The Delaware Supreme Court on May 31, 2012 upheld the Delaware Court of Chancery’s decision in Martin Marietta Materials, Inc. v. Vulcan Materials Co.1 to temporarily enjoin for four months Martin Marietta’s hostile takeover bid for Vulcan. The decision serves as a warning regarding the danger of entering into a non-disclosure agreement if a negotiated transaction has the potential to later turn hostile.
Martin Marietta and Vulcan commenced confidential merger discussions in 2010 and in May of that year entered into a non-disclosure agreement (the “NDA”) and a joint defense agreement to share antitrust analyses (the “JDA”). Notably, neither the NDA nor the JDA included an express “standstill” provision. During the course of the discussions, Vulcan and Martin Marietta exchanged confidential information.
In December 2011, Martin Marietta launched an unsolicited exchange offer for Vulcan’s shares and commenced a proxy contest to elect four directors to Vulcan’s board at Vulcan’s June 1, 2012 annual meeting. Martin Marietta brought suit in the Delaware Court of Chancery seeking a declaratory judgment that its exchange offer and proxy contest did not breach the NDA. In connection with its takeover bid, Martin Marietta disclosed confidential information received from Vulcan, as well as information regarding its prior negotiations with Vulcan, in its filings with the U.S. Securities and Exchange Commission (the “SEC”), and in other public communications such as investor calls and presentations.
Vulcan filed a counterclaim in which it sought a declaratory judgment that Martin Marietta had breached the NDA and the JDA and requested that the court temporarily enjoin Martin Marietta’s hostile takeover bid. Chancellor Leo E. Strine, Jr. granted Vulcan’s request and, specifically, enjoined Martin Marietta from taking steps to acquire control of Vulcan’s shares or assets for a period of four months.
Key terms of the NDA
The NDA required that nonpublic information provided under the NDA be used solely for the purpose of evaluating a “Transaction,” which was defined as a possible business combination transaction between Martin Marietta and Vulcan. In addition to this restriction on use, the NDA required that such information be kept confidential, and prohibited disclosure of the fact that information had been shared, that Martin Marietta and Vulcan were engaging in negotiations, as well as any of the terms, conditions or other facts with respect thereto, in each case, except as “legally required.” In what Chancellor Strine described as a “notice and vetting process,” the NDA required a party that was requested or required to disclose confidential information to provide the other party with prompt notice so as to allow such party to seek a protective order or other appropriate remedy. In the absence of such an order or remedy, the notifying party was permitted to disclose only such material as in the opinion of its counsel was legally required to be disclosed. Both the NDA and the JDA expressly stated that a breach would result in irreparable harm and that the harmed party would be entitled to injunctive relief.
Prohibition on use of confidential information for hostile bid
Vulcan asserted that the NDA and JDA prohibited the use of confidential information for any purpose other than a negotiated business combination, and that Martin Marietta had used confidential information in formulating its hostile bid. In response, Martin Marietta argued that the definition of “Transaction” did not specifically differentiate between a friendly or hostile process, and that it was therefore permitted to use the information for purposes of formulating its hostile bid. Further, Martin Marietta claimed that even if such use was prohibited, it had not used any of the confidential information when formulating its bid.
Chancellor Strine stated that he did “not embrace Martin Marietta’s version of events” and concluded that Martin Marietta had utilized nonpublic information covered by the terms of the NDA and the JDA to formulate its bid.
Chancellor Strine also held that the term “Transaction” should be interpreted to only include negotiated transactions, and not hostile ones. In reaching this conclusion, he first determined that the definition of “Transaction” in the NDA (and the related definition in the JDA) was ambiguous and thus required a review of extrinsic evidence to ascertain the intentions of the parties. After such review, including a review of the parties’ negotiating history and edits to the draft versions of the NDA, he concluded that the parties did not intend that the definition would encompass a hostile takeover bid, whether by Martin Marietta or Vulcan. Instead, a “Transaction” was limited to “any…steps leading to a formal mingling of the two companies’ assets that is contractually agreed upon, or consented to, by the sitting boards of both companies at the outset of those steps being taken.”
Prohibition on disclosure of confidential information unless “legally required”
In addition to finding that Martin Marietta had violated the “use” restrictions in the NDA, Chancellor Strine then determined that Martin Marietta had further violated the NDA by also violating its “disclosure” restrictions. Martin Marietta argued that the NDA’s exemption permitting the disclosure of confidential information if “legally required” allowed it to disclose confidential information in its SEC filings. Chancellor Strine rejected Martin Marietta’s contention, finding that the SEC disclosure obligations were triggered by Martin Marietta’s own voluntary conduct (the exchange offer and proxy contest), and not by external demands, such as interrogatories or subpoenas. In addition, he determined that Martin Marietta’s disclosure in its SEC filings far exceeded what was “legally required” under SEC rules. Further, even if Martin Marietta’s disclosure of confidential information in its SEC filings had fallen within the “legally required” exception, Martin Marietta nonetheless violated the NDA and the JDA by not complying with the notice and vetting procedures provided in the NDA and the JDA.
