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DELAWARE'S "NO-GO" TREATMENT OF NO-TALK PROVISIONS: DEAL-PROTECTION DEVICES AFTER OMNICARE

BY AMY Y. YEUNG* AND CHARLES B. VINCENT

**

ABSTRACT

This article analyzes the Delaware courts' treatment of clauses that can be treated under one interpretation as a "no-talk" deal-protection device used by corporations in friendly acquisitions. In Energy Partners, Ltd. v. Stone Energy Corp., a 2006 Delaware Court of Chancery opinion, the court focused on the narrow issue of whether a target could prevent an acquiring company from dealing with a third-party company that threatened its deal. Although the court denied injunctive and declaratory relief predominantly on ripeness grounds, an application of the facts of Energy Partners helps demonstrate how deal-protection devices have evolved since the controversial Omnicare decision. This article analyzes the recent Delaware Court of Chancery case and reaches three conclusions: (1) Omnicare continues to be restricted to its facts and could be further restricted to mergers facing review solely under Revlon; (2) provisions involving no-talk restrictions have been narrowly construed by the court in order to ensure that boards are not prohibited from exercising their fiduciary duties if a superior offer emerges; and (3) based on the court's treatment of legal restrictions vis-à-vis a merger, litigation in Delaware related to directors' fiduciary duties in a merger/acquisition context may be governed by the broad principle of encouraging discussions and negotiations with third parties when the directors have signaled the corporation's entrance into the merger/acquisition moment.

I. INTRODUCTION

Corporations and investment banks have seen a significant spike in the total number of mergers and acquisitions.1 In order to pursue these corporate

*Associate, Washington, D.C. law firm; law clerk, Vice Chancellor Donald F. Parsons, Jr., Delaware Court of Chancery, 2006-07.

**Law Clerk, Justice Henry duPont Ridgely, Delaware Supreme Court, 2007-08. All views represented in this article are solely those of the authors.

1During the 1990s, merger and acquisition activity experienced considerable growth. In 1990, just over 2,000 transactions were consummated; such growth reached its peak in 2000 with 11,123 deals. Although deals in 2008 have dropped in comparison to prior years, 2005, 2006, and 2007, have had 11,013, 11,750, and 10,574 deals respectively, with a total value averaging $1.35

312 DELAWARE JOURNAL OF CORPORATE LAW [Vol. 33 changes, companies invest time, effort, and capital to determine economic feasibility and corporate compatibility. Such courtship costs include attorney engagement in sustaining client economic goals and may also include litigation prior to or following consummation of the deal. Delaware courts, perhaps in part due to their swift adjudication, have seen an increase of such litigation assessing the legal feasibility of the companies' desires.2

As with most major transactions, investment of time and effort in pursuit of a merger or acquisition is costly. Corporations attempt to limit their economic losses by negotiating contractual provisions intended to compensate for any loss incurred for anticipated delays or unanticipated developments (such as third-party acquisition proposals) that may derail the final consummation of the deal.3 Such protective measures have extended trillion. See MergerStat.com, M&A Activity U.S. and U.S. Cross-Border Transactions, https://www.mergerstat.com/newsite/free_report.asp (last visited Aug. 8. 2008) (providing the total number of deals and value for such mergers and acquisitions from 1962 to current). See also Mergers and Acquisitions—Summary, http://www.allcountries.org/uscensus/882_mergers_ and_acquisitions_ summary.html (last visited July 19, 2008) (most recent compilation and analysis conducted by the U.S. Census). See also Centre for European Economic Research, EU M&A Monthly Reports for April and May 2008, available at https://zephyr.bvdep.com/version 2007726/cgi/template.dll?freetpl=frame.tpl&product=24&productname=zephyr&productdirectory =Zephyr&page=freeStatistics (last visited May 17, 2008) (analyzing trends in investment banking consultancy relating to mergers and acquisitions); Office of Advocacy, U.S. Small Business Administration, Mergers and Acquisitions in the United States, 1990-1994 (Oct. 1998), available at http://www.sba.gov/advo/stats/m_a.pdf (analyzing the frequency and impact of mergers and acquisitions on small businesses by industry and size, in combination with the Center for Economic Studies).

2See Delaware Corporate and Commercial Litigation Blog, Injunctive Relief Denied to Minority for Challenged Stock Offering, http://www.delawarelitigation.com/2007/07/articles/ chancery-court-updates/injunctive-relief-denied-to-minority-for-challenged-stock-offering/ (July 24, 2007, 21:37 EST) ("This [case] is an example of how quickly the [Delaware Court of Chancery] can act in appropriate circumstances. The complaint was filed on June 20. Expedited discovery was ordered and a hearing was held on July 6 [for a July 11 deadline.]"); Delaware Corporate and Commercial Litigation Blog, Specific Performance Claim Rejected, http://www.delawarelitigation. com/2007/12/articles/chancery-court-updates/specific-performance-claim-rejected/ (Dec. 24, 2007, 16:58 EST) ("The complaint in this case was filed, and discovery and a trial took place, as well as a summary judgment motion disposed of [], and a final post-trial decision issued, all in about 30 days."). See also E. Norman Veasey, The Roles of the Delaware Courts in Merger and Acquisition Litigation, Speech presented at the Fourth Annual Mergers and Acquisitions Insight Information Co. (June 18, 2001), in 26 DEL. J. CORP. L. 849 (2001) (discussing several substantive reasons why corporations litigate in Delaware).

3See Contract Law—Mergers and Acquisitions—Delaware Chancery Court Addresses Default Interpretation of Broadly Written Material Adverse Effect Clauses.—In re IBP, Inc. Shareholders Litigation v. Tyson Foods, Inc., No. 18373, 2001 Del. Ch. LEXIS 81 (June 15, 2001), 115 HARV. L. REV. 1737, 1737-38 (2002) (describing material adverse effect clauses in merger agreements); Stephen Fraidin & Jon D. Hanson, Toward Unlocking Lockups, 103 YALE L.J. 1739, 1814-17 (1994) (using lockups as a mechanism for corporate compensation for pre-bid investment and post-bid delay). See also United Rentals, Inc. v. RAM Holdings, Inc., 937 A.2d 810, 845 (Del. Ch. 2007) ("The law of contracts, however, does not require parties to choose optimally clear language; in fact, parties often riddle their agreements with a certain amount of ambiguity in order to

2008] DELAWARE'S "NO-GO" TREATMENT OF NO-TALK PROVISIONS 313 beyond those of mere financial compensation in the event of a failed deal to restrictive covenants that prevent one or both parties from deliberately avoiding consummation, particularly when economic conditions outside of contractual limits change the overall cost-benefit analysis. In light of the increase in mergers and acquisitions, corporations have more heavily relied on certain defensive devices implemented in commercial agreements, attempting to mitigate the chances of a failed merger. Likewise, corporate litigators either defend or challenge the boundaries of legally permissible takeover defenses. Such use of defensive devices causes some uncertainty in a deal (and, under an economic rubric, additional cost to the corporation) where corporations would otherwise prefer guarantees of fair (maximum) economic returns to the shareholder. In Delaware, whether or not such contractual provisions can be legally applied depends, in part, on whether the corporation is up for sale.

This article uses the unique combination of contractual provisions in Energy Partners, Ltd. v. Stone Energy Corp.4 as a case study in applying Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc.,5 or the so-called "Revlon mode," and extrapolating whether a no-delay provision, included in a merger agreement functioning as an indirect no-talk provision, would violate directors' fiduciary duties. Although many articles have been written on various other takeover devices,6 this article focuses exclusively on the reverse "no-talk" clauses prevalent in many merger agreements today.7 This article seeks to answer three questions. First, how have the Delaware courts interpreted Omnicare, Inc. v. NCS Healthcare, Inc.8 in the context of pro-posed corporate acquisitions? This article first surmises that, akin to the analysis in Energy Partners, courts may factually distinguish Omnicare in all but extreme situations. Second, to what degree can a merging party contractually restrict the other party from discussing strategic alternatives

reach a compromise.").

4Energy Partners, Ltd. v. Stone Energy Corp., Nos. 2402-N, 2374-N, 2006 Del. Ch. LEXIS 182 (Del. Ch. Oct. 11, 2006), reprinted in 32 DEL. J. CORP. L. 584 (2007).

5506 A.2d 173 (Del. 1986). 6See, e.g., Stephen M. Bainbridge, Precommitment Strategies in Corporate Law: The Case

of Dead Hand and No Hand Pills, 29 J. CORP. L. 1 (2003) (discussing poison pills and other precommitment strategies); Thanos Panagopoulos, Thinking Inside the Box: Analyzing Judicial Scrutiny of Deal Protection Devices in Delaware, 3 BERKELEY BUS. L.J. 437 (2006) (exploring various deal-protection devices). Panagopoulos offers several reasons why absolute lockups may be in the stockholders' best interests, but argues that reaching this conclusion necessarily requires reversing Omnicare, Inc. v. NCS Healthcare, Inc., 818 A.2d 914 (Del. 2003). Panagopoulos, supra, at 441-43, 466-68.

7Although this article is written in the context of merger agreements in which shareholders are provided with a right to vote, the language at issue in litigation often exists in merger agreements regardless of the shareholder right to vote.

8818 A.2d 914 (Del. 2003).

314 DELAWARE JOURNAL OF CORPORATE LAW [Vol. 33 with third parties without legally violating the board's fiduciary duties? This article supports the contention that Delaware courts have interpreted contractual restrictions broadly to avoid any potential conflict with a board's fiduciary duty, particularly when the target is up for sale. Third, how would the facts of Energy Partners be analyzed under Omnicare obligations had the merits of an indirect no-talk provision been addressed. Finally, this article applies the Energy Partners analysis to strategies in drafting contracts subject to Delaware law in the area of mergers and acquisitions.

II. BACKGROUND

A. Energy Partners, Ltd. v. Stone Energy Corp.

The facts of Energy Partners can be broadly described as a fore-seeable but unlikely series of proposed corporate acquisitions where the acquiring company, ATS, Inc. (ATS), sought to purchase another acquiring company, Energy Partners, Ltd. (EPL), but without the target that EPL had planned to merge with, Stone Energy Corporation (Stone).9

Stone's board of directors first negotiated and approved a merger agreement on April 23, 2006 with Plains Exploration and Production Company (Plains, Stone-Plains Agreement, or Stone-Plains Merger).10 The Stone-Plains Agreement contemplated that Stone would merge into a wholly owned subsidiary of Plains.11 Pursuant to Omnicare,12 prohibiting a fait accompli, and ACE,13 regarding the existence of directors' ongoing fiduciary obligations, the Stone-Plains Agreement permitted Stone "to investigate other unsolicited proposals that qualified as superior to the Plains trans-action."14 Upon a decision to pursue another transaction, Stone also contractually agreed to pay Plains a termination fee of $43.5 million, which represented approximately three percent of the total value of the Plains transaction.15

9Energy Partners, 2006 Del. Ch. LEXIS 182, at *1-2, reprinted in 32 DEL. J. CORP. L. at 584-85.

10Id. at *5, reprinted in 32 DEL. J. CORP. L. at 586. 11Id. 12Omnicare, 818 A.2d at 936-37. 13747 A.2d 95 (Del. Ch. 1999). 14Energy Partners, 2006 Del. Ch. LEXIS 182, at *5, reprinted in 32 DEL. J. CORP. L. at

586. 15Id. at *5 n.9, reprinted in 32 DEL. J. CORP. L. at 586 n.9 (stating EPL had represented the

aggregate equity value of the Plains transaction to be approximately $1.46 billion).

2008] DELAWARE'S "NO-GO" TREATMENT OF NO-TALK PROVISIONS 315

One month later, EPL offered, in an unsolicited bid, to acquire Stone.16 Stone's board determined that the offer qualified under the fiduciary exception provision in the Stone-Plains Agreement and initiated negotiations with EPL.17 Following negotiations, EPL presented Stone's board of directors with a final merger agreement on June 15, 2006 (Stone-EPL Agreement or Stone-EPL Merger).18 In that agreement, Stone would merge with a wholly owned subsidiary of EPL and Stone stockholders would receive a choice of cash or stock.19 The Stone board approved the Stone-EPL Merger and terminated the Stone-Plains Agreement on June 22, 2006.20 EPL then agreed to pay the contractual termination fee on behalf of Stone to Plains.21

In creating the Stone-EPL Agreement, the two parties followed the general structure of the Stone-Plains Agreement.22 In both of the agree-ments, the target had an express no-shop provision restricting the target's actions.23 The acquiring company, in both agreements, did not have this same express restriction.24 In addition, the Stone-EPL Agreement permitted Stone, but not EPL, to terminate the Stone-EPL Merger if EPL, in response to a "third-party acquisition proposal," changed its recommendation for the merger (Third-Party Acquisition Proposal Clause or Section 6.2(e)).25 Section 6.2(e) would be triggered under certain situations that caused EPL to abandon, impair, or delay the Stone-EPL Merger.26 Lastly, the Stone-EPL Agreement required EPL to pay Stone a $25.6 million termination fee if EPL's stockholders did not approve the Stone-EPL Merger in response to the Third-Party Acquisition Proposal Clause.27 Under this scenario, EPL would also lose the $43.5 million it had advanced to Plains on behalf of Stone.28

16Id. at *6, reprinted in 32 DEL. J. CORP. L. at 586. 17Id. 18Energy Partners, 2006 Del. Ch. LEXIS 182, at *6, reprinted in 32 DEL. J. CORP. L. at

586. 19Id. 20Id. at *6-7, reprinted in 32 DEL. J. CORP. L. at 587. 21Id. at *7, reprinted in 32 DEL. J. CORP. L. at 587. 22Energy Partners, 2006 Del. Ch. LEXIS 182, at *7, reprinted in 32 DEL. J. CORP. L. at

587. 23Id. 24Id. 25Id. 26Energy Partners, 2006 Del. Ch. LEXIS 182, at *11 n.29, reprinted in 32 DEL. J. CORP. L.

at 588 n.29. 27Id. at *9, reprinted in 32 DEL. J. CORP. L. at 588. Additionally, if the EPL stockholders

voted down the merger for any other reason, EPL also would have to pay Stone its termination fee. Id. at *3 n.25, reprinted in 32 DEL. J. CORP. L. at 588 n.25.

28Second Amended Complaint ¶ 25, Energy Partners, Ltd. v. Stone Energy Corp., 2006 Del.

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Two months after EPL and Stone signed their merger agreement, ATS announced a hostile tender offer for EPL conditioned on the EPL stockholders turning down the Stone-EPL Agreement.29 Believing they were prevented from exploring this tender offer by the Third-Party Acquisition Proposal Clause of the Stone-EPL Agreement (discussed below), ATS and EPL brought suit against Stone seeking a declaratory judgment in the Delaware Court of Chancery that the clause relating to the Third-Party Acquisition Proposal Clause was an invalid no-shop clause under Omnicare, Paramount Communications Inc. v. QVC Network Inc., and Quickturn Design System., Inc. v. Shapiro.30 ATS also contended that the combined force of the $25.6 million termination fee and the $43.5 million paid in advance for the Stone-Plains termination agreement created a coercive effect resulting in a ten percent drop in EPL's $690,950,987 value (based on when EPL entered into the Stone-EPL Agreement) if the EPL stockholders were to vote to reject it.31 In its answer, Stone contended that the provision did not prevent ATS and EPL from talking.32 Stone also presented a ripeness argument based on the fact that the shareholders had not voted yet and the EPL board had already recommended against the ATS tender offer, which would render as premature any arguments presented at that juncture.33

B. The Unique Structure and Function of the Stone-EPL Agreement: The Parties' Interpretation of Section 6.2(e)

The Stone-Plains Agreement did not explicitly define EPL's obligations following the consummation of the Stone-Plains Agreement. Ch. LEXIS 182 (Del. Ch. Oct. 11, 2006) (No. 2374-N), available at 2006 WL 3703288.

29Energy Partners, 2006 Del. Ch. LEXIS 182, at *9, reprinted in 32 DEL. J. CORP. L. at 588.

30Id. at *39, reprinted in 32 DEL. J. CORP. L. at 601 (citing Omnicare, Inc. v. NCS Healthcare, Inc., 818 A.2d 914 (Del. 2003); Paramount Commc'ns Inc. v. QVC Network Inc., 637 A.2d 34 (Del. 1994); and Quickturn Design Sys., Inc. v. Shapiro, 721 A.2d 1281 (Del. 1998)). The parties also found supportive language in ACE Ltd. v. Capital Re Corp., 747 A.2d 95, 107 (Del. Ch. 1999).

31Second Amended Complaint ¶¶ 29-31, Energy Partners, Ltd. v. Stone Energy Corp., 2006 Del. Ch. LEXIS 182 (Del. Ch. Oct. 11, 2006) (No. 2374-N), available at 2006 WL 3703288; Plaintiff ATS, Inc.'s Answering Brief in Opposition to the EPL Defendants' Motion to Dismiss at 4, Energy Partners, Ltd. v. Stone Energy Corp., 2006 Del. Ch. LEXIS 182 (Del. Ch. Oct. 11, 2006) (No. 2374-N), available at 2006 WL 3703287. Whether ATS had standing or if its claims were justiciable were not decided by the court because the court ultimately dismissed the claims. See Energy Partners, 2006 Del. Ch. LEXIS 182, at *29 n.74, reprinted in 32 DEL. J. CORP. L. at 596 n.74. Further, although the parties presented coercion claims, this article does not delve into those aspects of the parties' complaints.

32Energy Partners, 2006 Del. Ch. LEXIS 182, at *31, reprinted in 32 DEL. J. CORP. L. at 597.

33Id.

2008] DELAWARE'S "NO-GO" TREATMENT OF NO-TALK PROVISIONS 317 Rather, the Stone-Plains Agreement contained a fiduciary exception provision that maintained the legal flexibility required by the directors' fiduciary duties.34 Such a provision, then, allowed the Stone directors to investigate other unsolicited proposals qualifying as superior to the Plains transaction.35 In addition, in the event that a superior proposal would result in the termination of the Stone-Plains Merger, Stone would have to pay Plains the agreed upon $43.5 million termination fee.36 These provisions, presumably, provided greater certainty to Plains and compensation upon the failure of consummation.

Although such a contractual markup would have only affected the Stone-Plains Merger breakup upon EPL's proposed tender offer, EPL and Stone then used the Stone-Plains Agreement as part of the template for their own merger agreement.37 Consequently, EPL and Stone transposed several provisions from the Stone-Plains Agreement into their own merger agreement, including Section 6.2(e).38 Notably, EPL and Stone did not import another section of the Stone-Plains Agreement, which would have allowed either Stone or EPL to terminate the merger in response to a third-party proposal.39 Because they omitted this no-shop clause, the parties disagreed on how third parties should be treated, based on the residual combination of "third-party acquisition" and Section 6.2(e).40

The Stone-EPL Agreement defined third-party acquisition proposal as "'an inquiry, offer or proposal' . . . 'conditioned upon the termination' of the Stone Merger Agreement and 'abandonment' of the [Stone-EPL Merger] . . . in which the third party would acquire 30 percent or more of EPL."41 In the event that a third-party acquisition proposal occurred, the Stone-EPL Agreement provided to Stone, but not EPL, the ability to terminate the merger if EPL changed its recommendation for the Stone-EPL Merger.42

34Id. at *5, reprinted in 32 DEL. J. CORP. L. at 586. 35Id. 36Energy Partners, 2006 Del. Ch. LEXIS 182, at *5, reprinted in 32 DEL. J. CORP. L. at

586. 37Id. at *7, reprinted in 32 DEL. J. CORP. L. at 587. 38Id. 39Id. at *15 n.43, *60, reprinted in 32 DEL. J. CORP. L. at 590 n.43, 609. 40Energy Partners, 2006 Del. Ch. LEXIS 182, at *11, reprinted in 32 DEL. J. CORP. L. at

588-89. 41Id. at *8-9, reprinted in 32 DEL. J. CORP. L. at 588. Within this umbrella, EPL defined

"potential or definitive strategic alternatives through both internally generated and third-party proposals" as "strategic alternative activities." Plaintiff Energy Partners, Ltd.'s Pre-Trial Opening Brief at 1, Energy Partners, Ltd. v. Stone Energy Corp., 2006 Del. Ch. LEXIS 182 (Del. Ch. Oct. 11, 2006) (Nos. 2402-N, 2374-N), available at 2006 WL 3449176.

42Energy Partners, 2006 Del. Ch. LEXIS 182, at *8, reprinted in 32 DEL. J. CORP. L. at 587-88.

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Section 6.2(e), entitled "Conduct of Business by Parent [EPL] Pending the Merger" provides, in pertinent part:

Except as expressly permitted or required by this Agreement, prior to the Effective Time, neither Parent nor any of its Subsidiaries, without the prior written consent of Target, shall:

(e) knowingly take, or agree to commit to take, any action that would or would reasonably be expected to result in the failure of a condition set forth in Sections 8.1, 8.2, or 8.3 [conditions to consummation of the merger] or (b) at, or as of any time prior to, the Effective Time, or that would reasonably be expected to materially impair the ability of Target, Parent, Merger Sub, or the holders of Target Common Shares to consummate the Merger in accordance with the terms hereof or materially delay such consummation . . . .43

EPL and Stone disagreed on the interpretation of Section 6.2(e) and its application to ATS's proposed tender offer. Stone contented that the combination of the third-party acquisition proposal definition and Section 6.2(e) created the inability for Stone to initiate discussions with any third party. In effect, Stone argued that the Section was more akin to a "no-talk" provision, such that negotiations with ATS would be contractually precluded by Section 6.2(e).44 Stone contended that discussion or solicitation would be permissible under the merger agreement, provided that EPL did not take any action resulting, or reasonably resulting, in a material delay or impairment of the Stone-EPL Merger.45 Nevertheless, to the degree that a discussion then created such impairment, those discussions, Stone contended, would then violate Section 6.2(e) because they would materially and "reasonably be expected to impact the Stone Merger."46

43Id. at *7-8, reprinted in 32 DEL. J. CORP. L. at 587. 44Id. Distinct from a "no-shop" clause, a no-talk clause attempts to preclude, as a

contractual matter, the ability to discuss a competitor's offer to merge. A "no-shop" clause, on the other hand, precludes active shopping by the board, but allows the board to entertain (superior) offers that are presented to the board. Whether Ace holds that no-talk provisions are invalid is not discussed in this article. Rather, the issue in Energy Partners is the validity of a clause that under one interpretation of the contract language, could be used as a no-talk.

45Id. at *11, reprinted in 32 DEL. J. CORP. L. at 589. 46Energy Partners, 2006 Del. Ch. LEXIS 182, at *11, reprinted in 32 DEL. J. CORP. L. at

589.

2008] DELAWARE'S "NO-GO" TREATMENT OF NO-TALK PROVISIONS 319

Such an interpretation of Section 6.2(e) appeared to be consistent with the factual background preceding the new merger agreement. Stone had just contractually released its obligations acquiring Plains in order to be acquired by EPL. Having just left a similar situation, it is understandable that Stone would have also tried to protect itself contractually from the possibility of being "disowned" in the Stone-EPL Merger. Stone, then, seemed to incor-porate its history in its interpretation of Section 6.2(e) and in its allegations of deal certainty in the Stone-EPL Merger.

EPL and ATS, however, disagreed with Stone's application of Section 6.2(e) to the current merger situation. EPL contended that Section 6.2(e) should not be interpreted as a no-talk clause.47 Such an interpretation, they contended, would preclude the EPL board from talking or negotiating with ATS relating to the terms of the tender offer because those discussions might have the practical effect of a breach of contract.48 In essence, EPL con-tended that Stone's interpretation of Section 6.2(e) would equate to preventing the EPL board from even speaking with any third-party offeror.49

To preclude such a discussion would impermissibly violate the EPL board's exercise of fiduciary duties and, EPL contended, could not have been a proper interpretation of Section 6.2(e).50 In that respect, EPL asserted that such a broad understanding of the language, if so interpreted, would violate the directors' fiduciary duties to the shareholders.51 Accordingly, EPL sought from the court a declaratory judgment that Section 6.2(e) does not prohibit EPL from "'soliciting, initiating, or encouraging from any person any inquiry, offer, or proposal that is reasonably likely to lead to a merger, consolidation, or other type of acquisition of [EPL], including discussing with third parties unsolicited acquisition proposals.'"52

47Id. at *14, reprinted in 32 DEL. J. CORP. L. at 590. 48See id. at *2, reprinted in 32 DEL. J. CORP. L. at 584-85. 49Id. at *30, reprinted in 32 DEL. J. CORP. L. at 597. 50Energy Partners, 2006 Del. Ch. LEXIS 182, at *30, reprinted in 32 DEL. J. CORP. L. at

597. 51See Omnicare, Inc. v. NCS Healthcare, Inc., 818 A.2d 914 (Del. 2003); Revlon, Inc. v.

MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986). These opinions, as discussed infra Part III.A, hold that directors have a continuing obligation to discharge their fiduciary duties after a merger agreement is announced, irrespective of contractual limitations attempting to circumvent those duties. Reference to these cases also implicates Paramount Commc'ns Inc. v. QVC Network Inc., 637 A.2d 34 (Del. 1994), and ACE Ltd. v. Capital Re Corp., 747 A.2d 95 (Del. Ch. 1999).

52Energy Partners, 2006 Del. Ch. LEXIS 182, at *17, reprinted in 32 DEL. J. CORP. L. at 591 (quoting Complaint for Declaratory Relief at ¶ 1).

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C. The Court's Holding Regarding the Stone-EPL Merger Agreement

In Delaware, courts tend to bind sophisticated corporations to the unambiguous language of the merger agreements they sign.53 Particularly when all of the parties are "sophisticated individuals and entities and possess a demonstrable measure of business acumen[,]" the court has stated that it will consider the parties to have fully evaluated the agreement "both from a business and legal standpoint."54 Using such case law as a basis for interpreting the merger agreement, the court in Energy Partners then applied a plain meaning interpretation to the disputed Section 6.2(e).55

The Delaware Court of Chancery held that Section 6.2(e) and the language of the Third-Party Acquisition Proposal Clause unambiguously permitted EPL to discuss strategic alternate activities with an active third-party interest, such as ATS.56 Specifically, the court concluded that Section 6.2(e) "does not prevent EPL from investigating, negotiating about, or pursuing the ATS Tender Offer or any other Third Party Acquisition Proposal."57 In that regard, the court examined the "reasonably likely to lead to a merger, consolidation, or other type of acquisition"58 aspect of Section 6.2(e) and concluded that the contractual language does permit situations where EPL may be subject to third-party proposals without triggering

53See DeLucca v. KKAT Mgmt., LLC, No. 1384-N, 2006 Del. Ch. LEXIS 19, at *7 (Del. Ch. Jan. 23, 2006) ("[I]t is not the job of a court to relieve sophisticated parties of the burdens of contracts they wish they had drafted differently but in fact did not. Rather, it is the court's job to enforce the clear terms of contracts."); Progressive Int'l Corp. v. E.I. Du Pont de Nemours & Co., No. 19,209, 2002 Del. Ch. LEXIS 91, at *4 (Del. Ch. July 9, 2002) ("Sophisticated parties are bound by the unambiguous language of the contracts they sign."). See generally AT&T Corp. v. Faraday Capital Ltd., 918 A.2d 1104, 1108 (Del. 2007) ("'[A] contract is ambiguous only when the provisions in controversy are reasonably or fairly susceptible of different interpretations or may have two or more different meanings.'") (quoting Rhone-Poulenc Basic Chems. Co. v. Am. Motorists Ins. Co., 616 A.2d 1192, 1196 (Del. 1992)); United Rentals, Inc. v. Ram Holdings, Inc., 937 A.2d 810, 813 (Del. Ch. 2007) (finding ambiguity in the contract and considering extrinsic evidence, following an expedited trial, to conclude that the "defendants understood [the agreement] to preclude the remedy of specific performance and that plaintiff knew or should have known of this understanding").

54Cantor Fitzgerald, L.P. v. Cantor, No. 18,101, 2001 Del. Ch. LEXIS 137, at *16 (Del. Ch. Nov. 5, 2001).

55Energy Partners, 2006 Del. Ch. LEXIS 182, at *50-60, reprinted in 32 DEL. J. CORP. L. at 605-09.

56Id. at *55, reprinted in 32 DEL. J. CORP. L. at 607. 57Id. For the parties' definitions of "third-party acquisition proposal" and "strategic

alternative activities," see supra note 41 and accompanying text. 58Energy Partners, 2006 Del. Ch. LEXIS 182, at *17, reprinted in 32 DEL. J. CORP. L. at

591.

2008] DELAWARE'S "NO-GO" TREATMENT OF NO-TALK PROVISIONS 321 liquidated damages present in the merger agreement.59 The court's assess-ment concluded that Section 6.2(e) might even include negotiations where the Stone-EPL Merger may be conditioned to fail.60

Beyond this aspect of the case, however, the court declined to apply Delaware legal precedent to the fiduciary duties of directors. Outside of a present suitor such as ATS, the court concluded such activities conducted by EPL's board of directors would be speculative.61 Accordingly, the court held that any interpretation of Section 6.2(e) related to "strategic alternative activities" or ATS's per se invalidity were not justiciable62 and the court declined to determine the applicability of legal precedents such as Omnicare, Paramount, and ACE on whether Section 6.2(e) was interpreted to mean that EPL could search beyond that of ATS's interest.63

III. FINDING THE BALANCE BETWEEN PROTECTING DEALS THAT THE BOARD DEEMS AS "GOOD" FOR SHAREHOLDERS

AND THE CORPORATION AND KEEPING DOORS OPEN IN CASE "BETTER" DEALS COME ALONG

Because the court dismissed the fiduciary duty issues as not ripe, the issues relating to whether such a contractual clause could be an effective provision mitigating a corporation's actions post-agreement remain un-answered. Such circumstance is factually unique in that, in Energy Partners, the parties' extrapolated Section 6.2(e) from the original merger agreement but failed to adopt the corresponding fiduciary duty exception clause. Though contracts might fail to incorporate or integrate fiduciary exception clauses, the facts in this case implicated the contractual language in a very unique way, i.e., EPL's decision to merge with Stone but not Plains and a third-party acquiring entity entering unannounced and unexpected into

59Id. at *55-56, reprinted in 32 DEL. J. CORP. L. at 607. 60Id. at *56, reprinted in 32 DEL. J. CORP. L. at 607. 61Id. at *46-47, reprinted in 32 DEL. J. CORP. L. at 604. 62Energy Partners, 2006 Del. Ch. LEXIS 182, at *47, reprinted in 32 DEL. J. CORP. L. at

604. 63Id. at *65, reprinted in 32 DEL. J. CORP. L. at 611. The day after the Delaware Court of

Chancery issued its opinion, EPL and Stone agreed to terminate the Stone-EPL Agreement. EPL Terminates Merger Agreement with Stone Energy, OILVOICE.COM, Oct. 12, 2006, http://www.oilvoice.com/EPL_Terminates_Merger_Agreement_with_Stone_Energy/9844fe6f.aspx. Stone agreed to EPL paying $8 million of the termination fee rather than the full $25.6 million. Id. It is unclear whether EPL received from Stone any of the $43.5 million advanced for the Plains termination fee. EPL, however, did post a loss in its fourth quarter of 2006 due in part to this advancement and its settlement of the termination fee between EPL and Stone. Energy Partners, Ltd., Annual Report (Form 10-K), at 27 (Mar. 1, 2007).

322 DELAWARE JOURNAL OF CORPORATE LAW [Vol. 33 the merger-acquisition decision. These circumstances are used in this article to extrapolate and apply the opinion's analysis to the fiduciary issues under Delaware case law present in the case. In order to do so, we will first briefly discuss the relevant case law used by EPL and ATS in their contentions that Stone's interpretation of Section 6.2(e) was a breach of the fiduciary duties of directors in Delaware corporations.

A. The Evolution of Judicial Review of Takeover Defenses: What Is the Role of the Board in Negotiated Acquisitions?

In order to understand the treatment of takeover defenses by the Delaware courts under the facts of Energy Partners, a general understanding of the prior case law pertinent to takeovers is necessary.64 Corporate law definitively allocates decision-making authority to the board under the business judgment rule, granting a board of directors the initial decision to enter into a negotiated merger transaction.65 Corporate takeovers, however, implicate accountability concerns, raising proverbial judicial eyebrows due to conflict of interest concerns between the personal interests of directors and the overall corporate policy protection afforded to shareholders.66 In

64Such a review is cursory and intended only to be a general understanding of the merger context in Energy Partners. For more in-depth treatment of these cases, see, e.g., Stephen M. Bainbridge, Unocal at 20: Director Primacy in Corporate Takeovers, 31 DEL. J. CORP. L. 769 (2006) (discussing Unocal and its progeny); Sean J. Griffith, The Costs and Benefits of Precommitment: An Appraisal of Omnicare v. NCS Healthcare, 29 J. CORP. L. 569 (2004) (reviewing the Omnicare decision); Janet E. Kerr, Delaware Goes Shopping for a "New" Interpretation of the Revlon Standard: The Effect of the QVC Decision on Strategic Mergers, 58 ALB. L. REV. 609 (1995) (explaining the lead up and potential effects of QVC on friendly and strategic mergers); Brian JM Quinn, Bulletproof: Mandatory Rules for Deal Protection, 32 J. CORP. L. 865, 873-76 (2007) (discussing QVC and the Delaware courts' restrictions on deal-protection devices); Judd F. Sneirson, Merger Agreements, Termination Fees, and the Contract-Corporate Tension, 2002 COLUM. BUS. L. REV. 573, 607-08 (discussing ACE); Leo E. Strine, Jr., If Corporate Action Is Lawful, Presumably There Are Circumstances in Which It Is Equitable to Take That Action: The Implicit Corollary to the Rule of Schnell v. Chris-Craft, 60 BUS. LAW. 877, 894-903 (2005) (discussing the judicial consequences of the Quickturn decision and its role in Omnicare).

65Pogostin v. Rice, 480 A.2d 619, 627 (Del. 1984) (holding that the business judgment rule is applicable in the context of a takeover). The underlying authority granted to directors for corporate governance is statutorily granted. See DEL. CODE ANN. tit. 8, § 141(a) (2001) ("The business and affairs of every corporation organized under this chapter shall be managed by or under the direction of a board of directors, except as may be otherwise provided in this chapter or in its certificate of incorporation."). In the context of Unocal, and often implicated in mergers, DEL. CODE ANN. tit. 8, § 160(a) (2001), is implicated, conferring broad authority upon a corporation to deal in its own stock.

66Bennett v. Propp, 187 A.2d 405, 409 (Del. 1962). Such a situation occurs because the board's power to act is fundamentally rooted in its duty and obligations to protect the corporate enterprise, including stockholders. See, e.g., Panter v. Marshall Field & Co., 646 F.2d 271, 297 (7th

2008] DELAWARE'S "NO-GO" TREATMENT OF NO-TALK PROVISIONS 323 those circumstances, Delaware courts hone their view of the target board's fiduciary duties depending on whether the company is in a sale or change of control, particularly because a target corporation's board will commonly employ defensive measures to avoid such a takeover. Such creative defensive maneuvering by boards has garnered names such as "Crown Jewel," "White Knight," "Pac Man," and "Golden Parachute."67 Under Delaware law, the target board's right to implement such protective measures extends primarily from its fiduciary duties of care and loyalty, which "protect[] the corporation and its owners from perceived harm whether a threat originates from third parties or other shareholders."68 When approving these devices, the board may consider various other constituencies, provided that, in doing so, there are "rationally related benefits accruing to the stockholders."69 Consideration of such constituencies or, as commonly put, the board's power to protect the corporation, is not absolute.70 In other words, the board's decisions cannot be considered in a vacuum. Rather, the board's exercise of power runs on a continuum with actions to protect the company as "defenders of the corporate bastion" on one end and actions to sell the company as "auctioneers charged with getting the best price for the stockholders at a sale" on the other.71 Regardless of whether the board acts as its corporation's defender or auctioneer, the directors' actions must be done for the benefit of the corporation and, accordingly, its stockholders.72

1. Unocal Corp. v. Mesa Petroleum Co.: Introduction of Heightened Scrutiny; A Board's Actions

Must Be Reasonably Related to the Posed Threat

When faced with an unsolicited tender offer or takeover bid, a target board may act as the "defender of the metaphorical medieval corporate bastion and the protector of the corporation's shareholders"73 provided that the target board's actions are not coercive or preclusive.74 The Delaware

Cir. 1981); Cheff v. Mathes, 199 A.2d 548, 556 (Del. 1964); Guth v. Loft, Inc., 5 A.2d 503, 510 (Del. 1939).

67Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946, 957 (Del. 1985). 68Id. at 955. See also DEL. CODE ANN. tit. 8, § 141(a) (2001). 69Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173, 182 (Del. 1986);

accord Unocal, 493 A.2d at 955. 70Unocal, 493 A.2d at 955. 71Revlon, 506 A.2d at 182. 72Unocal, 493 A.2d at 955 (citing Guth v. Loft, Inc., 5 A.2d 503, 510 (Del. 1939)); accord

Revlon, 506 A.2d at 179. 73Unitrin, Inc. v. Am. Gen. Corp., 651 A.2d 1361, 1388 (Del. 1995). 74Id. at 1387-88. See Gradient OC Master, Ltd. v. NBC Universal, Inc., 930 A.2d 104 (Del.

Ch. 2007) (discussing the legal background surrounding the concept of actionable coercion),

324 DELAWARE JOURNAL OF CORPORATE LAW [Vol. 33 Supreme Court promulgated an "intermediate" or "enhanced business judgment" standard of judicial review under which to analyze a target board's actions75 because of "the omnipresent specter that a board may be acting primarily in its own interests, rather than those of the corporation and its shareholders."76 Because the corporation does not have "unbridled discretion to defeat any perceived threat by any Draconian means available," Unocal requires a court to review the board's defensive measures and determine whether they are "reasonably related to the threats posed."77 To assess whether a threat is "reasonable in relation," the court must initially determine whether the board has shown that its defensive measure was "motivated by a good faith concern for the welfare of the corporation and its stockholders."78 Assuming the court finds no evidence of fraud or misconduct by the board (that is, the directors are disinterested, informed, and acting in good faith), the court will then determine whether the scope of the defensive measure taken was reasonable and also whether it is draconian (because it is preclusive or coercive) or proportionately reasonable in response to the threat posed.79 The failure of the board to meet such a two-part burden under Unocal "does not, ipso facto, invalidate the board's actions."80 Rather, once the business judgment rule is determined to be inapplicable, directors must then evince that the transaction meets an "entire

interlocutory appeal granted, No. 3021-VCP, 2007 Del. Ch. LEXIS 106 (Del. Ch. July 20, 2007), interlocutory appeal refused, 930 A.2d 928 (Del. 2007) (unpublished table decision).

75Unocal, 493 A.2d at 954. See also Unitrin, 651 A.2d at 1373-74 (reaffirming the Unocal standard). Because Unitrin clarified Unocal, the standard of review has also been referred to as the Unocal/Unitrin standard. See, e.g., In re Dairy Mart Convenience Stores, Inc., No. 14,713, 1999 Del. Ch. LEXIS 94 (Del. Ch. May 24, 1999), reprinted in 25 DEL. J. CORP. L. 411 (2000) (applying the "Unocal/Unitrin" standard). In order to qualify for Unocal review, the court must first determine that the board's conduct was defensive. See Unitrin, 651 A.2d at 1372. For purposes of this synopsis, this part presumes that a court has found that the board's actions have put it in the realm of "corporate defender."

76Unocal, 493 A.2d at 954. 77Id. at 955-56. 78Id. at 955. See also Unitrin, 651 A.2d at 1373 (framing the first part of Unocal as a test

for reasonableness that requires the board to show that it "had reasonable grounds for believing that a danger to corporate policy and effectiveness existed") (quoting Unocal, 493 A.2d at 955). Examples where the board would not meet this standard are when the board acts to entrench itself in office or disenfranchises the corporation's stockholders. See Unitrin, 651 A.2d at 1378, 1387; Unocal, 493 A.2d at 955.

79Unitrin, 651 A.2d at 1367; Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173, 180 (Del. 1986); Unocal, 493 A.2d at 955. See also Unitrin, 651 A.2d at 1373 (framing the second part of Unocal as a test for proportionality that requires the board to show that its "defensive response was reasonable in relation to the threat posed") (quoting Unocal, 493 A.2d at 955). The application of Unocal is supposed to be a flexible one. See Paramount Commc'ns, Inc. v. Time Inc., 571 A.2d 1140, 1153 (Del. 1990).

80Unitrin, 651 A.2d at 1377 n.18.

2008] DELAWARE'S "NO-GO" TREATMENT OF NO-TALK PROVISIONS 325 fairness" standard.81 On the other hand, if the measure is reasonable under the circumstances, the board's decision will be afforded the respect it would otherwise be given in the realm of business judgment, and the plaintiff then carries the burden of proving otherwise.82

2. Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc.:

Heightened Scrutiny When a Company Has Placed Itself on the Auctioning Block

In Revlon, the Delaware Supreme Court addressed whether such

defensive maneuvers implemented by a board are valid in the face of an active bidding contest for corporate control.83 If untainted by director inter-est or other breaches of fiduciary duty, such actions are deemed by the court to be reasonably related.84 When acting as an "auctioneer," however, the business is said to be in the "Revlon mode," under which circumstances the court's scrutiny of the board's actions is reviewed under the more exacting Revlon standard.85

To be clear, not every offer to buy, or transaction affecting the corporate structure, invokes enhanced judicial scrutiny under Revlon.86 Enhanced scrutiny under Revlon applies generally in situations where "a fundamental change of corporate control occurs or is contemplated,"87 particularly where the target corporation: (1) undertakes a transaction causing a change in corporate control; (2) initiates an active bidding process seeking to sell the corporation; or (3) makes the break-up of the corporate entity inevitable.88 When Revlon is triggered, the court will give less

81Id. (citing Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 361 (Del. 1993)); see Weinberger v. UOP, Inc., 457 A.2d 701, 710-11 (Del. 1983). Logically, if the board would fail to meet its burden under Unocal, it would be difficult to meet the entire fairness burden. See infra note 157. For an example of a case where the Delaware Supreme Court applied the entire fairness standard, see Mills Acquisition Co. v. Macmillan, Inc., 559 A.2d 1261 (Del. 1989).

82Unitrin, 651 A.2d at 1388; Unocal, 493 A.2d at 954, 958. See Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984), overruled on other grounds by Brehm v. Eisner, 746 A.2d 244, 254 (Del. 2000).

83Revlon, 506 A.2d at 176. 84Id. 85This necessarily implies that the sale or change of control of the target corporation is

inevitable. See Ivanhoe Partners v. Newmont Mining Corp., 535 A.2d 1334, 1345 (Del. 1987). 86Macmillan, 559 A.2d at 1285 n.35. See Paramount Commc'ns, Inc. v. Time Inc., 571

A.2d 1140, 1150 (Del. 1989). Indeed, determining the appropriate standard of review is often outcome determinative in the disposition of the case. See Unitrin, 651 A.2d at 1371; Macmillan, 559 A.2d at 1279.

87Barkan v. Amsted Indus., 567 A.2d 1279, 1286 (Del. 1989). 88Paramount Commc'ns Inc. v. QVC Network Inc., 637 A.2d 34, 47-48 (Del. 1994). See

326 DELAWARE JOURNAL OF CORPORATE LAW [Vol. 33 deference to the target board's responses to a takeover threat.89 If Revlon is triggered (i.e., the board is in its role as auctioneer),90 Unocal's defensive tactics are no longer considered and the board has a strict obligation to act in the best interests of the shareholders.91 To fulfill its fiduciary duty of loyalty, the board must act to secure the highest available price for the company. In other words, it incurs a responsibility to sell the company to the highest bidder in order "to bring the target's shareholders the best price available for their equity."92

In examining whether the board has fulfilled this obligation, the court will require "the most scrupulous adherence to ordinary principles of fairness in the sense that stockholder interests are enhanced, rather than diminished, in the conduct of an auction for the sale of corporate control . . . whether the 'sale' takes the form of an active auction, a management buyout, or a 'restructuring' . . . ."93 Thus, the court will closely scrutinize (1) the board's decision-making process in seeking the best value for the target corporation, and (2) the reasonableness of the board's actions "in light of the circumstances then existing."94 This second step mirrors Unocal's reason-ableness standard.95 It aims to "recognize[] the broad power of the board to

also Omnicare, Inc. v. NCS Healthcare, Inc., 818 A.2d 914, 928 (Del. 2003) (explaining where Revlon may apply); Arnold v. Soc'y for Sav. Bancorp, Inc., 650 A.2d 1270, 1289-90 & n.43 (Del. 1994) (reiterating that the language of QVC controls in Revlon situations and that Time emphasizes that a target must be acting for Revlon to be implicated); Paramount Commc'ns, Inc. v. Time Inc., 571 A.2d 1140, 1150 (Del. 1990) (suggesting Revlon may be implicated in situations where the target "initiates an active bidding process seeking to sell itself or to effect a business reorganization involving a clear break-up of the company" or "where, in response to a bidder's offer, a target abandons its long-term strategy and seeks an alternative transaction involving the breakup of the company."). These situations are not exclusive. See QVC, 637 A.2d at 47; Time, 571 A.2d at 1150.

89See Troy A. Paredes, The Firm and the Nature of Control: Toward a Theory of Takeover Law, 29 J. CORP. L. 103, 163-66 (2003) (advocating an even more strict review than currently evoked under the Revlon standard).

90See, e.g., Ivanhoe, 535 A.2d at 1345 (finding that the target was not for sale). Cf. Macmillan, 559 A.2d 1261 (applying Revlon where sale of target undisputed).

91Macmillan, 559 A.2d at 1285. 92Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173, 184 (1986). See

also McMullin v. Beran, 765 A.2d 910, 918 (Del. 2000) ("In the context of an entire sale, and in the absence of an extant majority shareholder, the directors must focus on one primary objective—to secure the transaction offering the best value reasonably available for all stockholders."). Where there is no majority shareholder and thus the board is in the process of selling the corporation, a court will still review to determine whether the board sought "the best value reasonably available to the stockholders." Id. In either case, the court's focus is clearly on "value maximization." Id. at 919.

