Anatomy of the no-shop provision

Headnote

The complexity of fiduciary duty law in the change of control context, as well as the variety of circumstances that influence such transactions, make the negotiation of no-shop and related provisions very difficult. The following article addresses some of the most important issues that might arise in negotiating such provisions.

"No-shop" clauses and the related "fiduciary out",' termination, and termination fee provisions are often the most highly negotiated terms in a merger agreement. What makes these provisions so challenging to negotiate are the competing objectives-some common to both the acquiror and the target-that these contract terms are intended to achieve. To obtain some measure of exclusivity, the acquiror will prefer a broad no-shop provision and a narrow fiduciary out, while the target, to preserve some measure of flexibility in responding to other offers, will often seek the reverse. On the other hand, both the target and the acquiror may want to discourage potential third party bidders from interfering with their transaction with a strong no-shop provision and a large termination fee. The parties' interests may also be aligned where the target perceives that a tight no-shop clause and a termination fee are required to reach agreement with an acquiror concerned about its high up-front costs and its reputation, which may be at stake if it is perceived as a "stalking horse." Conversely, both parties may want a less restrictive fiduciary out and a lower termination fee in order to avoid having the provisions declared invalid.2 Moreover, the circumstances surrounding the transaction (such as whether an auction has been conducted) can lead the parties to create fewer obstacles to third party offers in order to limit shareholder suits which may disrupt or prevent the merger. Loosening the no-shop clause might then be in both parties' interests.

Given these competing concerns, proper lawyering in this area depends on understanding the relationship between the parties and the interests most important to the client's board of directors. There is no single "ideal no-shop clause." Accordingly, this article aims to identify the more significant issues that arise in the course of negotiations and to suggest rationales for different positions that are often taken. But first a brief summary of the relevant law is needed to create the framework for the contract provisions.

The Legal Framework

The directors of a Delaware corporation3 owe stockholders the twin fiduciary duties of care and loyalty.4 A great deal of ink has been spilled trying to fashion a consistent and coherent system for applying these fiduciary principles (along with the judicially-created business judgment rule), particularly in the context of changes in corporate control. In part, this is due to the variety and complexity of merger and acquisition transactions; in part it has to do with the rapidly developing techniques and strategies used in the mergers and acquisitions business. For directors and advisors alike, an important lesson to be learned from such leading Delaware fiduciary duty cases as Unocal and Revlon6 is that the guiding principles governing a target board's exercise of its fiduciary duties in the context of a change in corporate control are simply guidelines; what a board should and should not do will be especially susceptible to the circumstances surrounding the particular change in control.

The core principle guiding the drafting of the noshop, fiduciary out, and related clauses arises from the target board's Revlon duties. Revlon stands for the oftquoted proposition that once it is recognized that the corporation is "for sale," the "directors' role change[s] from defenders of the corporate bastion to auctioneers charged with getting the best price for the stockholders at a sale of the company."7 More recent cases have enlarged upon this theme. Thus, directors need only seek "the best value reasonably available to the stockholders,"8 "provided [the price is] offered by a reputable and responsible bidder.,9

Courts have identified at least three scenarios that trigger Revlon duties: "( 1 ) when a corporation initiates an active bidding process seeking to sell itself; (2) when, in response to a bidder's offer, a target abandons its long-term strategy and seeks an alternative transaction involving the break-up of the company; or (3) when approval of a transaction results in a sale or change of control."'o Whether a company signs a merger agreement after an "active bidding process" or in response to an unsolicited but friendly offer, the target board's Revlon duties would seem to require that the board have an escape hatch from any no-shop clause in the agreement. If the board cannot consider alternatives, it may be prevented from maximizing the price paid for the company. In certain circumstancesfor example, where the no-shop provision acts to "end an active auction and foreclose further bidding""there is little doubt that a target board would violate its fiduciary responsibilities by agreeing to a no-shop without some sort of escape hatch.

