Supplement on Standstills

8/22/2019 Supplement on Standstills

1/15

Supplemental Reading: Standstills


2/15

Standstills: Ventas, Celera, Complete Genomics, Ancestry.com

2

Form of Standstill Provision

This provision would be a separately (often fiercely) negotiated provision often inserted into a Confidentiality

Agreement.

9. [Unless approved in advance in writing by the board of directors of the Company, the Recipient agrees

that neither it nor any of its Representatives acting on behalf of or in concert with the Recipient (or any ofits Representatives) will, for a period of [___] year[s] after the date of this Agreement, directly or

indirectly:

(a) make any statement or proposal to the board of directors of any of the Company, any of the Companys

Representatives or any of the Companys stockholders regarding, or make any public announcement,

proposal or offer (including any solicitation of proxies as such terms are defined or used in Regulation

14A of the Securities Exchange Act of 1934, as amended) with respect to, or otherwise solicit, seek or offer

to effect (including, for the avoidance of doubt, indirectly by means of communication with the press or

media) (i) any business combination, merger, tender offer, exchange offer or similar transaction involving

the Company or any of its subsidiaries, (ii) any restructuring, recapitalization, liquidation or similar

transaction involving the Company or any of its subsidiaries, (iii) any acquisition of any of the Company's

loans, debt securities, equity securities or assets, or rights or options to acquire interests in any of theCompany's loans, debt securities, equity securities or assets, (iv) any proposal to seek representation on the

board of directors of the Company or otherwise seek to control or influence the management, board of

directors or policies of any of the Company, (v) any request or proposal to waive, terminate or amend the

provisions of this Agreement or (vi) any proposal, arrangement or other statement that is inconsistent with

the terms of this Agreement, including thisSection 9(a);

(b) instigate, encourage or assist any third party (including forming a group with any such third party) to

do, or enter into any discussions or agreements with any third party with respect to, any of the actions set

forth in clause (a) above;

(c) take any action which would reasonably be expected to require the Company or any of its affiliates to

make a public announcement regarding any of the actions set forth in clause (a) above; or

(d) acquire (or propose or agree to acquire), of record or beneficially, by purchase or otherwise, any loans,

debt securities, equity securities or assets of the Company or any of its subsidiaries, or rights or options to

acquire interests in any of the Company's loans, debt securities, equity securities or assets[, except that

Recipient may beneficially own up to ___% of each class of the Companys outstanding loans, debt

securities and equity securities and may own an amount in excess of such percentage solely to the extent

resulting exclusively from actions taken by the Company].

[The foregoing restrictions shall not apply to any of the Recipient's Representatives effecting or

recommending transactions in securities (A) in the ordinary course of its business as an investment advisor,

broker, dealer in securities, market maker, specialist or block positioner and (B) not at the direction or

request of the Recipient or any of its affiliates.]

(e) Notwithstanding the foregoing provisions of this Section 9, the restrictions set forth in this Section

9 shall terminate and be of no further force and effect if the Company enters into a definitive agreement

with respect to, or publicly announces that it plans to enter into, a transaction involving all or a controlling

portion of the Companys equity securities or all or substantially all of the Company's assets (whether by

merger, consolidation, business combination, tender or exchange offer, recapitalization, restructuring, sale,

equity issuance or otherwise).]


3/15


3

Note on Ventas Inc. v. Sunrise Senior Living Real Estate Investment Trust (Ontario, Mar. 2007)

Sunrise Senior Living Real Estate Investment Trust (Sunrise), a Toronto Stock Exchange listed company,

put itself up for auction in November 2006. Seven parties, including Ventas Inc. and Health Care Property Investors

Inc. (HCP), signed confidentiality agreements. The confidentiality agreements signed by Ventas and HCPcontained standstill provisions prohibiting them from making a proposal to acquire securities or assets of Sunrise for

18 months without Sunrises prior written consent.1

Ultimately, the interested parties were winnowed to Ventas and HCP, and Ventas made a proposal to

acquire Sunrises assets for $15 per unit. HCP did not submit a final bid. As a result, Ventas and Sunrise entered

into an purchase agreement in January 2007 containing a no shop provision with a customary fiduciary out. Ventas

was given matching rights should a superior proposal arise, failing which Sunrise could terminate the purchase

agreement, subject to paying the 3.5% termination fee, and enter into an agreement with the new bidder. The

purchase agreement also contained a provision, not expressly subject to the fiduciary out, that required Sunrise to

not waive or fail to enforce the standstill provisions in any confidentiality agreements signed with third parties. The

relevant provisions are excerpted below:

4.4 (1) Following the date hereof, Sunrise REIT shall not, directly or indirectly, through any trustee,officer, director, agent or Representative of Sunrise REIT or any of its Subsidiaries, and shall not permitany such Person to,

(i) solicit, initiate, encourage or otherwise facilitate (including by way of furnishing information orentering into any form of agreement, arrangement or understanding or providing any other form ofassistance) the initiation of any inquiries or proposals regarding, or other action that constitutes, or mayreasonably be expected to lead to, an actual or potential Acquisition Proposal,

(ii) participate in any discussions or negotiations in furtherance of such inquiries or proposals orregarding an actual or potential Acquisition Proposal or release any Person from, or fail to enforce, anyconfidentiality or standstill agreement or similar obligations to Sunrise REIT or any of its Subsidiaries,

(emphasis added)

(iii) approve, recommend or remain neutral with respect to, or propose publicly to approve,recommend or remain neutral with respect to, any Acquisition Proposal,

or

(v) withdraw, modify or qualify, or publicly propose to withdraw, modify or qualify, in any manneradverse to the Purchasers, the approval or recommendation of the Board (including any committeethereof) of this Agreement or the transactions contemplated hereby.

