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Practice Points for A Single Bidder
Sale Process
Recent Delaware decisions have emphatically confirmed a trend of increased judicial deference to sale
process decisions made by directors without a conflict of interest. While deference to board decisions
made by independent, disinterested, engaged directors has always been the animating principle of
Delaware jurisprudence, the opinions issued by the courts over the past year have exhibited more
emphasis on that deference and less of a focus on judicial inquiry into the reasonableness of the
decisions made by independent boards.
Under the “heightened scrutiny” demands of the Revlon doctrine, directors, in a sale context, are obliged
to seek the best price for their company that is reasonably available. Delaware law previously made clear
that the courts are not to substitute their judgment for the board’s judgment as to what steps to take, but
rather are to evaluate with some restraint whether the board process was reasonable. The courts’ recent
shift—in language, tone, and substantive decisions—subtly, but clearly, reflects increased judicial
deference to directors’ judgments when making that evaluation. Consistent with this trend, the Delaware
Supreme Court, in a recent decision, confirmed that, even in a Revlon situation, an independent board
can engage with a single bidder in a sale process, and not actively shop the company either before or
after signing the merger agreement—so long as there is a “viable passive market check” after signing
(through a fiduciary out, accompanied by only modest deal protection provisions, so that other parties can
make unsolicited competing bids and the board can accept a superior bid if it is received).
In the past, the courts’ view was that a single bidder sale process was permissible in a Revlon situation
only under limited circumstances. The court tended to evaluate a non-auction sale strategy with
skepticism and to require that its reasonableness be supported by a board judgment informed through
consideration of the particular facts and circumstances, with an emphasis on knowledge of the likelihood
of competing bids, the benefits and risks of the single bidder strategy, and the nature of the deal
protection devices. By contrast, Chief Justice Strine recently wrote:
Revlon does not require a board to set aside its own view of what is best for the
corporation’s stockholders and run an auction whenever the board approves a
change of control transaction…. [A board may] pursue the transaction it
reasonably views as most valuable to stockholders, so long as the transaction is
subject to an effective market check under circumstances in which any bidder
interested in paying more has a reasonable opportunity to do so. Such a market
check does not have to involve an active solicitation, so long as interested
bidders have a fair opportunity to present a higher-value alternative, and the
board has the flexibility to eschew the original transaction and accept the highervalue deal.
Copyright © 2015 Fried, Frank, Harris, Shriver & Jacobson LLP
A Delaware Limited Liability Partnership
01/12/15
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Fried Frank Client Memorandum
While some have interpreted the Supreme Court as now having provided a blanket endorsement of the
concept of a single-bidder passive-shopping-only strategy without regard to the particular contextual
facts, in our view, the facts and circumstances supporting the reasonableness of the board’s decision are
still critical to the courts’ analysis. While the burden of establishing reasonableness under Revlon may
now be less demanding than in the past, in our view, a board deciding to engage in a single-bidder
passive-shopping-only sale process will still have to establish that it had a reasonable basis for structuring
the process as it did. Notably, in the single-bidder passive-shopping-only sale process recently upheld by
the Delaware Supreme Court, the Court found that, among other supporting factors, there was “no hint” of
an entrenchment or defensive motive by the board and noted that, while there was a fiduciary out and
only a modest termination fee, no competing bid was received during the five-month period between
signing and closing.
Factors Supporting a Single-Bidder Passive-Shopping-Only Process
The following factors would support the reasonableness of a decision to engage in a single bidder
strategy with only post-signing passive shopping:

attractive price and terms of the bidder’s proposed transaction;

a low likelihood of other parties being interested in bidding, based on the board’s and
management’s experience and the advice of the investment bankers;

credible risks of active shopping of the company that the board resonably determines outweigh
the potential benefits of active shopping (taking into account such factors as the effect of the
process becoming public; the impact on customers, employees, and others; and the possibility of
a “failed” auction);

credible insistence by the bidder that the company not be shopped;

only “modest” deal protections;

the bidder being, in the board’s judgment, a “strong” buyer;

a reasonable period of time between signing and shareholder approval;

no defensive or entrenchment motive by the board and the absence of conflicts of interest on the
part of management;

alignment of the board’s interests with the stockholders, which could include significant stock
ownership by the directors (or by stockholders affiliated with and specifically represented by
directors);

significant advantages of the proposed transaction; and

target stockholders having a right to accept or reject the transaction.
Of course, all of these factors are not prerequisites and no single one or more may prove dispositive.
At one end of the continuum, a decision to engage in a single-bidder passive-shopping-only process
would clearly be reasonable if: there is an attractive bid, with certainty of closing; a strong bidder, who
credibly insists on exclusivity; meaningful concern about maintaining confidentiality of the process; a low
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likelihood of other interested bidders; deal protection terms that clearly facilitate post-signing unsolicited
bids being made and the company’s ability to accept them; and a stockholder vote on the transaction. At
the other end of the continuum, the foundation for the decision would be lacking if: there is a low bid, with
meaningful closing uncertainty; a weak bidder, who does not insist on exclusivity; limited concern about
confidentiality of the process; a high likelihood that there are other parties interested in bidding, including
stronger potential acquirors; and deal terms that materially inhibit third parties from making post-signing
unsolicited bids or the company from being able to accept them. The Supreme Court may have moved
the guidepost for where along this continuum a single-bidder passive-shopping-only strategy is
supportable; however, the facts supporting the board’s judgment continue to be critical.
Practice Points

