M&A Technique Upheld

Dennis McCarthy – (213) 222-8260 – dennis@monarchbayassociates.com

At the end of 2012, The Delaware Chancery Court upheld the use of a valuable technique in the auction of public companies, referred to as the “don’t ask, don’t waive” provision.

This provision prevents the bidders who lose in an auction from making a topping bid once the winning bid is determined.  It is designed to encourage bidders to make their best offer knowing that they won’t be forced into additional rounds of bidding.

It is a technique used to get sellers the highest price and to bring closure to an auction.

This provision, usually inserted into the standstill provisions of a non-disclosure agreement, is agreed upon at the very beginning of the auction process, often without much attention, when potential bidders are cooperative and eager to get started on their evaluation. 

It comes into play, however, at the very end of the auction process after the potential bidders’ evaluation is over and final bids have been submitted.

So, what’s the issue?

Under Delaware law, Board’s of companies have the duty to maximize value on a sale and to be fully informed of the potential for higher bids.

So, does the “don’t ask, don’t waive” provision prevent the Board of a selling company from entertaining potentially topping bids from losing bidders?

This was the question addressed by the Delaware Court. In a ruling Mid-December, the court determined that a selling company can use the “don’t ask, don’t waive” provision as a tool to maximize value as long as the Board, its advisers and  shareholders are aware of its use and understand its impact.

The “don’t ask, don’t waive” provision, therefore, remains an available technique for use by selling companies.

I think that this will be a very active M&A year. 

Companies and their advisers need to be informed about the latest developments in M&A.

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Background article on the topic: