Karl F. Balz
This article examines and discusses both the permissibility of no shop clauses under Delaware law and the treatment of impermissible no shop clauses by Delaware courts.
The article begins by providing an introduction to the topic. After differentiating between sale of control transactions and strategic transactions, the author argues that the correct standard of review for noshop clauses is the Revlon standard or, where Revlon is not applicable, the businessjudgment rule. Observing that both standards require directors to act in good faith and to pursue their shareholders’ interests, the author concludes that in both sale of control transactions and strategic transactions there is afar reaching accordance ofprudent director conduct pertaining to the adoption of no-shop clauses. The only difference is that sale of control transactions limit directors’ evaluation of a deal to its current share value whereas strategic transactions allow the consideration of long term goals. The decisive factor in both scenarios is the board’s capability ofshowing that it was fully informed about all available material information regarding the transaction. This being suggested, the article examines the application of the requirement of a fully informed board with respect to the various forms of no-shop covenants.
Turning to the question of how to proceed with impermissible no shop clauses, the article approves of the Delaware courts practice of invalidating them. After discussing the arising conflict between contract and corporate law values, the article argues that the invalidation of impermissible no-shop clauses is both consistent with established legal principles and desirable from a policy point of view. In doing so, the author bases his analysis primarily on established rules of agency law and the promotion of investor confidence.