On the other hand, a strong no-shop provision and a weak fiduciary out may be the necessary encouragement for the acquiror to enter into the agreement in the first place. Or, the target board may determine that limiting competing bids will induce the acquiror to offer its best price up front. In both cases, the no-shop provision may actually assist the target board in obtaining the best price reasonably available for the stockholders. A number of courts have acknowledged that the validity and enforceability"2 of no-shop provisions "turn on whether they assist the board in [its] obligation to seek the best value reasonably available for the stockholders."'3 Under this test, even an exclusive merger agreement (i.e., an agreement with a no-shop but no fiduciary out) may be valid if it helps maximize sale value to stockholders.

When a board's Revlon duties are triggered and there is more than one bidder, courts are apt to apply "enhanced scrutiny"-which involves review by the court of both "the adequacy of [the board's] decision-making process" and "the reasonableness of the [board's] action"'4-when analyzing a board's decision to enter into a no-shop provision.'5 Thus, courts will be more receptive to no-shop clauses where the board has gathered enough information to make an informed decision. "Where a board has no reasonable basis upon which to judge the adequacy of a contemplated transaction, a noshop restriction gives rise to the inference that the board seeks to forestall competing bids."'6

There are two points in time when a board's actions are likely to be judged in a merger transaction. First, when the target enters into an agreement that contains a no-shop provision, courts may ask if the board had sufficient information to determine whether the provision did more to enhance stockholder value (by encouraging its partner) than it did to discourage third parties. While a broad market check provides the best information, courts do not always require one." Moreover, the more freedom a target has to act on new information after signing a merger agreement, the less hostile a court is likely to be to a no-shop provision.

The second time a board's actions may be judged is after signing, when a third party makes a competing bid. If a no-shop provision prevents a target board from even considering the proposal, a court may inquire whether the board has breached its duty of care by reaching an important business decision-effectively rejecting an offer-before fully informing itself of the relevant facts. Although courts seem to acknowledge that no-shop provisions can, in appropriate circumstances, accord with the board's Revlon duties, it is not difficult to imagine a court holding that a target board breached its fiduciary duties by rejecting an offer, even though the cause of the rejection-the noshop clause-was instrumental in the first instance in bringing in a committed partner. No-Shop Provisions

Set out in the box on page 6 is a typical "no-shop" provision with "fiduciary out" language included in sections (a) and (b). The provision is intertwined with the parties' rights to terminate the agreement and the target's obligation to pay a termination fee. The standard noshop provision is comprised of four parts. Section (a) contains limitations on (1) soliciting competing bids, (2) furnishing information and (3) negotiating with third parties, while section (b) limits the target's right to change its mind. Escape hatches are common in both section (a) (although not with respect to the (a)(i) provision against soliciting competing bids) and section (b), to reflect the target board's Revlon duties as well as its information gathering obligations. Sections (c) and (d) provide for a securities law carve-out and notice procedures.

The "no solicitation" and "no negotiation" aspects of section (a) prohibit the target from seeking alternate proposals to acquire the target (Acquisition Proposals) or even responding to unsolicited bids that do not meet certain criteria. Target's counsel may sometimes object that the terms "encourage" and "discussion" are too broad and would catch inadvertent discussions (e.g., answering the phone and finding a bidder on the other end of the line) or other contacts intended only to obtain enough information about a third party proposal to enable the board to determine whether to exercise its fiduciary out. While the acquiror might be persuaded to delete "discussions" (discussions that are "encouraging" would be picked up under clause (i) in any event), the term "encouragement" taken in context should be read to mean active, knowing assistance or encouragement. Moreover, acquiror's counsel is also likely to argue that since the merger agreement will be a public document, any third party bidder will know the restrictions that the target board is under and can tailor its competing offer, should it decide to make one, accordingly. Therefore, the acquiror might contend that certain minimum conditions on the board's ability to inform itself are appropriate, namely, the competing offer should be in writing and should provide sufficient information on its face to permit the target board to make a good faith determination whether its fiduciary out has been triggered.