Subsequent disclosure of confidential information initially disclosed as “legally required”
Martin Marietta contended that once it had publicly disclosed confidential information pursuant to a legal requirement, further disclosure of such information would not violate the NDA. Chancellor Strine stated that the text of the NDA did not support this conclusion and held that each disclosure of confidential information that was not “legally required” constituted a separate violation of the NDA.
Vulcan sought injunctive relief, and Chancellor Strine, making reference to the numerous breaches of the NDA and the JDA that he had found, enjoined Martin Marietta from pursuing any steps to acquire control of Vulcan’s shares or assets for a period of four months.
On May 31, 2012, one day before Vulcan’s annual meeting, the Delaware Supreme Court upheld Chancellor Strine’s decision, including the temporary injunction, and thereby prevented Martin Marietta from seeking election of its slate of four nominees to Vulcan’s board of directors.
The Martin Marietta decision is informed by facts specific to this case, particularly as a result of Chancellor Strine’s reliance on evidence extrinsic to the NDA. Nonetheless, Martin Marietta highlights certain important considerations in the context of confidentiality agreements, including the following:
Beware of “backdoor” or “de facto” standstills
- When analyzing whether a confidentiality agreement restricts an acquiring counterparty from launching a hostile acquisition bid, parties have generally focused on whether an explicit standstill provision has been included in the agreement and, if so, the terms, restrictions and duration of any such standstill.
- The Martin Marietta decision sounds the alarm that common “use” and “disclosure” restrictions in confidentiality agreements may be interpreted by courts to serve as a de facto standstill by imposing significant practical limitations on an acquirer’s ability to commence a hostile bid.
- As a result, even in the absence of an explicit standstill provision, acquirers that wish to retain flexibility to later commence a hostile bid must consider whether “use” and “disclosure” provisions should include specific exceptions, or carve outs, that would permit a party to both use and disclose confidential information in the context of any business combination (whether friendly or hostile).
- When an explicit standstill provision has been included, a common assumption has been that a potential acquirer will only be restricted from making a hostile bid up until the termination of such standstill, which typically has a shorter negotiated length than the overall non-disclosure provisions in the confidentiality agreement. However, after Martin Marietta, parties must also give consideration to potential restrictions that may apply during the period of time after the standstill clause has expired but the general use and disclosure restrictions remain in place.
- Standstill provisions often include “fallaway” clauses that cause express standstill restrictions to terminate early upon the occurrence of certain events, including if the target enters into a transaction agreement with a third party or if a third party commences a tender offer that is not rejected by the target‘s board. This decision raises the question of whether these fallaway clauses actually achieve their desired effect, given that other use and disclosure provisions may nonetheless restrict an unsolicited bid. Acquirers may wish to propose explicit terms making clear that if express standstill restrictions terminate pursuant to the triggering of such a “fallaway” provision, the use and disclosure provisions of the agreement will not serve to neutralize the fallaway.
- The Martin Marietta opinion states that the foregoing issues may properly be dealt with through the use of “clean teams,” where a bidder would use a second “non-tainted” team to avoid contravening any applicable “use” or “disclosure” restrictions. However, given the almost certain need for senior management and the board to be involved in any acquisition process involving a hostile bid, we believe this is unlikely to be a realistic solution.
- Chancellor Strine refers to Delaware as “a state whose public policy is pro-contractarian” and emphasizes that Delaware courts endeavor to enforce agreements, including confidentiality agreements, as written. The “contractarian nature of Delaware corporate law” reinforces the obvious need for precise drafting to help generate the desired outcome.
- In particular, Chancellor Strine, when granting injunctive relief, stated that parties are permitted to “agree contractually on the existence of requisite elements of a compulsory remedy, such as the existence of irreparable harm in the event of a party’s breach,” and ”that such a stipulation is typically sufficient to demonstrate irreparable harm.” Notably, Delaware courts have granted injunctive relief even in circumstances when it interfered with the shareholder franchise. Parties should carefully consider the implications of injunctive relief when providing for it in a confidentiality agreement.
- When faced with ambiguous contract provisions, Delaware courts will turn to extrinsic evidence to elucidate the intention of the parties. As a result, when preparing board materials, internal memoranda or notes and presentations by financial advisors, parties should bear in mind that a court might later review such materials as “extrinsic evidence” when evaluating an ambiguous provision.
The Martin Marietta decision puts acquirers of public companies on notice that entering into a confidentiality agreement with the target may significantly limit the acquirer’s ability to subsequently engage in a hostile takeover bid. Acquirers wishing to maintain the flexibility to pursue a hostile bid must ensure that the terms of any confidentiality agreement are carefully drafted and precisely integrated to ensure that such limitations are clear at the outset.