(2) Notwithstanding anything contained in Section 4.4(1), until the Unitholder Approval, nothing shallprevent the Board from complying with Sunrise REIT's disclosure obligations under applicable Laws withregard to a bona fide written, unsolicited Acquisition Proposal or, following the receipt of any suchAcquisition Proposal from a third party (that did not result from a breach of this Section 4.4), fromfurnishing or disclosing non-public information to such Person if and only to the extent that:

(i) the Board believes in good faith (after consultation with its financial advisor and legal counsel) thatsuch Acquisition Proposal if consummated could reasonably be expected to result in a Superior

1 Significantly, however, the standstill provision in the Ventas confidentiality agreement differed from the HCPconfidentiality agreement in that Ventas standstill provision terminated if a third party made a bid for Sunrise or ifSunrise entered into a purchase agreement with a third party. The HCP standstill contained no such limitation.


4/15


4

Proposal2

(3) Notwithstanding anything contained in Section 4.4(1), until the Unitholder Approval, nothing shallprevent the Board from withdrawing or modifying, or proposing publicly to withdraw or modify itsapproval and recommendation of the transactions contemplated by this Agreement, or accepting, approvingor recommending or entering into any agreement, understanding or arrangement providing for a bona fide

written, unsolicited Acquisition Proposal (that did not result from a breach of this Section 4.4) ("ProposedAgreement") if and only to the extent that:

(ii) the Board, believes in good faith (after consultation with its financial advisor and legal counsel)that such Acquisition Proposal constitutes a Superior Proposal and has promptly notified thePurchasers of such determination,

(7) Sunrise REIT shall, as promptly as practicable, notify the Purchasers of any relevant details relating toany Acquisition Proposal.

(8) Sunrise REIT shall

(v) not amend, modify, waive or fail to enforce any of the standstill terms or other conditionsincluded in any of the confidentiality agreements between Sunrise REIT and any third parties.(emphasis added)

Subsequently, HCP offered to acquire Sunrise for $18 per unit on terms identical to the Ventas/ Sunrise

transaction, subject to its concluding an agreement with the management company of Sunrises properties. Sunrise

did not immediately treat this proposal as a superior proposal because of the uncertainty created by this condition.

The parties then made various applications to court, essentially to determine whether Sunrise could entertain the

HCP offer.3

In holding that the Purchase Agreement requires Sunrise to enforce the HCP Standstill, precluding the

higher bid, the Ontario Superior Court wrote:

Sunrise REIT expressly and unambiguously agreed that it would not amend, modify, waive or fail toenforce any of the standstill terms or other conditions included in any of the confidentiality agreements

2 As defined in the Purchase Agreement: "Superior Proposal" means any unsolicited bona fide written AcquisitionProposal made by a third party that in the good faith determination of the Trustees, after consultation with itsfinancial advisors and with outside counsel: (a) is reasonably capable of being completed without undue delay (b)[is fully financed]; and (c) would, if consummated in accordance with its terms, result in a transaction morefavourable to Unitholders from a financial point of view than the transactions contemplated by this Agreement.

3

Summarizing the parties positions, the Court wrote: It is Ventas' position that as part of the auction process, aconfidentiality agreement that included the Standstill Agreement was entered into by HCP and Sunrise REIT.Ventas played by the rules and won the auction. The benefits of winning the auction included a binding obligationon Sunrise REIT to enforce the HCP Standstill Agreement. . The rationale for deal protection devices such as theStandstill Agreement between Sunrise REIT and HCP is that, in a contested bidding situation, they encouragebidders to make their best bids. In any event, as set forth in the Purchase Agreement, Ventas states that ultimately itshould be for the unitholders to decide which course to take. Sunrise REIT does not take the position that thePurchase Agreement is ambiguous. Rather, it submits that Sunrise REIT contracted for a fiduciary out mechanismin the Purchase Agreement and these provisions were a fundamental aspect of the commercial context of the processthat was designed to maximize value for the unitholders.


5/15


5

between Sunrise REIT and any third parties. The standstill enforcement obligations are found in sections4.4(1) and 4.4(8) of the Purchase Agreement.

Sections 4.4(2) and 4.4(3) address Sunrise REIT's obligations with regard to "a bona fide written,unsolicited Acquisition Proposal (that did not result from a breach of this section 4.4)." Sections 4.4(2) and4.4(3) are prefaced with the words "notwithstanding anything contained in section 4.4(1)." Sections 4.4(2)and (3) do not say "notwithstanding anything contained in section 4.4(1) or 4.4(8)." If it had been theparties' contractual intention to exempt the circumstances described in sections 4.4(2) and (3) from theoperation of section 4.4(8), they could have so provided but they did not. Similarly, unlike sections 4.7 and4.8 which commence with the words "notwithstanding any other term of the Agreement", sections 4.4(2)and 4.4(3) do not use this language.

It also should be observed that 4.4(2) and 4.4(3) contemplate a bona fide Acquisition Proposal.Bona fide means acting or done in good faith; sincere, genuine. I agree with the submission of counsel forVentas that a proposal made in breach of a contractual obligation not to make such a proposal cannot beconsidered to be bona fide. Sections 4.4(2) and 4.4(3) are not designed to address Acquisition Proposalsthat are not bona fide. So, for instance in this case, HCP is in breach of its Standstill Agreement andtherefore HCP's proposals would not be encompassed by sections 4.4(2) and 4.4(3) because they could notbe considered to be bona fide. Furthermore, sections 4.4(2) and 4.4(3) also contemplate an AcquisitionProposal from a third party that did not result from a breach of section 4.4. An Acquisition Proposal

submitted in breach of a standstill agreement, to the extent it is considered by Sunrise REIT, would resultfrom a breach of section 4.4. Again, in this case, sections 4.4(2) and 4.4(3) would be inapplicable on thisground as well.