93Macmillan, 559 A.2d at 1285. 94Paramount Commc'ns Inc. v. QVC Network Inc., 637 A.2d 34, 45 (Del. 1994). 95See Omnicare, Inc. v. NCS Healthcare, Inc., 818 A.2d 914, 932 (Del. 2003) ("A board's

decision to protect its decision to enter a merger agreement with defensive devices against uninvited competing transactions that may emerge is analogous to a board's decision to protect against dangers to corporate policy and effectiveness when it adopts defensive measures in a hostile takeover

2008] DELAWARE'S "NO-GO" TREATMENT OF NO-TALK PROVISIONS 327 make decisions in the process of negotiating and recommending a 'sale of control' transaction, so long as the board is informed, motivated by good faith desire to achieve the best available transaction, and proceeds 'reasonably.'"96 If the court does not find that the board breached its duty, then it will not substitute its business judgment for that of the board; rather, the business judgment rule applies and the burden shifts back to the plaintiff to prove otherwise.97 Regardless of whether the board acts as a defender or auctioneer, it must not be a passive instrumentality.98

3. Paramount Communications Inc. v. QVC Network Inc.: Unifying the Heightened Scrutiny Standard Through a No-Shop Clause

Similar to other merger and acquisition cases, Paramount Communications Inc. v. QVC Network Inc.99 involved an unsolicited third-party's attempt to wedge itself between the pending merger of two other companies.100 Paramount and Viacom initiated merger discussions designed to deter any third party from disrupting the pending merger.101 Particularly, and ultimately fatal to the case, the Paramount board agreed that even in the face of an unsolicited third-party bid that could yield potentially higher benefits for its shareholders, it would not negotiate or discuss this bid unless a determination that such discussions or negotiations were necessary for the board to comply with its fiduciary duties.102 Thus, when QVC proposed a superior merger price and a bidding war ensued, the Paramount board determined that the no-shop clause precluded substantive discussion of the QVC offer.103

On appeal, the Delaware Supreme Court found that the no-shop provision was unenforceable because it unduly restricted the board's ability to exercise its fiduciary duties to respond to changing circumstances and potential alternative offers.104 The court concluded that these provisions, "whether or not they are presumptively valid in the abstract, may not validly

contest."). See supra note 78 and accompanying text.

96Equity-Linked Investors, L.P. v. Adams, 705 A.2d 1040, 1055 (Del. Ch. 1997). 97QVC, 637 A.2d at 45 & n.17; Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946, 954

(Del. 1985). 98Citron v. Fairchild Camera & Instrument Corp., 569 A.2d 53, 68 (Del. 1989); Unocal, 493

A.2d at 954. 99637 A.2d 34 (Del. 1994). 100Id. at 36. 101Id. 102Id. at 39, 48. 103QVC, 637 A.2d at 41. 104Id. at 50-51.

328 DELAWARE JOURNAL OF CORPORATE LAW [Vol. 33 define or limit . . . directors' fiduciary duties under Delaware law . . . ."105 The no-shop clause in the Paramount-Viacom agreement undermined the Paramount directors' ability to best serve the corporation's shareholders.106 In that respect, Paramount created the circumstances in which the Delaware Supreme Court focused Delaware merger law onto the stockholders' receipt of the best opportunities in a control contest, even in light of a prior contractual commitment that purports to completely lock in the initial bargain.107

No-shop provisions, then, are determined to be invalid and unenforceable to the extent that they limit the exercise of directors' fiduciary duties.108 Accordingly, "directors of a Delaware corporation have a con-tinuing obligation to discharge their fiduciary responsibilities, as future circumstances develop . . . ."109

4. Omnicare, Inc. v. NCS Healthcare, Inc.

Although controversial, Omnicare110 further developed the Paramount view of directors' fiduciary duties. In this case, competing merger interests of three pharmaceutical corporations collided when the target corporation, NCS, was forced to choose between bankruptcy and acquisition.111 After a national search, Omnicare was the only corporation interested in acquiring NCS, but the offer was contingent on an asset sale of the company in bankruptcy.112 NCS did not wish to pursue this option; instead, it contacted another corporation, Genesis, to develop a viable alternate offer.113 Genesis was interested in pursuing the corporation, but had previously suffered a last-minute outbid by Omnicare in a past transaction, and made clear to NCS that it had no interest in being a "stalking-horse merger partner" that would end with a company like Omnicare becoming the ultimate victor in a bidding war.114 With such a caveat in mind, Genesis and NCS began discussing Genesis's terms.

105Id. at 48. 106See id. at 51. 107QVC, 637 A.2d at 43-44. See also ACE Ltd. v. Capital Re Corp., 747 A.2d 95, 104-05

(Del. Ch. 1999). 108QVC, 637 A.2d at 51. 109Omnicare, Inc. v. NCS Healthcare, Inc., 818 A.2d 914, 938 (Del. 2003). 110818 A.2d 914 (Del. 2003). 111Id. at 921. The corporations were NCS (the target), Genesis (the acquirer), and Omnicare

(the third-party). 112Id. 113Id. 114Omnicare, 818 A.2d at 921-23. This type of motivating factor has also appeared in at

2008] DELAWARE'S "NO-GO" TREATMENT OF NO-TALK PROVISIONS 329

After six weeks of negotiations, Genesis proposed a merger agreement that provided recovery for both NCS's senior debt-holders and its stockholders.115 Genesis also negotiated for, and obtained, several deal-protection devices, including an exclusivity clause purporting to lock up the transaction and the elimination of any fiduciary out.116 Additionally, Genesis negotiated for certain voting rights at the time of the shareholder vote.117

Omnicare realized that its ability to buy NCS might be in jeopardy. A month after Genesis's proposal, but during the negotiation process between Genesis and NCS, Omnicare's board authorized and faxed a proposal to acquire NCS without involving the sale of assets in bankruptcy.118 The deal-protection devices put in place by Genesis, however, largely prevented NCS from entertaining any third-party offer.

Omnicare filed suit to enjoin the NCS-Genesis merger, and, notwithstanding the NCS-Genesis contract's exclusivity clause, eventually proposed a deal that undeniably exceeded Genesis's offer.119 This offer led to the withdrawal of the NCS board's recommendation to stockholders in favor of the NCS-Genesis merger.120 Nevertheless, because Genesis had negotiated certain majority voting rights for itself rendering a fait accompli, shareholder passage of a third-party offer was impossible. Litigation ultimately commenced to prevent the consummation of what was deemed to be an inferior offer by Genesis.121

Just as in QVC, the Delaware Supreme Court found that the deal-protection device used to protect the initial deal effectively precluded the board from exercising its fiduciary duties and maximizing value for the target's shareholders.122 The Delaware Supreme Court held that "directors of

least one other Delaware case. See Bainbridge, supra note 64, at 853 n.366 (suggesting that in Paramount Commc'ns Inc. v. QVC Network Inc., 637 A.2d 34, 48 (Del. 1994), QVC's desire to outbid Time for control of Paramount may have been inspired by QVC's CEO and major shareholder having once been fired by his counterpart at Paramount).

115Omnicare, 818 A.2d at 923. 116Id. at 933. In making this proposal, Genesis also demanded NCS agree to enter into a

temporary exclusivity agreement that would completely lock up the transaction and preclude a higher bid from anyone else. Id. at 923. Genesis originally demanded a thirty-day exclusivity period, but NCS negotiated it down to sixteen days. In re NCS Healthcare, Inc., S'holders Litig., 825 A.2d 240, 248-49 (Del. Ch. 2002), rev'd sub. nom. Omnicare, Inc. v. NCS Healthcare, Inc., 818 A.2d 914, 939 (Del. 2003). Because of the extended negotiations, this exclusivity period was extended twice. Id. at 249.

117Omnicare, 818 A.2d at 926. 118Id. Despite phone calls to discuss the proposal, Genesis's exclusivity clause prevented

anyone from returning Omnicare's messages. Id. 119Id. 120Id. at 926-27. 121Omnicare, 818 A.2d at 927. 122See id. at 936.

330 DELAWARE JOURNAL OF CORPORATE LAW [Vol. 33 a Delaware corporation have a continuing obligation to discharge their fiduciary responsibilities, as future circumstances develop, after a merger agreement is announced."123 In particular, the court described the respon-sibilities of directors to shareholders:

The stockholders of a Delaware corporation are entitled to rely upon the board to discharge its fiduciary duties at all times. The fiduciary duties of a director are unremitting and must be effectively discharged in the specific context of the actions that are required with regard to the corporation or its stockholders as circumstances change.124

Focusing its analysis on the deal-protection devices, the court reiterated that defensive measures approved by the target generally must withstand enhanced judicial scrutiny under Unocal.125 Although the Dela-ware Court of Chancery applied Unocal, the majority of the Delaware Supreme Court found that the defensive measures in place, considered conjunctively, precluded the NCS board from "exercis[ing] its continuing fiduciary responsibilities to the minority stockholders" because the board had bargained away its ability to approve "a subsequent superior offer."126 Because the majority concluded that the defensive measures were draconian, it did not have to reach the question of whether they were proportionately reasonable in response to the threat posed.127

The dissent argued that it would not have split its enhanced review under Unocal in the same fashion as the majority.128 For the dissent, the defensive measures were correctly reviewed in their entirety and, at the time of the negotiation, were reasonable to the potential threat Omnicare posed to Genesis and therefore bargained against.129 In other words, such a trans-action should not have been considered in a vacuum.

The question remains whether Omnicare is sui generis, as suggested by the dissent,130 or if Delaware courts will apply the case in order to prevent

123Id. at 938. 124Id. (footnote omitted). 125Omnicare, 818 A.2d at 931 (citing Paramount Commc'ns, Inc. v. Time Inc., 571 A.2d

1140, 1151-55 (Del. 1990)). 126Id. at 938-39. 127Id. at 935. Nevertheless, the court did conclude without analysis that the preclusive and

coercive nature of the defenses left them outside the range of reasonableness. See id. at 936. 128Id. at 943 (Veasey, C.J., dissenting). 129Omnicare, 818 A.2d at 945. 130Id. at 946.

2008] DELAWARE'S "NO-GO" TREATMENT OF NO-TALK PROVISIONS 331 a target from negotiating a similar combination of defensive provisions against an acquiring or acquired corporation.131

B. Striking this Balance in Light of Omnicare

Since Omnicare, Delaware courts have applied these cases in a manner that supports a rejection of contractual clauses limiting a director's fiduciary duties in a corporate merger. In QVC, the Delaware Supreme Court held that, to the extent that merger provisions are inconsistent with these duties, such provisions are "invalid and unenforceable."132 Although that case only generally defined the fiduciary duties implicated in a merger context,133 in Phelps Dodge Corp. v. Cyprus Amax Minerals Co.,134 the Delaware Court of Chancery suggested that provisions designed to restrict a board from communicating with third parties are unlawful because they prevent a board from informing itself about whether to negotiate with a third party.135 There, in seeking a preliminary injunction to invalidate a no-talk clause in a merger agreement, the plaintiffs contended that a merger partner and a new bidder could not discuss or negotiate an alternative transaction.136 Chancellor Chandler of the Delaware Court of Chancery, explaining that a decision not to negotiate must be an informed one, stated, "No-talk provisions, thus, in my view, are troubling precisely because they prevent a

131The nature of this article precludes substantial focus on the academic controversy stemming from this decision. For additional discussions, see, e.g., Bainbridge, supra note 64, at 831; Jack B. Jacobs, Implementing Japan's New Anti-Takeover Defense Guidelines Part I: Some Lessons From Delaware's Experience in Crafting "Fair" Takeover Rules, 2 N.Y.U. J.L. & BUS. 323, 346 (2006); E. Norman Veasey & Christine T. Di Guglielmo, What Happened in Delaware Corporate Law and Governance from 1992-2004? A Retrospective on Some Key Developments, 153 U. PA. L. REV. 1399, 1458-60 (2005). See also In re Toys "R" Us, Inc. S'holder Litig., 877 A.2d 975, 1016 n.68 (Del. Ch. 2005) (stating that Omnicare "represents, one senses, an aberrational departure from that long standing principle" that what matters is whether the board acted reasonably based on the circumstances then facing it); Robin Sidel, Merger Business Faces New Order with Court Ruling on "Lockups," WALL ST. J., Apr. 7, 2003, at C4 (quoting a Seattle University School of Law professor predicting that Omnicare will become the most controversial corporate case of the past twenty years).

