Two recent Delaware cases remind us of important provisions in confidentiality agreements entered into in connection with potential acquisitions.
In the typical friendly, negotiated acquisition, both parties will enter into a confidentiality agreement or non-disclosure agreement (referred to in lawyer-speak as a “CA” and “NDA,” respectively, but really the same thing). The main purpose of these agreements is to allow the parties to provide confidential business, financial and other information about themselves to the other party for the purposes of evaluating a potential transaction and conducting “due diligence.” Each receiving party agrees to keep the disclosing party’s information confidential and not to use it, other than in connection with evaluating a potential transaction.
The first clause is the “standstill clause,” which effectively prohibits either party from making a hostile bid or tender offer for the other party and specifically prohibits the use of confidential information for such purpose. This clause is typical in a CA involving public companies; however, even if the clause is missing, the court may still read it into the CA based on the other terms of the CA and the prior dealings of the parties. In Martin Marietta Materials, Inc. v. Vulcan Materials Co.2, the Delaware Chancery Court interpreted a CA that was originally entered into in connection with a friendly potential acquisition to bar the use of confidential information in a hostile bid by one party (Martin Marietta) for the other (Vulcan), even though the CA did not contain an express standstill provision, and enjoined the hostile bid for a period of four months. The moral of the story is: include a standstill provision in your CA from the start and save yourself the litigation expense and sleepless nights experienced by Vulcan in this case.
The second clause of note is a “ non-reliance” provision, in which the receiving party acknowledges that the disclosing party is not making any representation as to the accuracy or completeness of the confidential materials supplied and that the disclosing party will not have any liability for the supplied materials. This clause is typically supplemented by a waiver provision in which the receiving party waives any claims it might have in connection with any potential transaction unless the parties have entered into a definitive purchase agreement. In RAA Management LLC vs. Savage Sport Holdings, Inc.3, the Delaware Supreme Court relied on fairly typical non-reliance and waiver clauses in a CA to uphold a decision dismissing a suit by a potential acquirer against a target that failed to disclose significant liabilities early in the due diligence process. The would-be acquirer sued for $1.2 million in due diligence and negotiation costs that it incurred before it learned of the potential liabilities and terminated the process. The Court ruled that the nonreliance and waiver provisions barred the potential acquirer’s suit, even claims based on fraud or intentional misrepresentation, and upheld the lower court’s dismissal.
Both cases serve as a reminder to practitioners and clients alike that there is significant value in crafting a well-drafted CA