It seems to me that the clear scheme of this Purchase Agreement was ensure enforcement ofstandstill agreements that had been signed as part of the auction process. This strikes me as beingobjectively reasonable and was a form of protection afforded to the purchaser, Ventas. This was part of thepackage negotiated between it and Sunrise REIT.

Ontario Superior Court of Justice, Mar. 6, 2007 CarswellOnt 1704, 29 B.L.R. (4th) 292, 56 R.P.R. (4th)183

Upholding the decision, the Ontario Court of Appeal wrote:

[A]n important purpose of this part of the Purchase Agreement is to ensure the enforcement of standstill

agreements entered into by previous players in the auction process. The negotiating context demonstrates

that Ventas has been skillful in protecting its own position with respect to competition and standstills

unlike the HCPI Standstill, the Ventas/Sunrise Standstill Agreement expired at the conclusion of the

auction and it is objectively reasonable, given this background, that it would seek protection against

competition from those who were unsuccessful in the auction, particularly its principle competitor.

From Sunrise's perspective, the safety valve lies in the unitholders' meeting. If the unitholders

believe that there is a more favourable offer available one worth the risk of rejecting the Ventas proposal

they may well vote to reject the Ventas proposal at their meeting on March 30.

[HCP] placed great emphasis on the sanctity of the fiduciary out mechanism in acquisition

agreements of this nature. There is no doubt that the directors of a corporation that is the target of a

takeover bid have a fiduciary obligation to take steps to maximize shareholder (or unitholder) value in

the process. That is the genesis of the "fiduciary out" clauses in situations such as the case at hand. They

enable directors or trustees to comply with their fiduciary obligations by ensuring that they are not

precluded from considering other bona fide offers that are more favourable financially to the shareholders

or unitholders than the bid in hand.


6/15


6

It is not necessary nor would it be wise, in my view to go as far as HCPI suggests this court

might go, and adopt the principle gleaned from some American authorities, that the target vendor can place

no limits on the directors' right to consider superior offers and that any provision to the contrary is invalid

and unenforceable: see Paramount Communcations Inc. v. QVC Network Inc., 637 A.2d 34 (U.S. Del.

Super. 1994), and ACE Ltd. v. Capital Re Corp., 747 A.2d 95 (U.S. Del. Ch. 1999) at 105. That is not what

happened in this case.

The Trustees did not contract away their fiduciary obligations. Rather, they complied with them

by setting up an auction process, in consultation with their professional advisers, that was designed to

maximize the unit price obtained for Sunrise's assets, in a fashion resembling a "shotgun" clause, by

requiring bidders to come up with their best price in the second round, subject to a fiduciary out clause that

allowed them to consider superior offers from anyone save only those who had bound themselves by a

Standstill Agreement in the auction process not to make such a bid. In this case, that turned out to be only

HCPI.

An auction process is well-accepted as being one although only one "appropriate

mechanism to ensure that the board of a target company acts in a neutral manner to achieve the best value

reasonably available to shareholders in the circumstances" [citations omitted]. Here, the trustees, acting

reasonably and on professional advice, formed the view that an auction process was the best way to

maximize value, and conducted such an auction to the point where they attracted a successful bidder. This

is not a case where the Trustees were unable to judge the adequacy of the bid. They had dealt with seven

prospective purchasers in the course of the two auction rounds, and had received preliminary proposals.

Ventas's $15.00-per-unit price represented a 35.8% increase over the market price of the Units on the date

the auction closed. I do not think the Trustees can be said to have failed in the exercise of their fiduciary

obligations to their unitholders in these circumstances simply by agreeing in the Purchase Agreement to

preclude earlier bidders, who had bound themselves under Standstill Agreements not to do so, from coming

in after the auction was concluded and the "successful" bidder had showed its cards and attempting to "top

up" that bid.

It is well accepted that "where an agreement admits of two possible constructions, one of which

renders the agreement lawful and the other of which renders it unlawful, courts will give preference to the

former interpretation." Advancing this principle, the appellants argue that we should be loathe to adopt an

interpretation of the Purchase Agreement that is inconsistent with overarching fiduciary obligations. While

I accept the principle put forward, however, I do not think it applies in the context of this case for the

reasons outlined above. The interpretation given to the Purchase Agreement by the application judge is not

inconsistent with the Trustee's fiduciary obligation to maximize unitholder value. Indeed, it is consistent

with that obligation.

Ontario Court of Appeal, Mar. 23, 2007. 2007 CarswellOnt 1705, 222 O.A.C. 102, 29 B.L.R. (4th) 312, 56

R.P.R. (4th) 163, 85 O.R. (3d) 254

Aftermath: Sunrise was obligated to enforce the standstill with HCP, despite the apparent superiority of the HCP

proposal. Ultimately, however, Ventas increased its offer to $16.50 per unit, the Sunrise unitholders approved the

transaction, and the sale was completed in April 2007.


7/15


7

Note onIn Re Celera Corporation Shareholder Litigation, C.A. No. 6304-VCP, Mar. 23, 2012

In March 2011, Quest Diagnostics Inc. and Celera Corp. entered into a merger agreement providing for the

acquisition of Celera by a subsidiary of Quest for approximately $680 million. The acquisition agreement resulted

from a bidding process conduct in which Celeras financial advisors had contacted nine potential bidders, five of

which (Illumina, Inverness, Lab Corp., Qiagen, and Quest) performed at least some measure of due diligence. Inexchange for access to diligence information, all five of these companies entered into confidentiality agreements.

The confidentiality agreements contained standstill provisions that expressly prohibited them from making offers for

Celera shares without an express invitation from the Board. The standstill provisions also contained a provision

preventing the signing parties from asking the Board to waive this restriction, a so-called Dont Ask, Dont Waive

Standstill Provision.