An acquiror will want as many representatives of the target as possible to be subject to these provisions (although the target may agree only to use its best efforts to bring about this result). Moreover, from the acquiror's perspective, the final sentence of section (a) is particularly important, because it may insure that members of the target's management, acting as "individuals" rather than "representatives" of the company, do not solicit alternative transactions. This was the case in STV Engineers v. Greiner Engineering,' where a noshop provision was held not to have been violated despite the large and active role of senior managementacting as "individuals"-in a management buyout attempt.

The no-shop provision is only restrictive with respect to an Acquisition Proposal, which is typically defined as a proposal or offer for some percentage (usually 5-20 percent) of the target, gauged to permit the target to solicit and consider small asset sales which do not threaten the overall transaction (in any event, the "conduct of business" covenant usually prohibits asset sales out of the ordinary course without the acquiror's written consent). While the definition usually contemplates sales of equity as well as assets, it is hard to justify allowing any equity sales; the percentage relating to equity sales should at least be low enough to insure that the purchaser cannot interfere with the transaction.

Section (b) prohibits the target board from withdrawing or modifying its recommendation of the proposed merger in a manner adverse to the acquiror, approving or recommending an alternate Acquisition Proposal or entering into an agreement with respect to an alternate Acquisition Proposal, subject in each case to the fiduciary out discussed below. These covenants extend the target board's no-shop obligations beyond refraining from active solicitation or negotiation to affirmatively agreeing not to change its position in the face of an unsolicited proposal from a third party.

In section (c), the target gives itself a necessary escape hatch: it must be able to take a position as required by Rule 14e-2(a) under the Securities Exchange Act of 1934 in the event a third party launches a tender offer. The proviso makes clear that it may not take a position pursuant to Rule 14e-2(a)(1) (i.e., an approving position) unless it is permitted to do so under the no-shop provision. A cautious target may request a sentence making explicit that taking a neutral position pursuant to Rule 14(e)-2(a)(2) or (3) would not constitute the withdrawal by the target of its recommendation of the acquiror's transaction.

The seemingly innocuous section (d) can actually become quite important, particularly where the transaction is structured as a tender offer followed by a merger. Post-signing third party bids are likely to be made close to the expiration date of the tender offer, due to time constraints, and also because the third party may try to pressure the target by giving it minimal time to decide (once the tender offer is consummated the acquiror usually owns enough shares to control the target). The acquiror is often given several days to match the third party bid before the target may accept it.'9 Even if no explicit matching period is provided, prompt notice of third party interest, as well as the details of any interest or proposal and the status of ongoing discussions between the target and third party, are crucial-both for the acquiror to decide whether to raise the ante and for the target to keep the acquiror in the hunt.

The Fiduciary Out

In its simplest form, a fiduciary out provision simply provides that the covenants of the target in sections (a) and (b) are "subject to the fiduciary duties" of the target board. In practice, however, as more change in control fiduciary duty cases have been decided, acquirors have attempted to circumscribe the target board's exercise of its fiduciary duties by expressly identifying in the no-shop covenant certain circumstances that will trigger the fiduciary out. While the precise fiduciary out language will depend on all the circumstances discussed above, customary triggers include a requirement that the third party proposal be in writing, that it be related to a specified percentage of the target's stock or assets and that it be reasonably likely to lead to a proposal that is more favorable to the target's stockholders than the proposed merger with the acquiror. Acquirors will also seek to have the fiduciary out become inapplicable after stockholder approval of the transaction. Targets should be wary of such cut-offs, however, particularly when the closing may occur substantially after the stockholder vote, because stockholder ratification may not protect directors who ignore subsequent third party proposals. Section 251 (d) of the DGCL2, for instance, contemplates that directors may terminate a merger agreement after stockholder approval, suggesting that directors' fiduciary duties do not disappear after stockholder ratification.21

