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Based on this advice, the Capital Re board of directors determined to enter into
discussions with XL Capital, which discussions led to XL Capital increasing its offer to $13
per share in cash. The Capital Re board then concluded that this offer was superior to
ACE’s offer and resolved to terminate its agreement with ACE unless ACE matched this
offer. Although ACE maintained that Capital Re was not permitted to terminate the
agreement, ACE did increase its offer. After XL Capital again topped ACE’s offer with a
$14 per share cash bid, Capital Re advised ACE of its intention to terminate the merger
agreement unless ACE topped this bid within five days. Rather than continue the bidding
war, ACE filed suit to prevent Capital Re from terminating the agreement. ACE argued
that Capital Re breached the merger agreement by failing to get the requisite written
advice (i.e., that the consideration of the XL Capital offer was "required") before
negotiating with XL Capital.

ACE argued that Capital Re would never be required to obtain the best deal
reasonably possible because its stock-for-stock merger did not involve a change of control
under Delaware law. Accordingly, ACE argued there could never be a circumstance when
the Capital Re board would be required to use the "fiduciary out.” The court disagreed,
noting that if there were no fiduciary duty to negotiate with alternate bidders in
transactions not involving a change of control, the "fiduciary out" in the "no shop" would
be meaningless. The court found that a "no shop" provision that lacks a fiduciary out is
"particularly suspect when failure to consider other offers guarantees the consummation
of the original transaction, however more valuable an alternative transaction may be and
however less valuable the original transaction may have become since the merger
agreement was signed.”

The court was clear in its assessment of the duties of a board of directors not in
Revlon mode. A board cannot "without exercising due care, enter into a non-change of
control transaction affecting stockholder ownership rights and imbed in that agreement
provisions that guarantee that the transaction will occur and that therefore absolutely
preclude stockholders from receiving another offer that even the board deems more
favorable to them.” The court went on to find that just because the board has no Revlon
duties did not imply that it "can contractually bind itself to sit idly by and allow an
unfavorable and preclusive transaction to occur that its own actions have brought about.”

Notwithstanding the above, the court went on to describe a limited set of
circumstances in which a "no talk" provision could conceivably be permissible. After a
board of directors conducts a thorough canvass of the market and negotiates with various
bidders, a "no talk" provision may be appropriate if the board believes such a provision is
required to close a deal and end the auction process.

The court was also particularly troubled because the "no shop" seemed to require
Capital Re’s board of directors to rely on its legal counsel in determining if its fiduciary

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