When Quest emerged from this process as the winning bidder, the resulting acquisition was structured as a

front-end tender offer, followed by a second-step squeeze-out merger. The merger agreement contained several

deal-protection measures, including a break-up fee of about 3.5% of the total deal value and a no-shop provision

requiring Celera to terminate any existing discussions with, and not to solicit competing offers from, potential

bidders other than Quest.

When the merger was challenged in shareholder litigation, plaintiffs argued that the combination of the no-

shop provision with the Dont Ask Dont Waive standstill was particularly onerous because it prevented Celeras

board from entering into discussions with those most likely competing bidders. The litigation was ultimately settled

for non-monetary consideration including: (1) reduction of the termination fee (from $23.45 million to $15.6

million), modification of the No Solicitation Provision to invite competing offers from the potential bidders subject

to the Dont-Ask-Dont Waive Standstills, (3) a seven day extension of the tender offer; and (4) additional

disclosures about the transaction process and financial analysis.

In approving the settlement (and plaintiffs attorneys fees of $1.3 million), the court noted:

In waiving the Dont-Ask-Dont-Waive Standstills, Defendants invited back to the bargaining table thefour bidders arguably most likely to make a superior offer (because they already had performed some duediligence and perhaps could evaluate more quickly whether to make a competitive offer) Similarly,[l]owering a termination fee reduces the barrier to making a superior offer in the first place and increasesthe amount of the superior offers consideration that would go directly to shareholders. Lastly, extendingthe closing date of the tender offer afforded potential bidders more time to conduct due diligence andconsider whether to make a competing bid.

I also note that, as to a handful of the Plaintiffs claims, the therapeutic deal changes mayrepresent the maximum relief that Plaintiffs could have obtained. For example, Plaintiffs may have beenable to show that the combined potency of the Dont-Ask-Dont-Waive Standstills and the No SolicitationProvision was problematic. The terms of the Dont-Ask-Dont-Waive Standstills restricted the potentialbidder from, among other things, acquiring, offering to acquire, or soliciting proxies of Celera securities inany manner (including by assisting others to do any of the same) without the Companys express writteninvitation.

Furthermore, the affected bidders had agreed not to request the Company (or its directors,officers, employees or agents), directly or indirectly, to amend or waive any provision of [the relevantstandstill terms] (including this sentence). Viewed in isolation, these Dont-Ask-Dont-Waive Standstillsarguably foster legitimate objectives, ensuring that confidential information is not misused, establishing


8/15


8

rules of the game that promote an orderly auction, and giving the corporation leverage to extractconcessions from the parties who seek to make a bid.4 Similarly, the No Solicitation Provision, viewed inisolation, appears legitimate; although it prevented the Company from contacting potentially interestedparties, including the previously identified parties, it also contained a fiduciary out permitting the Boardto waive the Dont-Ask-Dont-Waive Standstills if strict compliance with the Merger Agreement wouldviolate the Boards fiduciary duty to maximize shareholder value.

Taken together, however, the Dont-Ask-Dont-Waive Standstills and No Solicitation Provisionare more problematic. [The Delaware Supreme] Court has stressed the importance of the board beingadequately informed in negotiating a sale of control: The need for adequate information is central to theenlightened evaluation of a transaction that a board must make. 5 Here, the Dont-Ask-Dont-WaiveStandstills block at least a handful of once-interested parties from informing the Board of their willingnessto bid (including indirectly by asking a third party, such as an investment bank, to do so on their behalf),and the No Solicitation Provision blocks the Board from inquiring further into those parties interest. Thus,Plaintiffs have at least a colorable argument that these constraints collectively operate to ensure aninformational vacuum. Moreover, the increased risk that the Board would outright lack adequateinformation arguably emasculates whatever protections the No Solicitation Provisions fiduciary outotherwise could have provided. Once resigned to a measure of willful blindness, the Board would lack theinformation to determine whether continued compliance with the Merger Agreement would violate itsfiduciary duty to consider superior offers. Contracting into such a state conceivably could constitute a

breach of fiduciary duty. 6

To be clear, I do not find, either in the circumstances of this case or generally, that provisionsexpressly barring a restricted party from seeking a waiver of a standstill necessarily are unenforceable.Such a ruling should be made, if ever, only on the merits of an appropriately developed record, especiallybecause those provisions may be relatively common.7 Rather, based on the issues it redresses, I find thisaspect of the settlement consideration to be valuable. Had Plaintiffs succeeded on this claim, the likelyremedy would have been an injunction against enforcing the Standstill agreements.8 Therefore, Defendantsagreement to waive voluntarily those problematic contractual provisions mooted Plaintiffs claims in thisregard.

Similarly, to the extent that Plaintiffs complained of a deficient or disloyal market check, thelikely remedy would have been limited injunctive relief, long enough to recreate an active market check but

without blocking the deal and sending the parties back to the drawing board.9

Where a company hasbeen exposed to the market and potential transactions shopped for some time, even as egregious case ofprocess defects probably would have led to an injunction of only twenty days or so.10 Furthermore, whereno rival bidder has made its presence known, preliminary injunctive relief may be completely illusory.11

4In re Topps Shareholders Litig., 926 A.2d 58, 91 (Del. Ch. 2007).5Paramount Commcns Inc. v. QVC Network Inc., 637 A.2d 34, 44 (Del. 1994) (quotingBarken, 567 A.2d at 1287).