The two most common fiduciary out formulations permit the target board to take actions in response to an Acquisition Proposal: (1) because it is necessary to take them to comply with the board's fiduciary duties, or (2) because failure to take them would be reasonably likely to constitute a breach of fiduciary duty. Although the two formulations would appear to be opposite sides of the same coin (if an action is necessary to comply, failure to take that action should constitute a breach), the "reasonably likely" standard of the second formulation arguably gives the target board a little more room to maneuver. Whichever formulation is chosen, it is the target board, acting in good faith with input from outside legal counsel, that makes the final determination whether to exercise its fiduciary out. While many first drafts of merger agreements from acquirors require a written opinion or written advice from counsel, it is unrealistic to expect a law firm to provide such a document. As noted above, the Delaware case law in this area provides guidelines-not black letter rules-the application of which depends heavily on the facts of a particular case. What then should be expected from target's counsel? The case law does not require the board to obtain the written opinion or advice of outside counsel. In this context, the issue will be how far the acquiror can push the target into accepting objective triggers for the board's exercise of its fiduciary duty. Mere "consultation" with outside counsel, if that is understood to mean simply a discussion of abstract legal duties, may not be a strict enough standard for an acquiror to accept. A requirement that the board's decision be based on advice of outside counsel (written or oral), creates a tougher standard because "advice" suggests that the lawyers were apprised of all the circumstances and gave direction to the board.

The fiduciary out exception to the covenant in section (a) customarily allows the target only to provide information or to obtain information (through negotiation); it does not permit the target to solicit or otherwise facilitate a competing bid. The exception in this context typically requires that the board determine that the competing offer is reasonably likely to be a Superior Proposal. By contrast, the fiduciary out exception to the covenant in section (b) may be invoked only if the competing offer constitutes a Superior Proposal. The somewhat looser formulation for section (a) arises from the board's duty to act in an informed manner: some minimum exchange of information with a competing bidder may be required in order to permit the board to make an informed decision as to whether the alternate proposal is, in fact, superior to the transaction with the acquiror. Typically, a "Superior Proposal" will be defined as an Acquisition Proposal that (1) the board, in good faith, based on advice of outside legal counsel and of an investment banker, determines to be more favorable than the acquiror's offer, and (2) is already financed or is readily financeable. The agreement will sometimes limit a Superior Proposal to proposals to acquire 50 percent or even 100 percent of the target.

As with the other triggers discussed above, the Superior Proposal condition provides the acquiror with greater objectivity and specificity than the somewhat vague fiduciary duty language. From the target's perspective, although the provision seems to limit the board's ability to exercise its fiduciary duties, the condition is likely to be an acceptable concession, because the board's duty in the Revlon context is to maximize the value reasonably available to stockholders, provided the price is offered by a reputable and responsible bidder. That the terms of a Superior Proposal must be more favorable tracks the case law requirement to maximize value, while the ability to finance condition goes to the responsibleness of the bidder. Other constraints, however, such as limiting Superior Proposals to proposals for a set percentage of the target, may indeed go beyond fiduciary principles.

It has been argued that in most circumstances the clearer, more specific "Superior Proposal" formulation should be used in lieu of the fiduciary duty language.22 However, acquirors may want both standards on the theory that a Superior Proposal is a necessary but not sufficient trigger for the fiduciary out; that is, where a target board must consider the risk of losing a sure acquisition partner, it may determine that its fiduciary duties do not permit or require it to consider some Superior Proposals (e.g., those only marginally superior or those made by "disreputable" bidders who may be unable to consummate a transaction). Moreover, fiduciary law may change during the pendency of a transaction. The flexibility of the fiduciary duty formulation better reflects the complexity and variability of this area of the law.

The fiduciary out language in section (b) allows the target board to change its mind. In the context of the exercise by the target board of its fiduciary duties, the target may withdraw or modify its recommendation of the transaction, recommend an alternative Acquisition Proposal or, in most cases, actually enter into an acquisition agreement with a third party. If the parties decide to include a Superior Proposal requirement in section (a), there is even more reason to use one here, where the focus is more on Revlon duties than on information gathering. Thus, the target would be limited in section (b) to recommending only a Superior Proposal, entering into an acquisition agreement only with respect to a Superior Proposal or withdrawing or modifying its recommendation only in the face of a Superior Proposal. The third of this fiduciary triad is a little different than the others, because a board may seek to withdraw its recommendation for reasons quite apart from a competing bid: the so-called "discovered gold" scenario. The question becomes whether a company that is in "Revlon mode" may unilaterally, consistent with its board's fiduciary duties, decide not to sell itself because of some unforeseen development. While case law suggests that a company may fall out of "Revlon mode" in some situations,23 it is not clear that withdrawing a recommendation based on changed circumstances where there is no higher price available would ever be consistent with Revlon or a course of action dictated by a board's fiduciary duties.