132Paramount Commc'ns Inc. v. QVC Network Inc., 637 A.2d 34, 51 (Del. 1994). In Quickturn Design Sys., Inc. v. Shapiro, 721 A.2d 1281 (Del. 1998), the Delaware Supreme Court held ultra vires and void a rights plan provision that prevented a board of directors "from completely discharging its fiduciary duties to protect fully the interests of [the target corporation] and its stockholders." Id. at 1292.

133See QVC, 637 A.2d at 43 ("The directors' fiduciary duties in a sale of control contest are those which generally attach.").

134Nos. 17,398, 17,383, & 17,427, 1999 Del. Ch. LEXIS 202 (Del. Ch. Sept. 27, 1999). 135Id. at *1. 136Id.

332 DELAWARE JOURNAL OF CORPORATE LAW [Vol. 33 board from meeting its duty to make an informed judgment with respect to even considering whether to negotiate with a third party."137 A complete foreclosure to engage in nonpublic dialogue "is the legal equivalent of willful blindness."138

Although Phelps Dodge was not a change of control transaction, the decision suggests that directors cannot contractually limit their statutorily granted fiduciary obligations. Notwithstanding this, such a decision by the board must be an informed judgment even where the directors, under the business judgment rule, are not compelled to negotiate with the bidder.

In ACE Ltd. v. Capital Re Corp.,139 the court invalidated a merger provision restricting altogether a board's ability to communicate with third-party suitors, remarking that such a provision was pernicious "in that it 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."140 Like Phelps Dodge, ACE was a stock-for-stock merger. Nonetheless, the Delaware Court of Chancery applied QVC, finding that stock-for-stock mergers have similar ownership concerns and issues affecting stockholder property rights141 implicating many of the same policy concerns as more transparent change of control actions.142 The Delaware Court of Chancery then dismissed the suggestion that a change of control or merger/acquisition endows directors with additional situational duties.143 Instead, a board must always "exercise its bedrock duties of care and loyalty when it enter[s] the Merger Agreement."144

1. Why Are These Cases Implicated in Energy Partners?

As the Delaware Court of Chancery has noted repeatedly, parties who elect to jointly pursue an enterprise are assumed to have "substantial

137Id. at *4. 138Phelps Dodge, 1999 Del. Ch. LEXIS 202, at *4. 139747 A.2d 95 (Del. Ch. 1999). 140Id. at 106. For a more detailed discussion of ACE, see infra notes 151-156 and

accompanying text. 141Id. at 105 & n.30. For additional reading relating to "ownership" versus "enterprise"

issues of a corporation, see E. Norman Veasey, The Defining Tension in Corporate Governance in America, 52 BUS. LAW. 393, 394 (1997), and E. Norman Veasey, Duty of Loyalty: The Criticality of the Counselor's Role, 45 BUS. LAW. 2065 (1990).

142ACE, 747 A.2d at 105. 143Id. at 107. "QVC does not say that a board can, without exercising due care, enter into a

non-change of control transaction affecting stockholder ownership rights . . . ." Id. at 107-08. 144Id. at 108 (citing Phelps Dodge, 1999 Del. Ch. LEXIS 202, at *3-4).

2008] DELAWARE'S "NO-GO" TREATMENT OF NO-TALK PROVISIONS 333 knowledge [in] a wide range of business operational frameworks."145 In situations where "the parties are all sophisticated individuals and entities and possess a demonstrable measure of business acumen[,]" the parties are further assumed to have evaluated the partnership from both a business and a legal standpoint.146 From this, sophisticated corporations filing suit in Delaware are generally bound by the unambiguous language of the merger agreements they sign.147

Here, the parties to the Energy Partners merger agreement designed a unique combination of provisions, or rather absence of provisions, that forced Section 6.2(e) to function in a manner and situation that its drafters probably did not intend. When Stone and EPL took out the no-shop provision applicable to EPL and removed Section 10.1(j), which allowed EPL to terminate the Stone-EPL Merger Agreement in response to a third-party proposal, the parties tested the limit to the fiduciary duties obligating a Delaware corporation's board to provide shareholders the opportunity to receive the best available transaction in a control contest. In effect, such stripping of this language from the contract marooned Section 6.2(e) without an effective fiduciary exception for EPL in the face of a third-party transaction. Based on such an interpretation, the Delaware Court of Chancery could feasibly apply Omnicare and ACE and deem the measures draconian, even though—and unlike prior case law—the parties may not have had the intention to create such an effect.

Contractual provisions "may not validly define or limit . . . directors' fiduciary duties under Delaware law or prevent . . . directors from carrying out their fiduciary duties under Delaware law."148 Such analysis does not waver even after a merger agreement is announced.149 Upon a court's determination that Section 6.2(e) is interpreted as an insurmountable lock-up provision, such a contractual provision, then, would be deemed to be invalid and unenforceable.150 ATS and EPL argued that Section 6.2(e) violated this

145Cantor Fitzgerald, L.P. v. Cantor, No. 18,101, 2001 Del. Ch. LEXIS 137, at *16 (Del. Ch. Nov. 5, 2001) (citation omitted).

146Id. 147Progressive Int'l. Corp. v. E.I. Du Pont de Nemours & Co., No. 19,209, 2002 Del. Ch.

LEXIS 91, at *4 (Del. Ch. July 9, 2002) ("Sophisticated parties are bound by the unambiguous language of the contracts they sign.").

148Paramount Commc'ns Inc. v. QVC Network Inc., 637 A.2d 34, 48 (Del. 1994). 149Omnicare, Inc. v. NCS Healthcare, Inc., 818 A.2d 914, 938 (Del. 2003) ("[D]irectors of a

Delaware corporation have a continuing obligation to discharge their fiduciary responsibilities, as future circumstances develop, after a merger agreement is announced.").

150QVC, 637 A.2d at 51; see also Phelps Dodge Corp. v. Cyprus Amax Minerals Co., Nos. 17,398, 17,383, & 17,427, 1999 Del. Ch. LEXIS 202, at *4 (Del. Ch. Sept. 27, 1999) (suggesting restrictions that prevent a board from communicating with third parties are unlawful).

334 DELAWARE JOURNAL OF CORPORATE LAW [Vol. 33 principle developed in Paramount and Omnicare because Stone's interpretation of Section 6.2(e) materially impaired the directors from exercising their fiduciary duties to protect stockholder interests.151 If com-pelling, the court could have concluded that the contractual provision unduly restricted the board in violation of the directors' exercise of fiduciary duties, and deemed the contractual provisions to be invalid.

Similar in its facts, the Delaware Court of Chancery has suggested facial invalidity of no-talk provisions. In ACE, the court construed a pro-vision arguably in violation of the directors' fiduciary duties in a manner consistent with the free exercise of those duties.152 The provision at issue in that case was an uncontroverted no-talk provision conditioned "on the written advice of its outside legal counsel, that participating in such negotiations or discussions or furnishing such information is required in order to prevent the Board of Directors of the Company from breaching its fiduciary duties to its stockholders . . . ."153 Vice Chancellor Strine reasoned that, under one interpretation of QVC, there would likely never be a case where the board was required to speak to a third party in a non-change of control transaction.154 But, he added, that should a situation occur, the provision might then be construed as "an abdication by the board of its duty to determine what its own fiduciary obligations require . . . ."155 If so interpreted, such a contractual provision would be inconsistent with the directors' fiduciary duties and, therefore, invalid.156 Rather than invalidate the contractual provision, the vice chancellor functionally implied a fiduciary exception and construed the provision consistent with the board's fiduciary duties.

151Energy Partners, Ltd. v. Stone Energy Corp., Nos. 2402-N, 2374-N, 2006 Del. Ch. LEXIS 182, at *14 (Del. Ch. Oct. 11, 2006), reprinted in 32 DEL. J. CORP. L. 584, 590 (2007).

152See ACE Ltd. v. Capital Re Corp., 747 A.2d 95, 103-04 (Del. Ch. 1999) (holding that if ACE's interpretation is correct, it is "likely invalid"); see also RESTATEMENT (SECOND) OF

CONTRACTS § 193 (1981) ("[A] promise by a fiduciary to violate his fiduciary duty or a promise that tends to induce such a violation is unenforceable on grounds of public policy.").

153ACE, 747 A.2d at 98. 154Id. at 107 (rejecting the ACE factual situation as a scenario that meets these circum-

stances). The vice chancellor noted that: QVC does not say that a board can, without exercising due care, enter into a non-change of control transaction affecting stockholder ownership rights and imbed in that agreement provisions guaranteeing that the transaction will occur and that therefore absolutely preclude stockholders from receiving another offer that even the board deems more favorable to them.

Id. at 107-08. 155Id. at 106. 156Id. at 107.

2008] DELAWARE'S "NO-GO" TREATMENT OF NO-TALK PROVISIONS 335

ACE suggests the possibility that the court may more softly interpret contractual no-fiduciary out clauses and no-talk provisions by implying the existence of fiduciary exceptions or striking the contractual provision entirely. While the distinction is subtle, its economic or cost-benefit application to negotiating parties is significant. If the Delaware Court of Chancery routinely, and narrowly, carves the relevant fiduciary duty, negotiating parties will continue to create seemingly insurmountable contractual lockups. In that way, corporations positioned to pursue a merger opportunity should draft aggressive no-talk provisions and need not spend resources to vigorously negotiate them because the merger is at risk under these provisions only if a court is likely to functionally imply a tailored fiduciary exception based on the facts and circumstances of the case.157 If, however, the entire contractual limitation is subject to elimination altogether, then a party seeking to pursue a merger may instead strive toward negotiating contractual restrictions that aggressively—but do not excessively—restrict discussions with a third party.

IV. EVALUATION

Although the memorandum opinion largely focused on the ripeness issue and whether the Third-Party Acquisition Proposal Clause prevented EPL from talking to ATS, Energy Partners raises three questions that challenge the application of Delaware case law precedence in sale of control cases. First, and most narrowly, what is the overall ability of directors to negotiate with third parties as a result of the Energy Partners holding? Second, but interrelated to the first question, how has Energy Partners shaped an Omnicare analysis and to what extent is the directors' ability to negotiate contractually constrained based upon previous bargained efforts? Lastly, to what extent can such Energy Partners implications be extrapolated in future mergers and acquisition negotiated deals? As discussed in the context of these questions, the court utilizes several techniques that suggest that Omnicare will be applied narrowly in the future.

A. Has Energy Partners Changed the Overall Ability of Directors to Negotiate with Third Parties?

The Energy Partners opinion does not explicitly address the roles and responsibilities of directors. Therefore, one might assume that the Energy

157Of course, this assumes that the company is sued.

336 DELAWARE JOURNAL OF CORPORATE LAW [Vol. 33 Partners opinion precludes any relation to shaping the overall obligation of directors. This assumption, however, is erroneous. The opinion's analysis supports the overall trend of the Delaware Court of Chancery to grant generous deference to directors in their ability to negotiate during merger discussions.158 The disputed contractual language limited EPL's ability to pursue other options that would hinder the consummation of the merger; the party could not "knowingly take, or agree to commit to take, any action that would or would reasonably be expected to result in the failure of a condition set forth in Sections 8.1, 8.2, or 8.3 [conditions to consummation of the merger] . . . ."159 Notwithstanding such straightforward language, the court, however, interpreted the provision in two ways that limited it in such a way so as to allow directors the ability to seek third-party opportunities.

First, the court assessed the reasonableness that Stone might entertain negotiations with a third party. The court refused to analyze, in a hypo-thetical manner, whether this particular set of parties might reach an agreement that would then result in the consummation of the merger. Rather, the court concluded that mere open discussion alone would not be

158Generally, this deference appears in the context of an "entire fairness" review of a transaction. See, e.g., Kahn v. Lynch Commc'ns Sys., Inc., 638 A.2d 1110, 1120-21 (Del. 1994).

A condition precedent to finding that the burden of proving entire fairness has shifted in an interested merger transaction is a careful judicial analysis of the factual circumstances of each case. Particular consideration must be given to evidence of whether the special committee was truly independent, fully informed, and had the freedom to negotiate at arm's length.

