A nondisclosure agreement (NDA), which is also often called a confidentiality agreement, is frequently the first step before parties engage in merger and acquisition discussions. The purpose of the agreement is to protect the confidentiality of information exchanged by the parties during discussions. Where a public company is involved, such agreements also often include standstill provisions, which protect against hostile takeover attempts by the potential acquiror.
Recent Delaware Case Law
On July 10, 2012, the Delaware Supreme Court issued an opinion affirming the decision of the Delaware Court of Chancery in Martin Marietta Materials, Inc. v. Vulcan Materials Company. This decision concerned contracts entered into between Martin and Vulcan, two industry rivals, at a time when they were entertaining the possibility of a friendly merger. These contracts included an NDA, which did not contain a standstill provision, and a joint-defense and confidentiality agreement (JDA).
Martin initially determined to enter into discussions with Vulcan about a consensual deal only, and only if absolute confidentiality was maintained. As a result, the NDA entered into by the parties in May 2010 prohibited the "use" and "disclosure" of "Evaluation Material," except where expressly allowed. The NDA permitted use of the Evaluation Material, which generally speaking was any non-public information, "solely for the purpose of evaluating a Transaction." A Transaction was defined as "a possible business combination transaction ... between [Martin] and [Vulcan] or one of their respective subsidiaries."
The NDA prohibited the disclosure of Evaluation Material to anyone except each party's representatives. Furthermore, the NDA prohibited the disclosure of the existence of merger negotiations and certain other related information, except for disclosures that were legally required. The NDA then defined the conditions under which "legally required" disclosure of Evaluation Material and other negotiation-related information would be permitted and the associated notice and vetting procedures required to be satisfied before any such disclosure would be permitted.
The JDA prohibited and limited the use of disclosure of confidential information without the consent of all parties. The JDA also required that such confidential information be used "solely for the purposes of pursuing and completing the ‘Transaction.'" The JDA defined the Transaction as "a potential transaction being discussed by Vulcan and Martin ... involving the combination or acquisition of all or certain of their assets or stock."
When talks with Vulcan stalled, Martin made an unsolicited exchange offer in December 2011. In connection with the exchange offer, Martin also began a proxy contest to replace four of Vulcan's directors at Vulcan's June 2012 annual meeting.
Martin did not dispute that in preparing the exchange offer and proxy contest materials it used and disclosed Vulcan's non-public information. Martin did not receive the consent of Vulcan for this use and disclosure and did not follow the notice and vetting procedures required by the NDA. However, Martin contended that such use and disclosure was not legally prohibited by the NDA or the JDA.
Contemporaneously with the launch of its hostile takeover bid, Martin commenced an action in the Delaware Court of Chancery for a declaration that the NDA did not bar Martin from conducting its exchange offer and proxy contest. Vulcan counterclaimed for breach of the NDA and JDA. The Chancery Court determined that Martin had breached the NDA and JDA by using and disclosing confidential information. In so finding, the Chancery Court determined, notwithstanding the absence of a standstill provision, that the NDA and JDA prevented Martin from:
- Using the confidential information for a hostile takeover, rather than the permitted use of a contractually negotiated business combination transaction between the parties;
- Disclosing the existence of merger discussions or any confidential information, except (i) as legally required by the receipt of oral questions, interrogatories, requests for information or documents in legal proceedings, subpoena, civil investigative demand or other similar process (as set forth in the NDA); and (ii) if its legal counsel had, after giving the other party notice and a chance for comment, limited disclosure to the minimum necessary to satisfy the legal requirements; and
- Disclosing confidential information through press releases, investor conference calls, and communications with journalists, each of which was in no way legally required.
As a result, the Chancery Court enjoined the exchange offer and proxy contest for a four-month period. Given limitations on calling special meetings under Vulcan's governing documents, this effectively precluded a proxy contest until Vulcan's June 2013 annual meeting.
In confirming the decision, the Delaware Supreme Court noted that standstill agreements and confidentiality agreements are qualitatively different, and that the absence of a standstill agreement does not imply that a party may use confidential information for a hostile takeover in contravention of the terms of a confidentiality agreement. Furthermore, the Delaware Supreme Court affirmed that pursuant to the terms of the NDA, Evaluation Material was not properly disclosed in the exchange offer and proxy contest materials, notwithstanding Securities and Exchange Commission reporting requirements, because such disclosure, even if "legally required," had not been externally demanded and the related disclosure had not been through the notice and vetting process. In conclusion, the Delaware Supreme Court affirmed the four-month injunction of the exchange offer and proxy contest.
There are a few key takeaways that practitioners should consider when drafting an NDA in the context of a merger-and-acquisition transaction:
- Although a standstill agreement and confidentiality agreement are qualitatively different, a confidentiality agreement may be enforced to prevent or delay a hostile takeover that improperly uses confidential information.
- Defining the use of confidential information should be done carefully with recognition of its potential effect on a hostile offer. If an exception is provided for disclosures that are "legally required," this exception should be defined carefully and fully, including whether "legally required" disclosure is only permitted for external demands.
- Exceeding the minimum disclosure required by law may expose a party to legal repercussions.
- Where there are antitrust issues, it is not uncommon to have both an initial NDA and a subsequent JDA. The confidentiality provisions in these agreements should either be congruent or deliberately different.
A court's analysis is likely to turn on specific contractual language and, where the contractual language is ambiguous, the negotiating history. We anticipate that "standard" NDA forms may evolve to try to avoid an inadvertent standstill, and parties who are interested in not having their information used in a hostile offer should review very carefully the NDA language (as should parties who want to retain the flexibility to pursue a hostile offer).