12.4 Ensuring Exclusivity, Deal Protection Devices 415Board duties, “fiduciary out” under Delaware law. Particular board duties can
influence the use of deal protection mechanisms especially where board members
owe a duty to act in the interests of existing shareholders rather than the firm. For
example, a merger agreement tends to require a fiduciary out clause under Dela-
ware law.
In Delaware, deal protection devices used to be recognised as permissible means of protect-
ing a deal from third-party interference in transactions not involving a sale of control. The
Unocal standard was applied. There should therefore be reasonable grounds to believe that
a third-party bid would be a danger to corporate policy, and the deal protection measure
should be reasonable in response to the perceived threat.
In contrast, the Revlon test is applied to the use of deal protection devices in change-of-
control transactions. The deal protection device must therefore be designed to secure the
best value reasonably available to stockholders.^32
The Delaware Supreme Court’s 2003 opinion in Omnicare^33 signals a change in both the
standard of review and substantive law applicable in Delaware. In Omnicare, the court
adopted a per se rule invalidating board approval of “locked up” transactions and empha-
sised the duty of the board to obtain the best price. After Omnicare, contracts have required
some form of fiduciary out.^34
Under Delaware law, the legal effect of an exclusive merger agreement depends on tar-
get directors’ fiduciary duties. There is an established “basic principle that corporate direc-
tors have a fiduciary duty to act in the best interests of the corporation’s shareholders”.^35
Directors cannot validly contract away this duty, because a contract that purports to relieve
directors of their fiduciary duties is not binding.^36 For this reason, a merger agreement tends
to be subject to a “fiduciary out” clause: “A fiduciary out may simply be a proviso stating
that nothing contained in the merger agreement shall relieve the board of directors of its fi-
duciary duty to the shareholders. Alternatively, the fiduciary out may expressly retain a
right for the target’s board to solicit other offers or to negotiate with other bidders if its fi-
duciary duties so require. The most potent version relieves the target board of its obligation
to recommend the initial offer to the shareholders if a better offer is made or permits the
target to terminate the merger agreement if a higher offer is received. Buyers typically resist
inclusion of a fiduciary out, as it largely undermines the basic purpose of an exclusive
merger agreement (especially in the latter variants), while there is a division of opinion
among takeover practitioners as to whether targets should insist on such a provision.”^37
No “fiduciary out” requirement under Community law. A “fiduciary out” is not
part of EU company law. The main rule is that where the acquirer has dealt with
the vendor through an “organ” authorised to represent it under Article 9 of the
First Company Law Directive, the agreement is enforceable against the vendor
(^32) Cole J Jr, Kirman I, op cit, pp 86–87.
(^33) Omnicare, Inc. v. NCS Healthcare, Inc., 818 A.2d 914 (Del. 2003).
(^34) Cole J Jr, Kirman I, op cit, p 92. For deal protection devices under Delaware law in gen-
eral, See, for example, Rieckers O, Treuepflichten versus Vertragsfreiheit. Neues zur
Wirksamkeit von Deal-Protection-Klauseln in der Rechtsprechung Delawares, RIW
2003 pp 668–676.
(^35) Unocal Corp. v. Mesa petroleum Co., 493 A.2d 946, 955 (Del. 1985).
(^36) Bainbridge SM, op cit, p 182.
(^37) Bainbridge SM, op cit, pp 183–184.