Rumor has it that Salesforce has been approached with an acquisition offer by a large technology company. The identity of the buyer (and the certainty of such an acquisition) are unknown but news articles are throwing out names including IBM, Oracle and Microsoft. Given Salesforces’ high market cap of $47 million, the list of potential acquirers is fairly short and being narrowed each day.
While a Salesforce acquisition is still speculation, its potential is a great reason to discuss 2 important items for corporate lawyers to remember when it comes to mergers and acquisitions: standstill agreement and Revlon duties.
Standstill and Silent: Ensure that Any Potential Acquirer Signs a Confidentiality and Standstill Agreement
Depending on the exact details of a proposed merger and acquisition transaction, but particularly in a merger and acquisition involving a public company, the parties should enter into a confidentiality and standstill agreement. A potential acquirer will rightfully want to do a due diligence review of a target company, however the target company should protect itself before providing access to its confidential information and business records. A standstill agreement is usually included as part of a confidentiality or non-disclosure agreement but it may be structured as a separate agreement.
There are 2 types of standstill agreement:
(1) One type provides that the parties agree to deal exclusively with each other for a certain period of time. This helps to align the parties’ incentives to undertake due diligence and negotiations in good faith and steady force.
(2) The second type is a form of anti-takeover protection which helps to ensure that a potential acquirer will not use the confidential information they have obtained as part of the due diligence review to undertake a hostile bid of the target company. The standstill agreement will typically provide an exhaustive list of coercive actions including tender offers and proxy fights which the potential acquirer is precluded from doing for a certain period of time.
Remember Revlon Duties: Target Board Must Obtain the Best Price for Stockholders in a Sale of a Company
In Revlon, Inc. v. MacAndrews & Forves Holdings, Inc., the Supreme Court of Delaware held that in a transaction involving a change of control, the board of the target company must act according to their fiduciary duties and obtain the best price possible for stockholders. For lawyers, it is our job to ensure that the board of the target company is documenting with detail the discussions, analysis and extra steps taken to ensure they meet their Revlon duties. Salesforce is one of the largest cloud computing companies and although any serious acquisition offer will likely involve a hefty consideration amount, the board is still obligated to act to maximize value for its shareholders and the lawyers representing Salesforce will certainly be reminding them of this duty.
Standstill Agreement and Revlon Duties
A standstill agreement should be drafted with full consideration of the board’s Revlon duties. Entering into a standstill agreement cannot preclude the board from fulfilling its Revlon duties. Exclusivity for a finite period of time is encouraged to protect a deal and align incentives but it cannot preclude consideration of other parties or transactions which may yield higher value for stockholders.