6See QVC, 637 A.2d at 51 (To the extent that a contract, or a provision thereof, purports to require a board to act ornot act in such a fashion as to limit the exercise of fiduciary duties, it is invalid and unenforceable.);ACE Ltd. V.Capital Re Corp., 747 A.2d 95, 106 (Del. Ch. 1999) (finding no solicitation provision pernicious where itarguably required an abdication of the board of its duty to determine what its own fiduciary obligations require);see alsoIn re RehabCare Gp., Inc. Sholder Litig., C.A. No. 6197-VCL, tr. At 46 (Del. Ch. Sept. 8, 2011)(expressing doubt that dont-ask-dont-waive standstills are ever going to hold up if its actually litigated,

particularly afterTopps).7See 1 Arthur Fleischer, Jr. & Alexander R. Sussman, Takeover Defense: Mergers & Acquisitions 8.04[A], at 8-21(6th ed., rev. vol. 2012).8 See In re Topps, 926 A.2d at 92 (enjoining shareholder vote on merger until target waived standstill agreementused improperly).9In re Del Monte Foods Co. Sholders Litig., 25 A3d 813, 841 (Del., Ch. 2011) [hereinafterDel Monte I] (enjoiningtransaction for twenty days due to substantial process defects and banker conflicts).10See id.11See In re El Paso Corp. Sholder Litig., 2912 WL 653845, at *11 (Del. Ch. Feb. 29, 2012) (declining to enjointransaction despite likelihood of success on the merits because no rival bid for [the target] exists); see also id. At


9/15


9

Although post-closing damages still may be available if preliminary injunctive relief is only limited innature or denied altogether, the alleged process violations here, as discussed further infra, weresignificantly less severe than in Del Monte orEl Paso. Hence, the one-week extension arguably obtainedall the relief that was likely.

In Re Celera Corporation Shareholder Litigation, Civ. No. 6304-VCP, at 51-55.

Note onIn re Complete Genomics, Inc. Shareholder Litigation, C.A. No. 7888-VCL (Transcript, Nov. 27, 2012).

In a set of bench rulings issued in November 2012, the Delaware Court of Chancery temporarily enjoined amerger between Complete Genomics, Inc. and BGI-Shenzhen pending corrective disclosure regarding, among otherthings, BGIs willingness to employ Genomics current CEO and let him operate Genomics as an independent entityunder BGI ownership. The Court further enjoined Genomics from enforcing a confidentiality agreement with athird-party bidder that contained a Dont Ask, Dont Waive standstill provision. The Court also sharply criticizeda provision restricting the Genomics boards ability to change its recommendation.

Genomics is a Delaware corporation headquartered in California that has developed a unique DNA

sequencing technology. Its products generate significant revenues, but the company faces severe financial distress.As a result, in June 2012, Genomics publicly announced that it was pursuing strategic alternatives and contacted 42parties that might be interested in an equity investment, a strategic partnership, or an acquisition. Of these 42 parties,nine parties signed confidentiality agreements, four of which contained standstill agreements that prohibited thepotential bidder from making anypublic request to be released from the standstill agreement. The number of partiesinterested in bidding, however, dwindled to eight by the time the Genomics board asked for nonbinding proposals,with six parties proposing equity investments and two proposing transactions. Genomics pursued discussions withall parties, but focused on the two parties proposing transactions. Upon the withdrawal of one of those parties afterbeing refused exclusivity by the Genomics board, BGI emerged as the sole remaining bidder.

In September 2012, the Genomics board approved a merger agreement where Genomics would be acquiredby BGI in a two-step transaction. In the first step, an acquisition subsidiary of BGI will launch a tender offer forGenomics shares at $3.15 per share in cash and, if a majority of the shares are tendered, the parties will effect a

second-step merger for the same consideration. The $3.15 share price reflects a 54% per share premium over thestock price the day before the public announcement that Genomics was exploring strategic alternatives. Moreover,BGI further agreed to provide $30 million in bridge financing until closing of the merger. The merger agreementcontained a variety of deal protections, including a 4.8% break-up fee (and if a topping bidder emerged, BGI couldconvert the bridge loan into shares of Genomics and also participate in the higher topping price), a prohibition onterminating the merger agreement to accept a superior proposal and restrictions on the Genomics boards ability tochange its recommendation of the merger agreement or waiving any standstill agreements. Hence, short of a breachby BGI or an injunction order by a court, the only out of the merger agreement for Genomics was if the offer wasnot completed by the Outside Date.12

In its Nov 9 ruling, the Court (Vice Chancellor Laster) declined to enjoin the deal protection provisions,although it did call into question the ability of the board to restrict its ability to change its recommendation.

If stockholders can reject the transaction and maintain the status quo, then the transaction is not coercive.There may be negative consequences to continuing with the status quo, but neither the existence of thosenegative consequences nor accurate disclosures about them constitutes wrongful coercion.

*11 n.56 (Although it is true that the absence of a pre-signing market check and the presence of strong dealprotections may explain the absence of a competing bid, . . . [i]n the era in whichRevlon was decided, bidderswishing to disrupt transactions actually made their presence known and litigated to achieve their objectives.).12 Set as December 14, 2012 with the possibility of a 90 day extension if any condition to the offer is not met.


10/15


10

Here, the board worked diligently to give Genomics stockholders an option. Reid and the directorsbelieved that without a transaction, Genomics was and still is headed for bankruptcy. The board exploredfinancing options, then all strategic alternatives, in an effort to provide stockholders with an opportunity toreceive value for their shares. If stockholders do not like the options the board secured and would like totake their chances with the status quo, then they can decline to tender.

The merger agreement does not require the payment of a termination fee if stockholders simplydecline to tender and the minimum condition is not met by the outside date. The merger agreement onlyrequires the payment of a termination fee if the minimum condition is not met by the outside date and atopping bid has emerged, or the board has failed to maintain its recommendation in favor of the mergeragreement, or Genomics has breached the merger agreement.