More pressure for exclusivity and no active shopping. We expect that bidders will now be
more inclined to seek to pressure target company boards to agree to a single-bidder passiveshopping-only process. In determining its response, the target board must consider and weigh all
of the advantages and disadvantages of the process under the circumstances. In any given
case, establishing a floor price for the target—without the burden, uncertainty and risks of active
pre-signing shopping—while maintaining the ability to receive and accept competing bids postsigning, may, in the board’s reasonable judgment, be the best course for maximizing value.

Advantages of single-bidder passive-shopping-only process. The advantages to the target
of the first public announcement of the sale of the company being the signed deal, and to there
being no active post-signing solicitation, include the following:


a floor price for the target being established, with limited deal protections (that would not
preclude other possible bidders);

avoiding the possible adverse impact on employees, suppliers, customers, and other
constituencies that could accompany a more public process;

limiting the delay in getting to a signed agreement (and the associated deal risk);

limiting the time and burden on management of a more aggressive solicitation campaign;

restricting access to confidential company information; and

eliminating the possibility of (and stigma from) a failed auction.
Disadvantages of single-bidder passive-shopping-only process. The disadvantages of not
actively seeking out potential bidders include:

most critically, competition, if it can be developed, can be the most certain course to
maximize value;

the judgments by management, the directors and the investment bankers as to the
potential for interested bidders cannot be guaranteed, even if soundly based;

it may be possible to satisfy confidentiality concerns with a process that targets
solicitation of just the limited number of key potential bidders (in which case there would
be less reason for a single-bidder process); and
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Fried Frank Client Memorandum

certain potential bidders might not want to “jump” a signed deal and so may not submit a
bid post-signing although they would have been interested otherwise.

General process. In this new paradigm, if a target determines—whether on its own or after
being approached by a third party bidder—to offer itself for sale, then, as is always the case, the
target company must seek to ensure that the board process in general is as thorough and
effective as possible—including through retention of independent advisors; disclosure of any
conflicts of interests (of directors, investment bankers, management, or others) and appropriately
dealing with them; and a consistent focus on directors being informed, engaged, and motivated
to achieve the best result for shareholders.

Evaluating alternative shopping strategies. The target initially should evaluate whether to
approach a number of possible buyers, approach a targeted list of more likely buyers, or engage
with the “most likely” or “strongest” potential buyer. The potential benefits and risks of each
strategy should be considered. Relevant factors would include:



What is the likelihood of there being interested bidders?

How many parties might be interested? Who would they likely be? Has the company
been approached recently or in the past?

Is there a clear dominant buyer? Is there a small number of “strong” potential
bidders—in terms of value of the company to them, ability to pay, lack of issues
(such as antitrust or regulatory) that would affect certainty of closing, or other factors?

Would potentially interested bidders be less likely to engage during a post-signing
passive shopping period?
What would be the consequences of a public process, and would the process become
public?

Would a public process have an adverse impact on employees, suppliers, customers,
or other constituencies?

What would be the likelihood, and the consequences, of a “failed” auction?

Would a public process itself result in a material turnover of shareholders and, if no
deal is done, a more “unstable” shareholder body?

Is it feasible to make a few discrete calls at the beginning of the process to determine
possible interest without clearly opening up the process to public exposure?

How realistic is it that confidentiality could be maintained in a pre-signing shopping
process (no matter how limited)?
What do management and the investment bankers advise is the best way to approach
the process? Note that in a Revlon sale to a private equity firm, in a transaction in which
management would expect to be participating and so would have a conflict of interest, the
board would have to assume a more dominant role.
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Fried Frank Client Memorandum

Responding to a bidder’s exclusivity request. If a bidder requests exclusivity, the target board
should:

Deliberate to consider the reasonableness of agreeing to the requested process.

Try to determine the level of seriousness of the bidder’s insistence on the process.



Is it likely that the bidder would engage only if that process is adopted?

In responding to the request for exclusivity, should the target specify that exclusivity
would have to be accompanied by merger agreement provisions that facilitate a
viable passive market check (such as limited deal protections, a suitable period
between signing and closing, no force-the-vote provision, limited matching rights if
any, and a committed merger agreement)?
Evaluate the bid.