Termination Provisions and Fees

The interplay among the no-shop, termination, and termination fee provisions is complex, and termination triggers vary considerably from agreement to agreement. Often the target will be required to terminate the contract before entering into a competing acquisition agreement, and some contracts even require termination prior to the target board's withdrawal of a recommendation or approval of another transaction. This termination requirement has three goals. First, it may give the acquiror some comfort that it is not going to be used as a stalking horse and forces the target to balance its duties: on the one hand to lose a sure thing, on the other to encourage a Superior Proposal. (Of course, if the target is entering into another agreement, the balancing act becomes much simpler.) A second goal is to allow time for the acquiror to match the Superior Proposal: the target often may not terminate under section (b) for some number of days (typically, five) after notifying the acquiror of its intent to do so. If the acquiror does amend its bid during the matching period, the target will have to measure the new bid against the third party bid to decide whether, in the context of its fiduciary duties, it should still accept the alternate bid and terminate or keep with its original partner. The provision does not usually contemplate the possibility of a protracted bidding contest, because it is not in either party's interest to suggest in the contract that there was that much money left on the table. Finally, forcing the target to terminate before acting on a Superior Proposal often helps the acquiror to guarantee that it will be paid its termination fee, because the termination provisions often condition the effectiveness of such termination on the prior or concurrent payment of the fee.

If the fiduciary out provisions do not require the target to terminate the agreement prior to or concurrently with withdrawing its recommendation or recommending another transaction, the acquiror will often have the immediate right to terminate. Sometimes the target will have the right, but not the obligation, to terminate in such circumstances. From the acquiror's standpoint, however, it makes little sense to allow, but not require, the target to terminate, because in either case the acquiror loses its opportunity to buy the target, but in the latter case it can increase its chances of being paid its fee, as discussed below.

In some cases, the acquiror will seek the right to terminate if the target exercises its fiduciary out in order to participate in discussions with or provide information to a third party. Such a provision is difficult to justify, particularly where there has been no pre-signing market check. Without some exchange of information, many third parties would be hard-pressed to make a meaningful bid for a company already bound by a merger agreement. Target boards would find it difficult to risk losing an existing deal to provide information to a third party that is simply testing the waters. Chilling the right to exchange information could seriously reduce the effectiveness of the fiduciary out.

Termination of the merger agreement upon the target board's exercise of its fiduciary out typically triggers the requirement to pay a termination or "break-up" fee. While termination fees in the range of 1-3 percent of the purchase price have generally been upheld by Delaware courts,24 where the termination fee is used to favor one bidder over another or acts to end an active auction, courts may invalidate it. To reduce the risk that the fee will not be upheld, drafters often focus on the termination fee as compensation, rather than as a defensive mechanism (although both, in the appropriate circumstances, are valid purposes*). Thus, for instance, termination of the agreement may trigger a smaller fee but require reimbursement of the acquiror's expenses up to a certain amount. This is particularly useful to an acquiror with high expenses, such as a foreign acquiror whose financing arrangements might require payment of significant out-of-pocket fees and expenses even if the transaction is never consummated.