As a result, Genomics can freely choose the status quo without penalty. The fact that they mayface bankruptcy under those circumstances does not make the merger agreement coercive. That situation, infact, represents the business reality, i.e., the status quo that Genomics stockholders currently face.

The merger agreement also is not preclusive. As Revlon teaches, deal protection measures arewrongfully preclusive if they effectively preclude bidders from competing with the favored bidder. Here, acompeting bidder could commit publicly to a tender offer for any and all of Genomics' shares to be

followed by a back -end merger at the same offered price. It's the same type of public commitment that acontroller makes when they initiate a Siliconix process. Because of that ability, there is a realistic path forstockholders to receive an alternative bid.

I am now going to turn to the recommendation limitations. The plaintiffs have also challengedSections 5.3(d), (e) and (f) of the merger agreement, which place extensive limitations on the board's abilityto provide Genomics' stockholders with a current merger recommendation. In substance, these sectionsattempt to restrict the board's ability to change its recommendation with the types of conditions andprocedures frequently and historically used to regulate a target's contractual ability to terminate a mergeragreement and accept a superior proposal.

Contractual transplants of this variety are fraught with peril. So long as a board of directors validlyenters into the merger agreement in the first place, no-shop and related termination rights are measured atthe time of decision and subsequently governed by contract.

The carve -out from a target board's obligation to recommend a merger agreement raises issuesthat are fundamentally different because it implicates duties to target stockholders to communicatetruthfully. Unlike in the no-shop and termination outs, fiduciary duty law in this context can't be overriddenby contract.

There are an awful lot of issues lurking in the provision that the plaintiffs have challenged. If youwant an example of the types of issues that are here, you need look no further than some of the authoritiesthat I cited in Compellent. Particularly, you can review the two pieces by John F. Johnson entitled, "ARubeophobic Delaware Counsel Marks Up Fiduciary Out Forms, Parts I and II."

As I said at the outset, no one currently contends that there's presently any need for or desire onthe part of the board to change its recommendation. Rather than delve into these issues on the basis of afacial challenge, I'm going to deny the application but condition that denial on the plaintiffs receivingprompt notice from Genomics if the board considers whether it should change its recommendation. That's ifit considers it regardless of whether the board believes it could do so under the contract. There are certainsituations where those could be different things. The existence and imposition of this condition will permitany actual dispute, any actual concrete dispute as opposed to sort of a law review hypothetical question, tobe truly litigated on the facts.


11/15


11

Nov. 9, 2012 Transcript at 13-19.

When it subsequently discovered, however, that at least one potential bidder had entered into a standstillagreement that prevented the bidder from publiclyor privately requesting that Genomics waive or amend its terms a so-called Dont Ask, Don't Waive standstill the Court enjoined Genomics from enforcing the standstillagreement. In its November 27 ruling, the Court held:

In my view, a Dont-Ask-Dont-Waive Standstill resembles a bidder-specific no-talk clause. In PhelpsDodge Corporation v. Cyprus Amax, Chancellor Chandler considered whether a target board had breachedits fiduciary duties by entering into a merger agreement containing a no-talk provision. Unlike a traditionalno-shop clause, which permits a target board to communicate with acquirers under limited circumstances, ano-talk clause and here Im quoting from the Chancellor "not only prevents a party from solicitingsuperior offers or providing information to third parties, but also from talking to or holding discussionswith third parties. Thats from Page 4 of the transcript.

The Chancellor concluded that there was a reasonable probability that for the target board to haveagreed to such a provision violated its ongoing and again, Im quoting duty to take care to be informedof all material information reasonably available. Thats from Page 2 of the transcript. This was becausethe target boards agreement to disable itself from engaging in a dialogue with potential acquirer under anycircumstances whatsoever was the legal equivalent of willful blindness.

Subsequent Delaware decisions have endorsed the Phelps Dodge analysis. Vice Chancellor Lamb,my predecessor, did so in the Cirrus Holdings case. Quoting from that decision, directors cannot willfullyblind themselves to opportunities that are presented to them, thus limiting the reach of no talkprovisions. Then-Vice Chancellor Strine likewise cited Phelps Dodge with approval in his ACE Ltd. V.Capital Re case.

In holding that the no-talk provision comprised the target boards ongoing obligation to remaininformed, Chancellor Chandler in Phelps Dodge focused on the targets ability to decide whether tonegotiate with third parties and whether the provision impermissibly prevented the board from meeting itsduty to make an informed judgment with respect to even considering whether to negotiate with a thirdparty. Thats from Page 1 of the transcript. As Chancellor Chandler noted, a board doesnt necessarilyhave an obligation to negotiate. That, of course, has been confirmed by this Delaware Supreme Court in

Gantler v. Stevens. It was also what Chancellor Allen held in the TW Services case.

Regardless, a board does have an ongoing statutory and fiduciary obligation to provide a current,candid and accurate merger recommendation. A board has an ongoing fiduciary obligation to review andupdate its recommendation. Thats clear from the original Van Gorkom decision. It was the explicitholding of Vice Chancellor Noble in the Frontier Oil Corp. v. Holly Corp. decision Im going to quotefrom that Revisiting the commitment to recommend the Merger was not merely something that theMerger Agreement allowed the Board to do; it was the duty of the Board to review the transaction toconfirm that a favorable recommendation would continue to be consistent with the fiduciary duties.

Maintaining a current and candid merger recommendation is part of the directors duty ofdisclosure. For that, you can see the Berkshire Realty Company case from 2002 in which the followingwas stated: If the board, in the exercise of its business judgment, determined that liquidation -- which

was the decision at issue was not in the best interests of . . . its stockholders, it could not haverecommended a liquidation without violating its fiduciary duty to the stockholders. Put simply, Delawarelaw requires that a board of directors give a meaningful, current recommendation to stockholders regardingthe advisability of a merger including, if necessary, recommending against the merger as a result ofsubsequent events. There, Im paraphrasing from and would refer you to Frank Balotti and Gil Sparksarticle titled Deal-Protection Measures and the Merger Recommendation, and particularly page 476.

