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Delaware Court: ‘No Talk’ Provisions No Good

By Morton A. Pierce, M. Adel Aslani-far, and Matthew J. Gilroy
New York Law Journal, Nov. 13, 2000

The past several years have seen the increased use of "no solicitation" provisions
in merger transactions as a means of protecting the transaction from third-party
interlopers. Such provisions in merger agreements prohibit the target, or in some cases,
both the target and the acquiror, from seeking alternative acquisition proposals or even
responding to unsolicited proposals that do not meet certain criteria.

The most restrictive formulation of a "no solicitation" provision is the "no talk.” A
"no talk" provision flatly prohibits the target’s board of directors from engaging in
discussions regarding alternate merger proposals submitted by third parties. Less
restrictive formulations of "no solicitation" provisions prohibit the target from actively
seeking third-party offers but include a "fiduciary out," which permits the target’s board
of directors to respond to certain unsolicited third-party offers to the extent necessary to
comply with the board’s fiduciary duties. Such provisions are known as "no shop"
provisions.

Three cases decided by the Delaware Chancery Court last year, Phelps Dodge
Corporation v. Cyprus Amax Minerals Company,1 ACE Limited v. Capital Re Corporation2
and In re IXC Communications, Inc. Shareholders Litigation3 have called into question the
use of "no talk" provisions as devices to insulate strategic mergers that do not trigger a
board’s Revlon duties. Revlon duties generally require a board of directors that has
committed to a sale of control of the company, usually in a cash transaction, to seek the
highest reasonably available price for stockholders.

Prior to these decisions, practitioners had tested the limits of Delaware fiduciary
law principles by including "no talk" provisions in stock-for-stock merger agreements
where the target was not in Revlon mode. Thus, the target would marry itself to a

1 C.A. No. 17398, 1999 WL 1054255 (Del. Ch. Sept. 27, 1999).
2 747 A.2d 95 (Del. Ch. 1999).
3 C.A. No. 17324, 17334, 1999 WL 1009174 (Del. Ch. Oct. 27, 1999).

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