On May 4, 2012, Chancellor Strine of the Delaware Court of Chancery issued an opinion finding that Martin Marietta Materials, Inc. breached two confidentiality agreements with Vulcan Materials Company when it commenced a $5.5 billion hostile bid for Vulcan in December 2011. Despite the absence of an explicit standstill provision in either confidentiality agreement, which were signed by the parties in the spring of 2010 in connection with then-friendly discussions about a possible merger, the Court enjoined Martin Marietta for four months from pursuing its bid for Vulcan. We expect the Court's decision to influence the negotiation of M&A confidentiality agreements. See Martin Marietta Materials, Inc. v. Vulcan Materials Co., No. 7102-CS (Del. Ch. May 4, 2012).
The Court concluded that Martin Marietta breached the confidentiality agreements by using confidential information in determining whether to launch a hostile bid and disclosing extensive details regarding the confidential merger discussions and other confidential information in its securities filings and other communications. The Court's opinion highlights a number of considerations that M&A practitioners should bear in mind when drafting and negotiating confidentiality agreements:
- Carefully Consider Standstill Obligations--They May Take Many Forms.
As this case makes clear, even if a bidder successfully negotiates a confidentiality agreement without a traditional standstill provision, other provisions in the agreement could act as an effective backdoor standstill obligation if they are not properly drafted. In particular, the Court's opinion focuses on two such provisions:
- Restrictions on Use of Evaluation Material. As is customary, the Martin Marietta/Vulcan confidentiality agreements restricted the use of confidential information received by the parties to the evaluation of a "Transaction," a term contractually defined in the agreements. The Court struggled with the parties' differing views as to whether the term "Transaction," as defined in the agreements, included a potential unsolicited bid. In particular, the Court focused on language defining a "Transaction" as being a business combination transaction "between" the parties (as opposed to "involving" the parties). After extensively parsing the contractual definition--which the Court ultimately concluded was ambiguous--and evidence of the parties' intent in entering into the agreements, the Court decided that the contractual definition of a "Transaction" only permitted the use of confidential information to further a consensual transaction. Thus, the Court concluded that Martin Marietta breached the confidentiality agreements when it used confidential information, including information about potential synergy savings and antitrust risk, in determining whether to launch a hostile bid. In light of the Court's guidance, we expect parties to confidentiality agreements to be more careful in defining the types of "Transactions" that can be advanced with the use of the other parties' confidential information--such as by specifically defining "Transaction" to be a negotiated transaction--particularly where the agreement does not otherwise include a standstill obligation.
- Disclosure of Evaluation Material. As is customary, the Martin Marietta/Vulcan confidentiality agreements attempted to define the limited circumstances under which the parties would be permitted to disclose confidential information publicly, including details of the parties' prior negotiations. However, the Court found that the confidentiality agreements were ambiguous as to whether such information could be disclosed pursuant to legal requirements triggered as a result of discretionary action--i.e., Martin Marietta's launching of the exchange offer--or whether disclosure was only permitted in response to externally driven legal requirements such as a subpoena or other similar process. Faced with this ambiguity, the Court relied heavily on extrinsic evidence and determined that Martin Marietta breached the confidentiality agreements by disclosing confidential information in its securities filings, even though some level of disclosure--arguably not as extensive and gratuitous as Martin Marietta provided--may have been required to comply with SEC disclosure requirements. The Court also took Martin Marietta to task for failing to comply with the notice provisions of the confidentiality agreements prior to its purported "required" disclosure of Vulcan's confidential information in its SEC filings. As the Court's opinion makes clear, a confidentiality agreement should address with precision the circumstances under which disclosure of confidential information, including deal discussions, is permissible in response to intrinsic and extrinsic legal requirements, and parties to such agreements should consider with care any procedural requirements prior to making required disclosures.
- Exercise Care in Documenting Deliberations.
Given the ambiguity of some of the fundamental contractual language reviewed by the Court, Chancellor Strine often resorted to the review of extrinsic evidence, including board materials, internal memoranda, handwritten notes and bankers' presentations. These materials ultimately led him to conclude that in entering into the confidentiality agreements, it was the parties' intent--particularly Martin Marietta's--to limit strictly their ability to disclose any confidential information. Some of these materials also show that prior to launching the hostile bid Martin Marietta and its advisors were concerned about the potential legal ramifications of the contractual language. This opinion is but another reminder of the high degree of care that dealmakers and their advisors should put into documenting their internal and external deliberations and potential legal issues.
- Maintain Consistency in Drafting.
Business combination transactions often necessitate that multiple agreements govern the treatment of confidential information, and drafters should take care to ensure these agreements include consistent language. Martin Marietta and Vulcan entered into two confidentiality agreements, the second one intended to facilitate an analysis of the antitrust implications of the proposed merger. However, the two agreements differed in the way they defined "Transaction." The initial agreement only permitted information to be used in connection with a possible business combination transaction between the companies, whereas the subsequent agreement only permitted information to be used for purposes of pursuing and completing the potential transaction then being discussed by the companies. The latter definition more clearly encompassed only a negotiated deal, which is what the parties were then discussing. Although this distinction was not dispositive in this case, drafters should take care to avoid inconsistencies in confidentiality agreements that may create unintended ambiguity.
The Court's decision to enjoin Martin Marietta's hostile bid seems to have been influenced heavily by facts specific to the parties' course of conduct prior to and following execution of the confidentiality agreements, including Martin Marietta's heightened concern with preserving the confidentiality of information during the time leading to the execution of the confidentiality agreements, its officers' clear reliance on confidential information in subsequently formulating the hostile bid and, ultimately, what an outside observer could argue was an over-disclosure in its SEC filings of confidential information that was intended to appeal to Vulcan's stockholder base more than to address disclosure requirements. Nevertheless, the Court's opinion provides practitioners with very important guidance regarding takeover strategy and the way the Court will technically construe certain fundamental provisions of M&A confidentiality agreements.