Chancellor Allen made the same comment in his 2000 Business Lawyer article where he pointedout, A board may not suggest or imply that it is recommending the merger to the shareholders if in fact itsmembers have concluded privately that the deal is not now in the best interest of the shareholders.


12/15


12

What these decisions and these authorities show is that the board has an ongoing statutory andfiduciary obligation with respect to the merger recommendation. So regardless of whether a no-talkprovision, as in Phelps Dodge, or a Dont Ask, Dont Waive provision here, would create problems for thedecision to negotiate, and certainly Phelps Dodge holds that it would, those provisions interfere with thetarget ability to determine whether to change its merger recommendation because they absolutely precludethe flow of incoming information to the board.

So in my view, by analogy to Phelps Dodge, a Dont Ask, Dont Waive Standstill is impermissiblebecause it has the same disabling effect as the no-talk clause, although on a bidder-specific basis. Byagreeing to this provision, the Genomics board impermissibly limited its ongoing statutory and fiduciaryobligations to properly evaluate a competing offer, disclose material information, and make a meaningfulmerger recommendation to its stockholders. With respect to the Dont Ask, Dont Waive Standstillprovision, therefore, the plaintiffs have established a reasonable probability of success on the merits thatthat provision represents a promise by a fiduciary to violate its fiduciary duty, or represents a promise thattends to induce such a violation. Thats from Section 193 of the Restatement of Contracts.

I would note as an aside that to the extent that people focus on the fact that at the tender offer stageof a two-step merger, the recommendation is really something that flows from federal law rather thanDelaware law, I would refer you to the Matador Capital Management Corporation v. BRC Holdings case in

which Vice Chancellor Lamb, my predecessor, held that in a two-step acquisition governed by a mergeragreement, the same principals apply to the front-end recommendation as they do to the statutory mergerrecommendation.

More recently, in the Orchid Cellmark decision, Vice Chancellor Noble observed that in a two-step merger, tendering, of course, is a substitute for the shareholder vote. That likewise indicates that themerger recommendation provisions and obligations flow through in this context.

And then there is a whole long line of decisions starting with the transcript ruling by ViceChancellor Lamb in Peapod, rolling through Glassman and Andra v. Blount, and more recently, I havecited it in CNX and in the original I shouldnt say original because that harkens to 1986 but in theRevlon decision that I wrote a couple years ago, noting that when you have a two-step transaction,fiduciary obligations apply to a two-step thats entered into by agreement to the same degree that they

apply to the one-step. So the fact that were now at a stage where the recommendation is a product of a14D-9 rather than technically a product of 251 doesnt change the fiduciary analysis.

In terms of the issue of irreparable harm, I think for purposes of the Dont Ask, Dont WaiveStandstill, its met. We just dont know and we would never be able to know unless Party J decides tocavalierly breach its own promise whether Party J would ever want to make some type of bid or otheracquisition proposal. Yes, it would be nice to say confidently, as Mr. Aronstam does, that this is a lowlikelihood event. Unfortunately, time-bound mortals arent able to see the future. We can makeprobabilistic predictions but we cant know. This is a provision that flat-out prohibits, analogously to abidder-specific no-talk clause, incoming information from that bidder under any circumstances. So just asthat type of provision would create a situation that cant be remedied, likewise, here, I think that type ofsituation creates a situation that cant be remedied.

Nov. 27, 2012 Transcript at 14-20.


13/15


13

In re Ancestry.com Consolidated Shareholders Litigation, Del. Ch. No. 7988 (Strine), Dec. 17, 2012.

In October 2012, Permira, a private-equity firm, agreed to pay $32 per share to acquire Ancestry.com, a 41%

premium over the companys pre-sale closing price. Permira outbid TPG Capital and Providence Equity Partners in

the sale process. Investors, however, challenged the transaction, arguing among other things that (1) TimothySullivan, Ancestrys CEO, along with other company officials and Ancestrys financial advisor, Qatalyst Partners,

improperly favored Permiras bid; (2) inadequate disclosure; and (3) the inclusion, in the transaction, of a Dont-

Ask-Dont Waive standstill provision.

After reviewing the pre-trial record, Chancellor Strine remained unconvinced of the allegations of improper

motivations underlying the sale process. He nevertheless found evidence of defective disclosure. With regard to the

Dont-Ask-Dont Waive standstill, Strine reasoned as follows:

Now I'll get to the emerging issue of December of 2012. Who would have thunk that this would

be the no-ask, no-waiver month. On that issue, I think that the plaintiffs have a reasonable probability of

success around the disclosure point.

I think the plaintiffs actually had a reasonable probability of success on the substance of the

thing. And let me be clear about why I think that is and why I do not.

I'm giving you a bench ruling. Bench rulings are limited rulings. They're time-pressured ones.

So when you're time pressured, you should be very careful about making broad pronouncements

of law for the obviously reason that you've been time pressured, and the reflection of time might allow you

to make a more sensible ruling. [Additionally, when] you give a bench ruling and you're dealing with a

particular situation.

Per se rulings where judges invalidate contractual provisions across the bar are exceedingly rare in

Delaware, and they should be. It's inconsistent with the model of our law.

This Court is a court of equity, and ... it's usually for the Legislature to determine when

something is per se unlawful. It's not for the Court. Now, sometimes people do something that's totally

inconsistent with the statute. That's not the Court making up a law. That's the Court saying, That provision

violates a statute.

I know of no statute, I know of nothing, that says that these provisions are per se invalid. And I

don't think there has been a prior ruling of the Court to that effect. I know people have read a bench opinion

that way. I think there was a lot going on in that case. Again, there is a role that bench opinions play, and I

don't think it's to make per se rules.

