In the complex world of mergers and acquisitions, the steps taken by and documents exchanged between acquirors and targets in a courting phase can have dramatic consequences, especially when it comes to the execution of non-disclosure agreements with standstill provisions and the delivery of confidential information during a due diligence process. This was recently illustrated in the case of Certicom Corp. v. Research in Motion Limited.
In the Certicom case, the facts were as follows:
- RIM had been a customer of Certicom since 2000 and the parties exchanged commercial information in the ordinary course of their business pursuant to standard form non-disclosure agreements over the years.
- In February of 2007, Certicom and RIM first discussed the possible acquisition of Certicom by RIM. At that time, Certicom and RIM executed a new form of non-disclosure agreement (the “2007 NDA”) that provided:
- the use by RIM of confidential information disclosed pursuant to the 2007 NDA was limited to certain “permitted purposes” (defined to mean some form of business combination between the parties);
- a standstill provision pursuant to which RIM specifically agreed not to make a hostile take-over bid for Certicom within a 12 month period; and
- an express right of the disclosing party to seek injunctive relief for any unauthorized use of the confidential information provided pursuant to the terms of the 2007 NDA.
- In September of 2007, Certicom provided RIM with confidential information pursuant to the 2007 NDA, including Certicom’s 2008 financial year strategic growth and business plan and other sensitive business information which was not in the public domain and which was not otherwise available to RIM in the course of the exisiting business relationship between RIM and Certicom.
- On June 17, 2008, Certicom and RIM executed a second non-disclosure agreement (the “2008 NDA”) in the ordinary course of the parties’ commercial relationship without a standstill provision but with an express right of the disclosing party to seek injunctive relief upon a breach of the non-disclosure provisions.
- In October of 2008, additional confidential information was provided by Certicom to RIM in reliance upon the 2008 NDA.
- On December 3, 2008 and after negotiations between Certicom and RIM failed to result in a friendly business combination, RIM announced its intention to launch a hostile bid to acquire 100% of the shares of Certicom.
The primary issue in the Certicom case was whether Certicom could obtain an injunction to stop RIM from proceeding with its hostile take-over bid for Certicom despite the fact that the contractual standstill provisions had expired. In this case, the court did order an injunction against RIM, relying on the fact that there was evidence that Certicom’s confidential information had indeed been reviewed by those people at RIM who were part of the decision-making process in launching the hostile take-over bid (i.e. RIM had failed to set up a “firewall”) and that Certicom’s confidential information was used by RIM to some degree in assessing the desirability of making its hostile bid. The court also found that RIM’s hostile take-over bid could not be interpreted to fall within the “permitted uses” contemplated by Certicom and RIM, which contemplated a friendly business combination “between” the parties rather than a hostile take-over bid with an offer being made directly by RIM to Certicom shareholders. The fact that the 2007 NDA and the 2008 NDA had express provisions for seeking injunctive relief ultimately cemented the court’s willingness to grant an injunction to stop RIM from launching its hostile take-over of Certicom (without Certicom having to establish the customary requirement of suffering irreparable harm if the injunction was not granted).
The Certicom case certainly highlights some important lessons in the world of mergers and acquisitions. In particular, it is clear that non-disclosure and standstill provisions provide two independent levels of protection for a potential target (or two traps for a potential acquiror). However and with the implementation of “firewalls” within the acquiror’s organization, an acquiror may still be able to launch a hostile take-over bid despite the receipt of confidential information from the target upon the expiry of a standstill covenant and provided that the acquiror can conclusively demonstrate that the “firewall” had indeed prevented the spread of confidential information to those persons assessing and initiating the hostile bid. Considering the impact that confidentiality and standstill provisions may have on the implementation of merger and acquisition strategies, the careful negotiation and drafting of these contractual provisions cannot be overstated.