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"No-Talk," No Good?

Provisions in merger agreements that prohibit the boards of target companies from talking to other suitors are "pernicious" and a form of "willful blindness."

1Jan

Provisions in merger agreements that prohibit the boards of target companies from talking to other suitors are "pernicious" and a form of "willful blindness." But that's not the spurned company talking. The harsh words are from two judges from the influential Delaware Chancery Court, which is putting pressure on companies to take off the "no-talk" blinders in mergers and acquisitions.

In one case, a judge denied the request for an injunction by Ace Ltd., a Bermuda-based insurance company, based on a no-talk clause in its merger agreement with Capital Re, an insurance holding company in New York. The clause "involves an abdication by the board of its duty to determine what its own fiduciary obligations require at precisely that time in the life of the company when the board's own judgment is most important," the judge wrote. Another judge issued similar sentiments in a merger involving Phelps Dodge Corp., saying its no-talk clause would be "the legal equivalent of willful blindness."

Although the opinions were seen by some as a win for investors, attorneys specializing in mergers and acquisitions were cautious in their appraisal of the probable impact. "They may make it more difficult to lock up deals, but there were some unique facts in the Capital Re case," notes Stephen Radin, a partner with Weil, Gotshal & Manges, in New York. He says two facts the court focused on were Ace's control over the votes of more than 45 percent of its target's (Capital Re) stock and Capital Re's failure to explore the marketplace before it signed the merger agreement.

"Whether the court would reach the same conclusion if those facts were not present is difficult to tell," he notes. "However, the court clearly stated a point of view, and that point of view leads to making it difficult to lock up deals."

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