Id. It also falls within the realm of business judgment. See Teachers' Ret. Sys. of La. v. Aidinoff, 900 A.2d 654, 670 n.20 (Del. Ch. 2006) ("To satisfy section 144(a)(1), the person seeking its protection must demonstrate that the directors approving the interested transaction were truly independent, fully informed, and had the freedom to negotiate at arm's length.") (quoting RODMAN

WARD, JR. ET AL., FOLK ON THE DELAWARE GENERAL CORPORATION LAW § 144.2.2 (4th ed. 2003)) (internal citations omitted). See also State of Wis. Inv. Bd. v. Bartlett, No. 17,727, 2000 Del. Ch. LEXIS 42, at *13-14 (Del. Ch. Feb. 24, 2000), reprinted in 26 DEL. J. CORP. L. 469, 480 (2001).

Whether or not the directors' actions constitute an abdication of directorial duty is a fact specific question. In other words, does the record indicate any self-interest or lack of independence on the part of the Medco board which caused them to delegate responsibility to Williams to negotiate the merger and to abandon any responsibility to review his work? The decision by the Medco board to delegate responsibility to Williams to negotiate the merger is 'not an abdication of directorial authority merely because [it] limit[s] a board's freedom of future action.' Rather, the decision by the Medco board to delegate responsibility to Williams can only be regarded as a valid exercise of business judgment.

Id. (citations omitted). 159Energy Partners, Ltd. v. Stone Energy Corp., Nos. 2402-N, 2374-N, 2006 Del. Ch.

LEXIS 182, at *8 (Del. Ch. Oct. 11, 2006), reprinted in 32 DEL. J. CORP. L. 584, 587 (2007) (quoting Section 6.2(e) of the Stone-EPL Agreement) (emphasis added).

2008] DELAWARE'S "NO-GO" TREATMENT OF NO-TALK PROVISIONS 337 interpreted to reasonably result in the listed conditions to consummate the merger.160 Thus, as an initial matter, the phrase "reasonably be expected to result"161 must have been interpreted narrowly so as to preserve the directors' ability to accrue information allowing the company to assess its position, notwithstanding the parties' negotiated contractual language that implied an ongoing obligation binding the company's direction to the merger consum-mation.

Second, the court interpreted the disputed language to allow the directors to pursue communications with a third party. Short of explicitly invalidating such contractual language, the court appears to have spurned the notion of one party contractually limiting directors' duties in "any action."162 Citing other sections of the contract creating remedies in the event of a merger termination, the court concluded that the phrase "any action" could not possibly mean "every" action.163 In this regard, the court supported prior cases, such as ACE, in which such a contractual provision, if read literally, would be determined to be invalid as a result of its inconsistency with directors' fiduciary duties.164 In both analyses of contractual language, Dela-ware's overall trend of supporting the flexibility and freedom of directors to pursue major corporate actions, even in the face of contracts that appear to completely bind directors to their previous decisions, was maintained. In other words, the court reaffirmed the ability of directors to negotiate with third parties, and further integrated the ability to negotiate with other parties as a part of the directors' fiduciary duty in the merger context.

160See, e.g., id. at *46-47, reprinted in 32 DEL. J. CORP. L. at 604. The court stated: Simply put, there is no "present harm" to EPL as a result of the speculative "future consequences" of pursuit of some third party proposal that falls outside the scope of that defined in Section 10.1(i) and this Court's declaratory judgment. There are inadequate facts and the chance is too remote and speculative that a future event will occur that would precipitate a breach of contract claim by Stone for open-ended damages based on section 6.2(e).

Id. (footnote omitted). 161Id. at *8, reprinted in 32 DEL. J. CORP. L. at 587 (referring to Section 6.2(e) of the

merger agreement). 162Id. 163See Energy Partners, 2006 Del. Ch. LEXIS 182, at *58-59, reprinted in 32 DEL. J.

CORP. L. at 608. 164Id. at *63, reprinted in 32 DEL. J. CORP. L. at 610 ("If so interpreted, such a contractual

provision would be inconsistent with the director's fiduciary duties and, therefore, invalid.").

338 DELAWARE JOURNAL OF CORPORATE LAW [Vol. 33

B. So Was it the Lack of a Fiduciary out That the Court Rejected in Omnicare or Something Else?

As noted by two commentators shortly after the court decided

Omnicare, "[T]he opinion throws open the door to debate over what combination of deal protective terms will survive judicial scrutiny."165 As a result, target companies have changed their bargaining strategy in order to better protect the pending deal.

Addressed in our case law review above, Omnicare limits the use of deal-protection devices since the court's holding requires that directors, in merger agreements, oblige first to their shareholders. A target corporation, then, may not bargain away its ability to consider a superior transaction.166 In Energy Partners, the Delaware Court of Chancery distinguished Omnicare because the stockholder vote for the Stone-EPL Merger was not a fait accompli167 because the Stone-EPL Agreement contained a fiduciary out clause for Stone.168 From an analytical perspective, these distinctions make sense. At the time the parties signed the Plains-Stone Agreement, Stone was clearly for sale, but its board had no knowledge of EPL's interest. While Section 6.2(e) prevented them from actively soliciting better offers, the Stone fiduciary out and court interpretation implying an EPL fiduciary exception allowed each party to fulfill their fiduciary duties of care and loyalty to their shareholders by ensuring the best return on their investment when and if a better offer presented itself. In Omnicare, the NCS board used its knowledge of Omnicare's offer to hamstring Genesis into increasing its bid, which it subsequently did.169 In addition, and perhaps determinative of a fait accompli, Omnicare also included a voting agreement allowing Genesis to secure the deal through voting and the lack of fiduciary out that might otherwise counteract the situation upon the presentation of a superior deal.170

At its basest level, a direct analogy to Omnicare (i.e., a complete lock-up of the vote and restriction to the director's fiduciary out), did not exist in

165Stephen I. Glover & Michael J. Scanlon, The Landscape for Negotiated Mergers After Omnicare Inc. v. NCS Healthcare, Inc.—What Combination of Protective Measures Will Withstand Scrutiny?, 35 Sec. Reg. & L. Rep. (BNA) 891, 893 (2003).

166Omnicare, Inc. v. NCS Healthcare, Inc., 818 A.2d 914, 936 (Del. 2003). 167"A fact or deed accomplished, presumably irreversible." BLACK'S LAW DICTIONARY 599

(6th ed. 1990). 168Energy Partners, 2006 Del. Ch. LEXIS 182, at *44 n.101, reprinted in 32 DEL. J. CORP.

L. at 603 n.101. 169Omnicare, 818 A.2d at 924. 170See id. at 927.

2008] DELAWARE'S "NO-GO" TREATMENT OF NO-TALK PROVISIONS 339 Energy Partners. Nevertheless, the disputed provisions did not permit any negotiations that might result in the failure of the contemplated merger, creating a fairly analogous parallel on the part of the directors of the corporation. The facts of Energy Partners provided the Delaware Court of Chancery with an opportunity to clarify the applicability of fiduciary duties in situations where directors are presented, and subsequently sign, a contractual lock-up no-talk provision, but then are faced with the unsolicited opportunity to create higher value to shareholders. Based on the court's analysis, to the extent that active bids present themselves to a target corporation, directors seem to have a responsibility to engage in negotiations related to the active bid, whether or not they transform into a competing bid. The Energy Partners analysis appears to make clear that consideration of unsolicited opportunities to the target corporation are part of the directors' obligations to the shareholders even if those discussions are contractually designed to be forbidden.

In addition to Energy Partners' analysis integrating the ability to negotiate with a third party as part of the fiduciary obligation of the board, Energy Partners clarifies that the pursuit of initial discussion with a prospective participant bidder falls outside of the Omnicare spectre and should not implicate an Omnicare analysis, at least until a later point determined by the parties' negotiations. In its opinion, the Delaware Court of Chancery held that, although such negotiations were not prohibited by Section 6.2(e), whether or not those negotiations would then become a violation of Strategic Alternative Transactions was hypothetical and not practical until such "question arises in a more concrete and final form[.]"171

Through this determination, Energy Partners extends the diameter of directors' fiduciary duties in a merger transaction to include unsolicited third-party offers providing an opportunity for directors to consider alternative options. As a result of Energy Partners, a no-talk clause may not be read as an outright restriction to any discussion relating to interest, but should be instead treated as a restriction that limits discussion initiated by the target corporation with another party interested in acquiring the target.

171Energy Partners, 2006 Del. Ch. LEXIS 182, at *26, reprinted in 32 DEL. J. CORP. L. at 596. The court concluded that it "must evaluate two separate scenarios in terms of justiciability[,]": first, "the applicability and validity of Section 6.2(e) as it pertains to Third Party Acquisition Proposals;" and second, "a broader declaration as to [EPL's] ability to explore and undertake Strategic Alternative Transactions." Id. at *32-33, reprinted in 32 DEL. J. CORP. L. at 598.

340 DELAWARE JOURNAL OF CORPORATE LAW [Vol. 33

C. The Status of Omnicare and the Application of ACE: How Has Energy Partners Affected a Corporation Board's Analysis

in Drafting a Merger Agreement?

The Delaware Court of Chancery's opinion in Energy Partners also provides insight into the future treatment of Omnicare. As the court notes, the factual differences between Omnicare and Energy Partners are didactic. Although both target corporations in these cases attempted to act in the best interests of their respective stockholders by using the emerging offers to create a pseudo bidding war, the remaining concessions given by NCS's board in Omnicare could not have resulted in the best price for its stockholders. NCS's board, by coupling the lack of the fiduciary out with the voting agreements as discussed above, prevented the corporation from considering a superior offer when and if such an offer materialized. Granted, had NCS not allowed Genesis to protect its deal as it did, Genesis may have simply abandoned the deal,172 leaving NCS stockholders in a worse position because Omnicare could have returned to its inferior bankruptcy bid.173 The board did not want to risk such a scenario.

Genesis, as a sophisticated party, realized the potential for an eleventh hour Omnicare offer and insisted on a means to avoid it.174 In addition, Genesis retained another method for protecting its deal; even if Omnicare did present a better offer, Genesis integrated the voting agreement to force the merger through regardless of Omnicare's terms.175 Had the Omnicare dissent prevailed, the minority stockholders would have likely brought suit against the respective boards of NCS and Genesis, and the court would have reviewed the transaction under the entire fairness rubric.176 Instead, the court found the bargain preclusive and beyond the range of reasonableness allowed under its intermediate scrutiny standard.177

172See Omnicare, 818 A.2d at 941-42 (Veasey, C.J., dissenting). 173Id. at 942; Griffith, supra note 64, at 614. This point, however, ignores the fact that two

of NCS's stockholders, representing the majority voting power of the corporation, sat on the board and bargained away their voting rights. The guarantee of the lower-priced merger, in conjunction with the other concessions Genesis received, may have proved fatal in the court's duty of loyalty scrutiny under either Unocal or Revlon. Although the NCS board may have made a fully informed decision, the court's separation of this aspect of review under either Unocal or Revlon rendered any future consideration moot.

174See Omnicare, 818 A.2d at 921. 175See id. at 926-27. 176See Weinberger v. UOP, Inc., 457 A.2d 701, 710-11 (Del. 1983). 177Omnicare, 818 A.2d at 936. Logically, if Genesis's actions could not have passed muster

under the intermediate standard, it certainly would have failed entire fairness review.

2008] DELAWARE'S "NO-GO" TREATMENT OF NO-TALK PROVISIONS 341

Notwithstanding the court's emphasis on these distinctions, elements of Omnicare appear to be highly analogous to the facts of Energy Partners, even when comparing the initial negotiations of Energy Partners with more full—even complete—negotiated offers seen in Omnicare.178 Under one interpretation of the contractual framework, EPL's directors' obligations were more restricted than those in Omnicare because, arguably, they could not even pursue information-seeking discussions with ATS. Similar to Omnicare's lack of fiduciary out, the EPL directors also were hampered by a prohibition of communication. Although the shareholder vote was not locked up by voting agreements, EPL's board endorsement was material to the success of the merger and any action short of an affirmative vote would surely disrupt that progress. Therefore, even when applying an Omnicare analysis on the directors' obligations, the use of a no-talk clause appears to be more restrictive than an actual lockup (fait accompli).