And the Celera case expressly went out of its way to say it's not making a per se rule. I think what

Genomics andCelera both say, though, is Woah, this is a pretty potent provision. And precisely because ofthis Schnell overlay, the equitable overlay of the law, directors need to use these things consistently with

their fiduciary duties, and they better be darn careful about them. Because they're often used in cases like

this which are governed by Revlon and the board's obligation to try to get the highest value.

And that obligation comes from the obvious reality that the board is saying to the stockholders,

You should give up your continuing investment in the company right now for a sum certain. Which means

that the directors are supposed to make sure that they've done everything reasonable to make sure that that


14/15


14

price is as high as possible, that they give the stockholders full information about it, and when the

stockholders vote, they know the risks.

So here we get a provision, and I'm not prepared to rule out that they can't be used for value-

maximizing purposes. But the value-maximizing purpose has to be to allow the seller as a well-motivated

seller to use it as a gavel, to impress upon the people that it has brought into the process the fact that the

process is meaningful; that if you're creating an auction, there is really an end to the auction for those whoparticipate. And therefore, you should bid your fullest because if you win, you have the confidence of

knowing you actually won that auction at least against the other people in the process.

That's what I understand the additional part of this no-ask part of the waiver provision is. Not

talking about the standstill itself, which gives the board the ability to control what happens with an offer.

We're talking about the ability for someone to even ask for a waiver. And it's on this idea of we've

identified the most likely potential bidders. In advance of any deal protections inhibiting them from making

a bid, we're bringing them in. We think they're the most likely. We recognize that other people may come

forward, and they'll be subject to different rules. But how do we, in a public company context, get these

most likely bidders to actually put their full bid on the table rather than hold something in reserve? We can

use this tool to gain credibility so that those final-round bidders know the winner is the winner, at least as to

them.

That's what I understand the argument is around these things, in that you're running an auction. I'm

not prepared to rule that out. I don't think the judges of this Court should be ruling that out. That sounds

like if you want to say per se invalidity, that sounds like something for the Legislature to decide. But we do

have an inescapable obligation to do what is the core job of this Court, which is to do that equitable

overlay. Which is if you're going to use a powerful tool like that, are you using it consistently with your

fiduciary duties, not just of loyalty, but of care?

And I think the plaintiffs here ... have pretty obviously shown that this board was not informed

about the potency of this clause. The CEO was not aware of it. It's not even clear the banker was aware of

it.

...

None of the board seems to be aware of this. The only way it has value as an auction gavel is if it

has the meaning I've just described. It was not used as an auction gavel. And when Permira was signed up,

Permira did not demand an assignment of it. And the board and its advisors did not waive it in order to

facilitate those bidders which had signed up the standstills being able to make a superior proposal.

I think that probabilistically is a violation of the duty of care. I think what's more important is that

I'm not prepared to allow this to go to a vote without the stockholders being told about that. I think... they

should know about this.

...

[A]t least when the electorate votes --if these things are going to be used, and they're used for a

gavel, then the electorate should know that with respect to the comfort they should take in the ability to

make a superior proposal, they should understand that there is a segment of the market where that segment

cannot take advantage of that; that the board made the cost/benefit trade-off that the best way to get the

value was to draw the highest bid out from those people while they were in the process; that in order to do

that, it had to incur the cost of giving to the winner the right to enforce it. But what you as a stockholder

know is, We invited these people in on the front end. That's how we tried to maximize value. You still have


15/15


15

the ability of somebody we didn't test the market with coming in, but you shouldn't assume that these other

people can come in. That's if it's actually been assigned.

What's harder to explain is if the winning bidder didn't ask for the assignment, how it is that the

seller --I admit I wouldn't do it until I signed the definitive acquisition agreement with Permira. I don't want

to tip Permira, but I would have had you guys sign first. And then the nanosecond after you didn't sign, I

would have sent a letter to all those people and said, We're waiving the sentence in your standstill that says,Blank has hereby waived. The remainder remains in force and effect. Which then makes clear to all of

them that if they wish to ask for a waiver in order to make a superior proposal, that they are legally allowed

to do that. That makes sense. That took this litigation for that to occur.

And so I think the plaintiffs have a point that there was --frankly, this was not used in a

probabilistic way, in my view, in keeping with the duty of care that's required of directors during a Revlon

process. ...

I think that this was a process that had a lot of vibrancy and integrity to it, probabilistically. I think

they tried to kick the tires. I think that they were trying to get these buyers to pay as full a price as

possible. They were trying to create a competitive dynamic.

Given that and given the ability of stockholders to vote for themselves, I'm disinclined to take it

out of their hands. If someone has the courage of his or her convictions and doesn't want to accept it, then

they should vote no. And a lot of times, these deals --I don't know whether there is an appraisal cap. But

even if people are going to tell me that Spectrum has a lot of votes and Sullivan has a lot of votes, if the

bulk of the remaining electorate says, We don't like this stinky deal; we believe everybody in America

wants another genealogy tree and is going to want to know how Norwegian they are or how Irish or how

Belgian or how Kenyan they are, they can protect themselves. I think given the market test that was done

here, I'm poorly positioned to take that risk for them, and I'm not prepared to do so.

And I think that is what separates out the absence of having a bidder on the table. That's a very

powerful dynamic, and it's one that this Court has to consider for the best interests of stockholders. That

said, the stockholders should vote knowing the material facts. And I've identified two ... flaws. And Ibelieve that my balance of the harms calculus only works if the electorate in fact has that full information.

And so... I'm going to enjoin the deal subject to those disclosures being promptly made.

Dec. 17, 2012

Documents

Supplement on Standstills