Triggering payment of the termination fee off the consummation of an alternative transaction can be helpful from the target's perspective, because stockholders, who will be receiving consideration for their shares, may be less likely to object to a large payment that effectively is borne by an alternate acquiror. As typically drafted, the acquiror becomes entitled to an inchoate right to the fee upon termination of the agreement. Unless within some period (typically one year) following the termination an alternative transaction is consummated or (in order to prevent the target from reaching an agreement within a year but closing thereafter) the target enters into an agreement with respect to an alternative transaction, the right to receive the fee expires. If the fee is triggered, however, it typically does not actually get paid until consummation of the alternative transaction. The acquiror can mitigate the effect of this by negotiating for a two-tiered fee, whereby some portion of the fee becomes payable immediately upon termination while the rest is not due until consummation of another transaction.26

There are three categories of termination rights that might trigger a termination fee. First, there are termination rights unrelated to Revlon concerns: an acquiror with high costs may negotiate for a fee in the event the agreement is terminated, for instance, due to a material adverse change in the target. Such a fee would cover the acquiror's costs but has no deterrent effect on competing bidders.

Next, there are termination rights associated with the exercise of the target's fiduciary out. If a target exercises its fiduciary out in order to enter into an agreement with a third party, a termination fee would normally immediately become due. If the target withdrew its recommendation or recommended an alternative transaction, a termination fee would generally become payable if another transaction were consummated within the one-year period discussed above. Often the parties will negotiate over whether the transaction ultimately consummated must be linked to the proposal (and the competing bidder) that led the target to change its recommendation. Requiring the transaction to be the "same" as the original proposal would be too restrictive, because subsequent negotiations may result in a restructured proposal or a new party may top the third party's proposal. Yet, if the triggering transaction is wholly unrelated to the original proposal, the target may be required to pay a fee even if the alternative transaction collapsed but a new transaction with an entirely new partner was consummated ten months later. While it may be possible to craft language that links the two triggers appropriately, the parties generally agree to use the time period within which a transaction must be consummated as a proxy for the relatedness of the triggers: the shorter the period, the more likely the two are to be linked.

The final category of termination triggers are those that do not arise as a result of a fiduciary out, but are nevertheless related to Acquisition Proposals. For instance, a target usually may terminate the agreement if the target's stockholders fail to approve it or if the transaction fails to close by some "drop dead" date. Both of these events are to some extent under the control of the target or its stockholders; in order to prevent the target from unfairly circumventing the termination fee provisions, the acquiror may demand a fee if the agreement is terminated under these circumstances and an Acquisition Proposal was outstanding at the time of the termination.7 In this case, the target should insist that the fee be payable only upon consummation of the Acquisition Proposal within some time period. Moreover, an "Acquisition Proposal" may be too low a threshold; the target may want the fee to be payable only if a Superior Proposal is consummated.

The question often arises as to whether the termination fee should be characterized as a form of liquidated damages. Many targets believe that they can limit their exposure by characterizing the fee in this manner While the acquiror might resist this characterization, the court in Brazen enforced a large termination fee on the basis of its being liquidated damages. The court implied, however, that had the agreement been silent on the matter, the business judgment rule would have applied. Because the discretion given the board under the business judgment rule is greater than that under a liquidated damages analysis, which requires a substantive showing of reasonableness, both parties may have an incentive not to identify the fee as liquidated damages in order to protect the enforceability of the fee. Of course, where enhanced scrutiny is applicable, it may be more difficult to sustain the validity of a termination fee that is not specified to be liquidated damages.

Non-Revlon Transactions

This article has so far focused on transactions that clearly implicate Revlon duties, such as cash tender offers followed by mergers or single-step cash mergers. However, no-shop provisions are also often contained in agreements involving transactions that do not trigger Revlon or raise other fiduciary issues. How should the no-shop clauses be modified-if at all-under these circumstances? While the scope of this article does not permit a thorough answer, a brief look at two common non-Revlon transactions may be useful.

Stock for stock mergers. Where control of a target is transferred to "a fluid aggregation of unaffiliated shareholders,"2 as in many stock for stock mergers, a target board does not become subject to Revlon duties. While enhanced scrutiny under Unocal and Unitrin would apply to the board's decision to enter into a no-shop in the face of a hostile third-party bid, the ordinary business judgment rule would instead apply if the agreement were entered into before any competing bids surfaced. Courts would be likely to uphold a target board's business judgment in entering into any type of no-shop clause-even one providing for exclusivity-as long as the board was not conflicted and was adequately in.formed.