More on point, however, is an extrapolation of the court's treatment of any clause that may function, under at least one interpretation, as a no-talk clause. In this situation, Omnicare, layered with Energy Partners and ACE, may provide better guidance. Read together, the cases imply that a merger clause that might be interpreted to function as a no-talk provision is unlikely to be interpreted as such. Of note, Energy Partners blurs the materiality of ACE's distinction of the "superior" offer. Whether or not an incoming offer is "superior," without any breach of fiduciary duty, is largely a hindsight outcome-determinative assessment made at the conclusion of the negotiation. One might interpret Energy Partners, to stand for the proposition that, upon a presented third-party offer that is merely superior on its face, any clause that might, under one interpretation, function to prohibit negotiations or communications will be read so as to avoid that interpretation or invalidated as inconsistent with directors' fiduciary obligations.

Based on the analysis of Energy Partners, one way to interpret the broader application of Omnicare to a merger agreement is that the initially strong view exhibited in Omnicare against the use of defensive devices is waning; the court will use the facts in Omnicare to distinguish the case in future applications. In other words, based on the analysis of Energy Partners, Omnicare could be read to bar only what the court terms in the plural as the "NCS directors' defensive devices,"179 i.e., rendering the merger a fait accompli, and prevent boards from applying such an extensively combined method of bargaining when the company is for sale. If a court

178Perhaps this is why the court in Energy Partners then turns to the analysis in ACE. 179Omnicare, 818 A.2d at 936.

342 DELAWARE JOURNAL OF CORPORATE LAW [Vol. 33 wanted to confine Omnicare to its facts, the collective defensive strategy applied by Omnicare makes such narrowing possible.180 Indeed, Energy Partners did just that.

Additionally, Energy Partners might be said to develop an Omnicare analysis by providing an example of "proportionate" defensive measures.181 Although Energy Partners confirms that an agreement to a restrictive device, consistent with Omnicare and its progeny, does not alone constitute a breach of fiduciary duty, the analysis in Energy Partners supports the court's willingness to interpret a defensive measure proportionately so that it protects the spirit of the initial contractual bargain without binding directors from considering tangible offers that may ultimately benefit shareholders. As addressed earlier, a legally enforceable defensive measure under Unocal requires a court to assess whether there were reasonable grounds to believe that a danger existed, and whether the directors acted in good faith. The facts in Energy Partners reflect such reasonableness, given the prior context of the failed merger due to a more competitive third-party offer.182 But the court then examined the defensive measure. Distinct from Omnicare's "reasonable" or "preclusive" language,183 the court then interpreted the defensive measure to allow for the potential of a better deal for shareholders, but without fatally forbidding such bargained restrictions.184 In this regard, Energy Partners reflects the court's willingness to assess the defensive measure proportionately so as to protect the spirit of a bargained merger agreement and still ensure a "continuing obligation to discharge [directors'] fiduciary responsibilities, as future circumstances develop, after a merger agreement is announced."185 In other words, Energy Partners suggests that the Delaware Court of Chancery may not entirely strike portions of the contract that purport to bind directors' hands completely, but may proportionately carve out necessary abilities to allow such discussion (or actions, as the case may be) without destroying the parties' original bargain.

180Further, because Omnicare was decided in the context of a Unocal-style defensive tactic, it may also be possible for a court to restrict Omnicare to Unocal takeovers. Given that the review under Revlon is stricter, however, it may be more difficult to confine Omnicare to the Unocal standard. This article's position that Omnicare suggests that the range of reasonableness prong of the intermediate scrutiny standard is the same under both Unocal and Revlon would also render this distinction moot.

181See Omnicare, 818 A.2d at 932. 182Indeed, none of the parties challenged these facts. 183Omnicare, 818 A.2d at 935. 184See Energy Partners, Ltd. v. Stone Energy Corp., Nos. 2402-N, 2374-N, 2006 Del. Ch.

LEXIS 182, at *64-65 (Del. Ch. Oct. 11, 2006), reprinted in 32 DEL. J. CORP. L. 584, 611 (2007). 185Omnicare, 818 A.2d at 938.

2008] DELAWARE'S "NO-GO" TREATMENT OF NO-TALK PROVISIONS 343

The implication of this analysis is that the original holding of Omnicare may now be seen by the Delaware Court of Chancery as too broad when placed in the application of today's corporate mergers and acquisitions. Although the general two-pronged test remains intact, a defensive measure that, on its face, "deprives stockholders of the right to receive all tender offers or precludes a bidder from seeking control"186 may not necessarily be outright stricken altogether. Energy Partners suggests that the Delaware Court of Chancery may approach the parties' bargain in a way that maintains the contractual bargain struck between the two parties and when a contractual defensive measure is directly implicated, a court may carve out from the defensive measure only what is necessary to fulfill the board's fiduciary duties before striking a contractual provision altogether.

Such an implication is consistent with the remainder of the Energy Partners analysis. After determining that the contractual language of Section 6.2(e) did not preclude negotiations relating to an active third-party bidder, the court then separated such a discrete opportunity from abstract third-party bidders, or strategic alternative activities. Consistent with the application of proportionate defensive measures, Energy Partners suggests that the Delaware Court of Chancery may err on the side of the original bargain, despite allowing future negotiations to take place.187

D. As a Result of Energy Partners, How Can Negotiating Parties Best Mitigate the Unexpected?

In light of Omnicare's limitations on negotiating for an absolute lockup (i.e., bargaining away the fiduciary out clause coupled with other defensive strategies), corporations now utilize other methods to help secure mergers. The Energy Partners opinion provides several insights that can help negotiating boards best utilize their resources.

First, and perhaps most importantly, the opinion confirms the trend of the Delaware Court of Chancery to allow boards maximum flexibility to investigate subsequent pursuits, even in the face of contractual lockups precluding such actions. A party trying to functionally secure their bargain must consider alternative approaches that would not be seen as limiting directors' ability to change the overall direction of the corporate form. In some sense, effective negotiations then include aggressive remedies that

186Id. at 935. 187See, e.g., Energy Partners, 2006 Del. Ch. LEXIS 182, at *45 & n.103, reprinted in 32

DEL. J. CORP. L. at 603 & n.103 (relying on the uncertainty of the third-party acquisition proposals to decline ruling on the declaratory judgment as it pertains to strategic alternative transactions).

344 DELAWARE JOURNAL OF CORPORATE LAW [Vol. 33 increase transaction costs in a way where the opposing corporation more seriously evaluates its prior commitments before considering newly dis-covered options. Such approaches may include creative contractual damages or an integration of companies (instead of a swallow-up merger) that creates synergies that go toward distinguishing the value of the current option or discounting the incoming offers. In that way, and notwithstanding the increased cost of negotiation, a court may hold that the overall contract is valid and not coercive because the contracts are no longer applicable.188

Second, Energy Partners' analysis of ACE becomes particularly pertinent for negotiating parties. To the extent that the Delaware Court of Chancery preserves to the fullest degree directors' ability to negotiate, parties engaged in merger discussions need not spend their "chips" to tailor no-talk or fiduciary exception clauses. This is because the court may be unlikely to preserve the directors' procurement of the "best" stockholder deal and allow discussions and even negotiations as a matter of fiduciary duty before honoring a contractual no-talk restriction.

In two Delaware Court of Chancery cases construing such provisions in a merger agreement, the court recognized that an outright ban on speaking to a third party would be "incompatible with the directors' fiduciary duties and, therefore, void"189 and chose to construe the disputed provisions broadly. The court in ACE applied a three-part framework to "examine[] whether an acquiror's or merger partner's contract rights should give way to the need to protect the target company's stockholders from a fiduciary breach"190 and concluded unlikely the situation where a board could fulfill its duty by "contractually bind[ing] itself to sit idly by and allow an unfavorable and preclusive transaction to occur that its own actions have brought about"

188Although atypical, parties might want to consider contractual damages that maintain the benefit of reimbursement of the other party, but in ways that incorporate secondary or tertiary goals of the opposing corporation, such as additional compensatory monies to an affiliated nonprofit corporation, an affiliate, or costs associated with any subsequent public relations expenses borne upon the party. Employee or executive swaps upon the development of the contract (with associated costs borne upon the loss of merger) may also be a way to integrate companies without outright lockup.

189Energy Partners, 2006 Del. Ch. LEXIS 182, at *64, reprinted in 32 DEL. J. CORP. L. at 611. See also ACE Ltd. v. Capital Re Corp., 747 A.2d 95, 107 (Del. Ch. 1999) ("A ban on considering such a [superior] proposal . . . comes close to self-disablement by the board. Our case law takes a rather dim view of restrictions that tend to produce such a result."); Phelps Dodge Corp. v. Cypress Amax Minerals Co., Nos. 17,398, 17,383, & 17,427, 1999 Del. Ch. LEXIS 202, at *4 (Del. Ch. Sept. 27, 1999) ("No-talk provisions . . . are troubling precisely because they prevent a board from meeting its duty to make an informed judgment with respect to even considering whether to negotiate with a third party.").

190ACE, 747 A.2d at 105.

2008] DELAWARE'S "NO-GO" TREATMENT OF NO-TALK PROVISIONS 345 through a no-talk provision.191 The court in Energy Partners also found that the provision was meant to be construed broadly and therefore consistently with the board's fiduciary duties.192

Given the inclination and probability that a court may construe such provisions broadly, a plaintiff would be unable to argue successfully that the combined effort of this clause and some other deal-protection device would be jointly preclusive. Put another way, the requirement that a merger agreement has a fiduciary out makes it improbable that a plaintiff will be able to align successfully this combination of defensive measures with the combination found in Omnicare. Thus, the plaintiff would be left to show that the rest of the deal-protections, exclusive of a broadly construed no-talk provision, somehow made the deal preclusive and invalid.

In making cost-benefit analyses on negotiated aspects of a merger agreement, the Delaware Court of Chancery opinions support a trend allowing directors the ability to communicate with a prospective third-party bidder as part of a directors' fiduciary duty, in spite of integrated no-talk provisions. Such a trend suggests that an acquirer should include strong contractual no-talk clauses and that those in the acquired position need not use negotiation chips to make available the opportunity to communicate with the unexpected third-party bidder.193

V. CONCLUSION

The debate over the validity of certain takeover defenses, such as no-talk clauses, remains strong in the wake of Omnicare. The post-Omnicare decisions, however, have effectively constrained Omnicare to its facts. Unlike the facts of Omnicare, where the acquiring corporation secured a combination of defensive measures that the court found preclusive and barred under its enhanced scrutiny analysis, subsequent cases, such as Energy Partners, have not had the same combination of defenses that warrant finding the adoption of takeover defenses preclusive and invalid. When no-talk provisions are in play, the courts have chosen to construe them broadly so as not to prevent a board from being able to exercise its fiduciary duties. Whether Omnicare can be further restricted to companies facing review under Revlon and not Unocal, or if Omnicare applies to both,

191Id. at 108. 192Energy Partners, 2006 Del. Ch. LEXIS 182, at *65, reprinted in 32 DEL. J. CORP. L. at

611. 193Moreover, unless the totality of provisions create a fait accompli, the Delaware Court of

Chancery appears to be trending away from a harsh application of Omnicare.

346 DELAWARE JOURNAL OF CORPORATE LAW [Vol. 33 remains to be seen. In the interim, merging companies need to remain diligent in negotiating terms that will yield the best return for stockholders. Protecting the deal remains essential for closure; the cases that have challenged these deal-protection devices post-Omnicare have helped ensure that the balance between board action and shareholder rights remains in check.