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Delaware Supreme Court Strongly Endorses the Power of Boards to Decide How to

Conduct a Sale of the Company Process

Theodore N. Mirvis, Paul K. Rowe , William Savitt & Ryan A. McLeod, Wachtell, Lipton,
Rosen & Katz

December 19, 2014

Earlier today, the Delaware Supreme Court issued a landmark decision strongly
reaffirming two basic principles of Delaware merger law: first, that a board of directors
has wide latitude to craft a sales process, including to choose a single-bidder strategy;
and, second, that the Delaware courts, even if they find that a board erred in decision-
making, cannot rewrite the merger contract in a way that reduces the buyer’s rights. C&J
Energy Servs., Inc. v. City of Miami Gen. Emps.’ & Sanitation Emps.’ Ret. Trust, No.
655/657, 2014 (Del. Dec. 19, 2014) (en banc) [107 A.3d 1049 (Del. 2014) – E.K.]

At a preliminary hearing last month, the Court of Chancery enjoined a proposed
merger transaction involving C&J Energy Services and Nabors Industries, because the C&J
board did not affirmatively shop the company either before or after signing the deal. The
court’s order required C&J to run a go-shop process notwithstanding the merger
agreement’s no-shop provision, and it ruled that Nabors could not treat C&J’s solicitation
efforts as a basis to walk away.

The Supreme Court unanimously reversed, emphatically rejecting the premise
that Revlon duties require an auction or other proactive market check. To the contrary,
Chief Justice Strine 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.” Independent and well-informed directors may
choose any reasonable path when selling a company, "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.” Thus, for example, a board may choose to
conduct discussions with only a single potential buyer, and then sign up a merger
agreement with customary "no shop" and "break fee" provisions, provided that there is
an opportunity, through a fiduciary out, for a new bidder to challenge the agreed
transaction by offering superior terms.

The Court also held that judges may not "blue-pencil an agreement to excise a
provision beneficial to" a buyer while simultaneously barring the buyer from "regard[ing]
the excision as a basis for relieving it of its own contractual duties.”

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