In stock for stock deals, then, any escape hatch from a no-shop should focus primarily on information gathering. If the target does demand an escape hatch, it may in this case prefer a Superior Proposal condition to terminating the agreement or recommending another deal instead of fiduciary duty language on the theory that, in the absence of Revlon duties, it is unlikely that a fiduciary duty condition-no matter how it is formulatedwould ever be met.

Controlling stockholders. In a "going private" transaction involving a majority stockholder,*control already resides in the hands of the stockholder, and the purchase of the minority shares is unlikely to trigger Revlon duties. However, controlling stockholders owe heightened duties to the minority, and a going private corporate transaction will be subject to an "entire fairness" analysis,3' comprising both a procedural and a substantive component. To help insure that the transaction is deemed to be procedurally fair, it may be useful to include a fiduciary out, even though Revlon duties would not apply. Moreover, in these types of transactions, decisions are customarily delegated to a committee of independent directors to bolster the procedural fairness argument. Fiduciary out provisions should therefore key off of the independent committee's determination, not the full board's.

Although Revlon does not apply in this context, the target board still owes a fiduciary duty to the minority, and the courts have identified that duty as one of "immediate value maximization."32 In substance, it is hard to distinguish this duty from a traditional Revlon duty (except that the duty is to get the best price available for a non-controlling ownership interest), and many of the arguments raised in this article will be equally applicable in this context. Because the target board has the additional complication of owing fiduciary duties to the acquiror as a controlling stockholder, the flexibility of the fiduciary language strongly argues for its use. The controlling stockholder may not object to fiduciary language since the possibility of a successful competing bid is very small.33 It is worth noting as a final point that a target board may still be subject to Revlon if the controlling stockholder dominates the target but owns less than a controlling equity position. Depending on the circumstances, all of the "controlling stockholder" duties could apply as well as Revlon, making the fiduciary out particularly important.

Conclusion

The complexity of fiduciary duty law in the context of a change in corporate control and the almost endless variety of circumstances that influence such transactions make the negotiation of no-shop and related provisions multi-faceted and challenging. This article has set forth some of the most important issues that might arise in the course of negotiations. Each set of contract provisions, however, must be carefully tailored to reflect the relationship between the parties, the history of the relationship, and the potential for competing suitors. Lawyers negotiating the provisions must be particularly attuned to these circumstances and to their clients' special concerns.

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NOTES

Footnote

1. In this article the terms "no-shop" and "fiduciary out" include the "nonegotiation" clause and the various other related clauses that are set forth in the box on page 6.

2. See Paramount Communications, Inc. v. QVC Network, Inc., 637 A.2d 34, 48 (Del. 1994), Revlon v. MacAndrews & Forbes Holdings, 506 A.2d 173 (Del. 1985), and Mills Acquisition Co. v. MacMillan, 559 A.2d 1261 (Del. 1989).

3. Unless stated otherwise, this article is based on Delaware law. While many states follow Delaware's lead, variations in the governing

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jurisdiction's fiduciary principles (whether by statute or by case law) may suggest modifications to the provisions discussed in this article. 4. See, e.g., Ivanhoe Partners v. Newmont Mining Corp., 535 A.2d 1334, 1341 (Del. 1987).

5. Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985). 6. Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1985). 7. Id. at 182.

8. QVC, 637 A.2d at 43 (italics added).

9. Mills Acquisition Co. v. Macmillan, Inc., 559 A.2d 1261, 1282 (Del. 1989) (italics added).

10. Arnold v. Society for Savings Bancorp., Inc., 650 A.2d 1270,1290 (Del. 1994) (citations omitted). I I . Revlon, 506 A.2d at 183.

