................................. 4, 5, 16, 21, 31

Cede & Co. v. Technicolor, Inc., 634 A.2d 345 (Del. 1993) .......................................................... 6

In re IXC Communications, Inc. Shareholder Litigation, 1999 WL 1009174 (Del.Ch. 1999). .. 13

In re Lear Corporation Shareholder Litigation, 926 A.2d 94 (Del.Ch. 2007).... 22, 23, 24, 25, 26, 31, 32, 33, 35

In re Netsmart Technologies, Inc. Shareholders Litigation, 924 A.2d 171 (Del.Ch. 2007).. 18, 19, 20, 21, 22, 31, 33, 34, 35

In re The Topps Company Shareholders Litigation, 926 A.2d 58 (Del.Ch. 2007).... 26, 27, 28, 29, 30, 31, 32, 33, 35

Mills v. Macmillan, Inc., 559 A.2d 1261 (Del. 1989)............................................................. 3, 4, 5

Paramount Communications, Inc. v. QVC Network, Inc., 637 A.2d 34 (Del. 1994)... 2, 3, 4, 7, 13, 14, 15, 16, 17, 32, 34, 35

Phelps Dodge corp. v. Cyprus Amax Minerals Co., 1999 WL 1054255, 2 (Del.Ch. 1999). 8, 9, 12

Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d. 173 (Del. 1986)............... 3, 4, 6

Weinberger v. UOP, Inc., 457 A.2d 701 (Del. 1983). .................................................................... 2

OTHER AUTHORITIES 

David A. Katz, Takeover Law and Practice 2007, in, Negotiating Business Acquisitions, vol. 2, § O, 1 (ABA 2007)..................................................................................................................... 8, 9

Diane Frankel, Fiduciary Duties in Considering Deal Lockups: What’s a Board to Do?, in , Negotiating Business Acquisitions, vol. 1, § K, (ABA 2007)................................................. 6, 8

Guhan Subramanian, Go-Shops vs. No-Shops in Private Equity Deals: Evidence and Implications, 63 Bus. Law. 729 (May 2008). ................................................................. 8, 10, 11

Joseph L. Morrel, Student Author, Go Shops: A Ticket to Ride Past a Target Board’s Revlon Duties?, 86 Tex. L. Rev. 1123 (2008). ......................................................................... 11, 12, 31

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Keith A. Flaum, 2007 Private Equity Buyer/Public Target Study Working Group , in, Negotiating Business Acquisitions, vol. 2, § P, 1 (ABA 2007) ................................................ 34

Koppes, Richard, The Role of Outside Counsel, (Atlanta, Ga., March 17, 2008) .......................... 8

Mark Lebovitch with Laura Gundersheim, “Novel Issues” or a Return to Core Principles? Analyzing the Common Link Between the Delaware Chancery Court’s Recent Rulings in Option Backdating and Transactional Cases, 4 N.Y.U.J.L. & Bus 505 (2008)....................... 30

Simon M. Lorne, Acquisitions and Mergers: Negotiated and Contested Transactions, §3:61, 3-218 (West Group 2002) .............................................................................................................. 6