In July, Delaware’s Supreme Court released its written reasons for affirming the Delaware Court of Chancery's ruling in the Martin Marietta decision, which halted the unsolicited offer for Vulcan Materials Company by rival sand and gravel maker Martin Marietta Materials, Inc. The decision barred Martin Marietta from pursuing a future bid for Vulcan for four months. In doing so, the Delaware Supreme Court concluded that Martin Marietta was in violation of the confidentiality agreements that were entered into while the parties were contemplating a friendly merger, despite the lack of any explicit standstill provisions in the agreements. While confidentiality agreements generally operate to restrict the use of disclosed information for certain stated purposes, a standstill provision explicitly prevents a party receiving disclosed information from making a hostile take-over bid.
While the Delaware case sets an important precedent under American corporate and securities law, Canadian lawyers have been following this case quite closely for an additional reason: the Delaware Court of Chancery, a court at the forefront of commercial and M&A law in North America, cited the 2009 Certicom/RIM decision from the Ontario Superior Court in its ruling. This bulletin briefly explores the relevance of these rulings and outlines some of their key lessons.
Delaware - The Martin Marietta/Vulcan Decision
In the spring of 2010, Martin Marietta and Vulcan began serious discussions regarding a friendly merger of the two companies. During negotiations, Martin Marietta and Vulcan entered into two agreements, a non-disclosure agreement (NDA) and a common interest, joint defense and confidentiality agreement. The NDA ensured that the parties would use each other's confidential information "solely for the purposes of evaluating a Transaction." The agreement defined the term "Transaction" as “a possible business combination transaction between [Martin Marietta] and [Vulcan].” There were no standstill provisions in either of the confidentiality agreements.
After the exchange of confidential information, Vulcan ended the negotiations and Martin Marietta then proceeded to launch an unsolicited exchange offer for the purchase of Vulcan’s shares and a proxy contest to elect new members to Vulcan’s board. Vulcan sought an order temporarily preventing Martin Marietta from proceeding with both actions.
Ontario - The Certicom/RIM Decision
Similar to the Delaware case, Research in Motion Limited and Certicom Corp. had entered into various non-disclosure agreements before beginning friendly discussions regarding the potential acquisition of Certicom by RIM. Although one of these non-disclosure agreements contained a standstill provision, it had expired before RIM made its hostile take-over bid for the shares of Certicom in 2008.
Under one of the NDAs between RIM and Certicom, RIM agreed that it would use confidential information received “only to the extent reasonably required to fulfill the Purpose”. Part of the definition of the "Purpose"included “assessing the desirability or viability of establishing or furthering a business or contractual relationship between the Parties which may include….some form of business combination between the Parties.”
Delaware and Ontario Decisions
In both the Delaware and Ontario decisions, the courts held that, in the applicable circumstances, a hostile take-over bid did not constitute a “business combination” between the parties.
The Ontario court held that the word "between" required some form of reciprocal action between the parties, with the target consenting to or endorsing the bid, and therefore participating with the bidder. Although the Delaware Chancery decision cited the Ontario ruling on the meaning of the word between, the Delaware analysis on the permitted uses of the confidential information under the NDA rested primarily on a broad review of the evidence including, for example, the interactions of the parties, as the intentions of the parties were not clear from certain provisions of the NDA. Although the Delaware Supreme Court affirmed the trial judgment, it did not decide or comment on the ambiguity-based analysis.
In both the Ontario and Delaware cases, the courts ruled that an injunction was an appropriate remedy; the Delaware court prohibited the hostile exchange offer by Martin Marietta from proceeding for four months while the Ontario court permanently prohibited the RIM bid.
Both the Delaware and Ontario decisions point to the need for careful drafting when preparing and negotiating specific terms of a confidentiality agreement. Parties should consider the potential impact of the contractual provisions, particularly the permitted use provisions, on subsequent transactions and avoid ambiguity in their agreements. For example, if the parties do not intend that the confidential information exchanged should be used for a business combination effected by hostile or unsolicited activities, then this should be stated in the agreement. If the intent is not expressly stated, a court may consider external factors, including, for example, the drafting history of the agreement, in order to clarify ambiguous wording.
The decisions also demonstrate that “permitted use” clauses in confidentiality agreements will be enforced and may operate, in effect, as standstill provisions despite the expiry of or the complete lack of explicit standstill provisions. Parties should therefore closely consider the wording of any permitted use provision, as the exceptions may be interpreted narrowly. A potential acquirer should carefully consider the implications of a restrictive confidentiality agreement both before receiving confidential information and before making a take-over bid.
Despite the protection afforded to the target companies of unsolicited take-over bids in the Certicom/RIM and Martin Marietta/Vulcan decisions, a potential target should still consider the benefits of a specific standstill provision when negotiating confidentiality agreements. With a standstill provision, a target does not need to prove that an unsolicited bid is outside the scope of the permitted use of confidential information under the agreement nor does the target need to prove that the confidential information received under the agreement was used in making the unsolicited bid.
A potential acquirer bound by a restrictive permitted use clause in a confidentiality agreement might be able to use a separate acquisition team, or a “clean team”, that is subject to a firewall to ensure it does not use confidential information. However, it may be difficult for a bidder to exclude certain key decision-makers from either the clean team or the team reviewing the confidential information in the context of the friendly merger discussions.
While the Delaware decision is not binding law in Ontario or in Canada, the Delaware courts are frequently referred to by Canadian courts with respect to corporate and securities law. Parties to M&A transactions in Canada should consider the lessons learned from these decisions.
Co-authored with Noah Kochman, Summer Student.