12. Case law is mixed as to the effect of no-shop provisions that "contract away la board's] fiduciary obligations." QVC, 637 A.2d at 51. While the

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QVC court found such a provision unenforceable, a number of cases indicate that a board's fiduciary duties do not give it the right to abrogate an executed merger agreement. See, e.g., Smith v. Van Gorkom, 488 A.2d 858, 898 (Del. 1985); Texaco, Inc. v. Pennzoil Co., 729 S.W.2d 768 (Tex. Ct. App.1987), cert. dismissed, 485 U.S. 994 ( 1988). It is possible that courts will entertain third party claims of unenforceability while at the same time

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prohibiting target boards from invoking their fiduciary duties to violate an executed merger agreement.

13 Rand v. Western Air Lines, C.A. No. 8632, 1994 Del. Ch. LEXIS 26, at *19 (February 25, 1994), (citiation omitted), aff'd, 659 A.2d 228 (Del. 1995).

14. QVC, 637 A.2d at 45. 15. See, c.g., Mills, 559 A.2d at 1288.

16. Barkan v. Amsted Industries Inc., 567 A.2d 1279, 1288 (Del. 1989). See also, QVC, 637 A.2d at 37 (target board must "act on an informed

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basis to secure the best value reasonably available to the stockholders"); Rand, 1994 Del. Ch. LEXIS at *10 ("Although the Court must apply `enhanced scrutiny,' the essential question remains whether a disinterested board has satisfied its duty to act on a fully informed basis."). 17. See e.g., Barkan, 567 A.2d at 1288.

18. SIV Engineers, Inc. v. Greiner Engineers, Inc., 861 E2d 784 (3rd Cir. 1988).

19. Both parties may want to provide for the extension of the tender offer in the event the matching period extends beyond the expiration date. 20. 8 Del. 251 (d) (1997).

21. But see In re Mobile Communications Corp. of America, Civ. Nos. 10627,10638,10644,10656, and 10697,1991 Del. Ch. LEXIS (January 7,

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1991 ) (holding that a termination right based on a change of recommendation expires once stockholder approval is obtained). 22. See Johnston and Alexander, Fiduciary Outs and Exclusive Merger Agreement-Delaware Law and Practice, INSIGHTS, Feb. 1997, p. 15. 23. .See, e.g., In re Santa Fe Pacific Corp. Shareholder Litigation, 669 A.2d 59 (Del. 1995).

24. Higher percentages are not unheard of in smaller transactions where the absolute amount of the fee may not be high. Cases in Delaware upholding termination fees of 2-3 percent include Brazen v. Bell Atlantic

Footnote

Corp., 695 A.2d 43 (Del.1997) (2 percent); Kysor Indus. Corp. v. Margaux, 674 A.2d 889 (Del. Sup. 1996) (2.8 percent); Roberts v. General Instrument, 1990 WL 118356 (Del. Ch. 1990) (2 percent); Lewis v. Leaseway Transportation, 1990 WL 67383 (Del. Ch. 1990) (3 percent); and Braunschweiger v. American Home Shield Corp., 1989 WL 128571 (Del. Ch. 1989) (2.3 percent).

25. See, e.g., Yanow v. Scientific Leasing, Civ. Nos. 9536 & 9561, 1988 Del. Ch. LEXIS 26 (February 5, 1988).

26. This was the case in the NYNEX/Bell Atlantic merger, the subject of Brazen v. Bell Atlantic Corp., 695 A.2d 43 (Del. 1997). 27. Although a fee payable upon stockholders' rejection of the deal may seem to be coercive, the Delaware Supreme Court approved such a fee in

Footnote

Brazen, 695 A.2d at 45.

28. Paramount Communications, Inc. v. Time, Inc., 571 A.2d 1140, t SO (Del. 1989).

29. Or a supermajority stockholder, if applicable law or charter provisions require a supermajority vote in some circumstances. 30. See, e.g., Mendel v. Carroll, 651 A.2d 297 (Del. Ch. 1994). 31. See, e.g., Kahn v. Lynch Communication Systems, Inc., 669 A.2d 79, 82 (Del. 1995).

32. Mendel, 651 A.2d at 306.

33. But see Mendel, 651 A. 2d 297, where a competing bidder sought an option which would have diluted the controlling stockholder's control position.