Is the price offered at the high end of the valuation range? How much can this bidder
pay? How accretive would the acquisition be for this bidder?

What is the certainty of closing? Can a “tight” agreement (from the seller’s point of
view) be negotiated? Are there any regulatory concerns? Does the bidder
understand that the seller will want a “hell or high water” commitment to resolve any
regulatory issues?

Does this bidder offer any unique advantages as compared to other potential
bidders?

Consider the extent to which other potentially interested bidders would or would not be
likely to submit a post-signing competing bid.

Try to negotiate a go-shop so that the company can be actively shopped post-signing.

Determine what value the board can extract from the bidder in exchange for agreeing to a
single-bidder process.
Ensuring the viability of a post-signing “passive market check”. If the board decides to
agree to a single-bidder process without active shopping post-signing, the board should seek to
ensure that the post-signing passive shopping will be a “viable passive market check”— by
limiting impediments to unsolicited competing bids emerging and by being in a position to accept
a superior bid if one is received. Thus, the board should:

Agree to only modest deal protections.

Obviously, obtain a fiduciary out so that a competing bid can be accepted. Also, do not
agree to a force-the-vote provision.

Agree only to limited restrictions on providing unsolicited competing bidders with
information.

Agree to matching rights, if any, that are as limited as possible.
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Fried Frank Client Memorandum


Ensure that there will be a sufficient period of time between signing and the shareholder
vote. (Thus, the bidder should understand that a 20-business day cash tender offer will
not be acceptable.)
Special issues in controller transactions. If the bidder is a controlling stockholder of the target
company, additional issues arise. Under Delaware law, unless the bidder complies with the MFW
guidelines, the court will apply entire fairness review under which, instead of deferring to the
directors’ decisions, the court will determine whether the price and the process were “entirely
fair”. Thus, the board should:

Determine whether the bidder agrees to follow the MFW guidelines; and, if so, ensure
that it is clear at the “outset” of the process that the bid is being conditioned on approval
by an independent and disinterested special committee and a majority-of-the-minority
stockholder vote.

If the MFW procedures are followed by the bidder, the business judgment rule will govern
a court’s review of the sale process. However, in light of the controller’s stock position,
considering whether or not to shop the company could be an academic exercise if, as is
typical, the controller has advised that it is a buyer only and is not willing to be a seller of
its shares. The special committee could probe the controller’s intentions; and, even if the
controller maintains the position that it will not be a seller, the investment banker to the
committee should advise the committee of the range of third party sale value.

Seek to maximize the price and obtain better terms from the controller. Given the
controller’s stock position and, if applicable, its position that it will not be a seller, the
committee’s only leverage may come from its ability to “just say no”. The committee
should communicate to the bidder the committee’s right and, when appropriate, its
intention to “just say no”.
*
*
*
Authors:
Abigail Pickering Bomba
Steven Epstein
Arthur Fleischer, Jr.
Peter S. Golden
David B. Hennes
Philip Richter
Robert C. Schwenkel
David N. Shine
John E. Sorkin
Gail Weinstein
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Fried Frank M&A Briefing
This memorandum is not intended to provide legal advice, and no legal or business decision should be
based on its contents. If you have any questions about the contents of this memorandum, please call your
regular Fried Frank contact or an attorney listed below:Contacts:
New York
Jeffrey Bagner
+1.212.859.8136
[email protected]
Abigail Pickering Bomba
+1.212.859.8622
[email protected]
Andrew J. Colosimo
+1.212.859.8868
[email protected]
Aviva F. Diamant
+1.212.859.8185
[email protected]
Steven Epstein
+1.212.859.8964
[email protected]
+1.212.859.8875
[email protected]
Arthur Fleischer, Jr. *
+1.212.859.8120
[email protected]
Peter S. Golden
+1.212.859.8112
[email protected]
David J. Greenwald
+1.212.859.8209
[email protected]
Tiffany Pollard
+1.212.859.8231
[email protected]
Philip Richter
+1.212.859.8763
[email protected]
Steven G. Scheinfeld
+1.212.859.8475
[email protected]
Robert C. Schwenkel
+1.212.859.8167
[email protected]
David L. Shaw
+1.212.859.8803
[email protected]
David N. Shine
+1.212.859.8284
[email protected]
John E. Sorkin
+1.212.859.8980
[email protected]
Steven J. Steinman
+1.212.859.8092
[email protected]
Jerald S. Howe, Jr.
+1.202.639.7080
[email protected]
Mario Mancuso
+1.202.639.7055
[email protected]
Brian T. Mangino
+1.202.639.7258
[email protected]
Christopher Ewan
1
Washington, D.C.
* Senior Counsel
New York
Washington, DC
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