Last week the Delaware Supreme Court upheld the Delaware Court of Chancery's ruling prohibiting Martin Marietta Materials, Inc. ("Martin Marietta") for four months from pursuing an unsolicited exchange offer to acquire Vulcan Materials Company ("Vulcan") and conducting a related proxy contest because of Martin Marietta's violation of confidentiality agreements between the two companies. As discussed below, the decision highlights the need for precise language in non-disclosure agreements and the willingness of Delaware courts to issue broad equitable remedies when violations are found.
Martin Marietta and Vulcan are the two largest United States producers of construction aggregates (supplying materials such as crushed stone, sand and gravel). In 2010 Martin Marietta initiated merger negotiations with Vulcan and the parties executed a two-year non-disclosure agreement (the "NDA") and, to facilitate an antitrust analysis, a joint defense agreement (the "JDA" and together with the NDA, the "Confidentiality Agreements"). The NDA contained common restrictions, including requirements to: (i) keep all Evaluation Material confidential; (ii) use the Evaluation Material only for an evaluation of a Transaction (defined as "a possible business combination transaction... between [Martin Marietta] and [Vulcan] or one of their respective subsidiaries."); and (iii) not disclose that Evaluation Material had been shared or that the two companies were engaged in merger discussions. Notably, the NDA did not contain a standstill provision preventing either Martin Marietta or Vulcan from acquiring shares of the other or acting in an "unfriendly" manner (e.g., proxy contests). Upon execution of the Confidentiality Agreements the parties exchanged sensitive non-public information, including information regarding synergy estimates, software programing and antitrust risks.
By mid-2011, market shifts caused Vulcan to lose interest in a potential transaction, which Vulcan conveyed to Martin Marietta. Martin Marietta, however, remained interested in acquiring Vulcan. The Court determined that Martin Marietta's attraction to Vulcan was largely based on the confidential information obtained through the merger evaluation process. On December 12, 2011, Martin Marietta sent a bear-hug letter to Vulcan, launched a tender offer for all of Vulcan's outstanding shares and initiated a proxy contest in an effort to install a Martin Marietta-friendly board. Martin Marietta also filed a proxy statement and a Form S-4 with the SEC that disclosed the failed negotiations with Vulcan, assessed possible synergies between the companies and identified the obstacles the two companies would face as a combined entity. Following the filing of the Form S-4, Martin Marietta disclosed much of the confidential information to its investors through calls and presentations. On the same day that it launched its tender offer, Martin Marietta filed suit in Delaware's Court of Chancery seeking a declaration that the Confidentiality Agreements did not bar it from making a hostile bid or engaging in the proxy contest. Vulcan counterclaimed for breach of the Confidentiality Agreements and sought a temporary injunction prohibiting Martin Marietta from continuing its hostile bid and proxy contest.
The Court of Chancery's Decision
Following an expedited trial, the Court found that Martin Marietta had relied on non-public information, provided by Vulcan pursuant to the Confidentiality Agreements, in forming its hostile bid. Having resolved this threshold issue, the Court turned to the question of whether the use and disclosure of the confidential information violated the Confidentiality Agreements, particularly when they did not have an explicit standstill provision. Chancellor Strine held that both the use and disclosure of the confidential information constituted a breach of the Confidentiality Agreements despite the absence of an explicit standstill provision. With respect to the breach of the Confidentiality Agreements, the Court noted that the issue "was purely contractual" and attempted to apply the plain and unambiguous terms of the Confidentiality Agreements.
The Court concluded that the terms of the JDA were unambiguous and that there was "no question that the one transaction being discussed by the parties when they entered into the JDA was a negotiated one." However, Chancellor Strine found the wording of the NDA to be ambiguous, specifically the provision that allowed the parties to use confidential information "solely for the purpose of evaluating the Transaction." "Transaction" was defined as "a possible business combination transaction...between [Martin Marietta] and [Vulcan] or one of their respective subsidiaries." The Court noted that the term "business combination" could not confidently be said to have a single clear meaning and as such the Court turned to the extrinsic evidence to resolve the issue.
In reviewing the extrinsic evidence, the Court found that (i) the history of the negotiations between the parties demonstrated that Martin Marietta was focused on ensuring that there would not be a hostile bid against it, (ii) previous drafts of the NDA demonstrated an intent by the parties to narrow the definition of "Transaction" and (iii) Martin Marietta's actions after launching the hostile bid demonstrated that it was concerned that its use of the information in connection with the hostile activity was not permitted by the NDA. Taking these facts into account, the Court determined that the NDA contained an implied requirement that any "Transaction" must be "contractually agreed upon, or consented to, by the sitting boards of both companies at the outset of those steps being taken," despite the fact that there was not an explicit standstill provision. Finding various breaches of the Confidentiality Agreements, the Court granted the injunction sought by Vulcan, enjoining Martin Marietta for four months from taking any steps to acquire control of Vulcan. This injunction had a particularly chilling effect as Vulcan's staggered board prevents Marietta from taking control of Vulcan's board until 2014.
The Vulcan decision sends a strong message regarding Delaware's continued strict enforcement of contracts and is an effective reminder that any company should engage counsel at an early stage to carefully craft all terms of a proposed confidentiality agreement. While, in this case, the Court's strict enforcement resulted in an implied standstill provision being read into the Confidentiality Agreements, potential sellers should not assume that all confidentiality agreements that restrict the use and disclosure of information will, as a matter of law, contain an implied standstill provision. If a seller wants the protection of a standstill provision, it should enter into a carefully worded, explicit agreement containing a standstill and defining its scope. A prospective buyer desiring transactional latitude will need to be equally careful in defining the permissible use of protected information.