On July 12, 2012, the Supreme Court of Delaware issued its final written opinion in a case that essentially turned confidentiality provisions into a "standstill" precluding a hostile takeover.  The case should cause businesses to scrutinize provisions in non-disclosure agreements that were previously considered acceptable.

Martin Marietta Materials, Inc. v. Vulcan Materials Company[1]  arose when negotiations between Martin Marietta Materials, Inc. ("Martin") and Vulcan Materials Company ("Vulcan") on combining the two companies stalled, and Martin decided to launch a hostile takeover bid for Vulcan.  In announcing its exchange offer and proxy contest, Martin disclosed in various filings Martin made under federal securities laws and in disclosures to investors and the media confidential information Martin had obtained from Vulcan.  The use of such confidential information was governed by two confidentiality agreements, a non-disclosure agreement ("NDA") and a Common Interest, Joint Defense and Confidentiality Agreement ("JDA").[2]  The Court found that Martin violated both the NDA and the JDA, and enjoined Martin from pursuing its hostile bid for Vulcan for four months. 

The Court's holding that Martin violated the JDA involved the provision in that agreement that restricted how confidential information could be used by the receiving party.  The JDA prohibited Martin's use of Vulcan's confidential information except "for purposes of pursuing and completing the Transaction."  The JDA further defined the Transaction as "a potential transaction being discussed by Vulcan and Martin . . . ."  Critically, although neither the NDA nor the JDA included an express standstill provision,[3]  the Court found that the only transaction being discussed when the JDA was signed was a negotiated merger.  Martin argued that its hostile bid may have ultimately facilitated a negotiated transaction, and therefore disclosure of the information was allowed in its hostile bid process as it was part of "pursuing and completing the Transaction."  The Court was unpersuaded, and concluded that using the confidential information for a hostile takeover violated the use restriction in the JDA because that was not a transaction being discussed by the parties.   

To avoid having a use restriction in a non-disclosure agreement operate as a backdoor standstill as in Martin Marietta:

  • Carefully review both the use restriction and the definition of Transaction for narrow language that might conflict with potential deal structures. 
  • Consider whether a transaction "involving" the parties may be more flexible than one "between" the parties. 
  • Avoid using the word "negotiated" in the definition of "Transaction" if a hostile process is possible. 
  • If the definition of Transaction in the draft agreement is limited to a purchase of 100% of the equity of the target through a bid process, consider whether you may alternatively want to use the information to look at an asset or a debt transaction, acquisition of less than 100% of the target, or a deal outside of the bid process, and revise the definition accordingly. 

The Court's conclusion that Martin violated the NDA involved the exception in the NDA for disclosure of confidential information.  As with most confidentiality agreements, the NDA limited disclosure of the confidential information to the receiving party's representatives, but included an exception that allowed disclosure to other parties in certain legal circumstances.  Paragraph 4 of the NDA began:

In the event that a party or any of its Representatives are requested or required (by oral questions, interrogatories, requests for information or documents in legal proceedings, subpoena, civil investigative demand or other similar process) to disclose any of the other party's Evaluation Material . . . .[4]

The Court interpreted this language narrowly, and did not agree with Martin that the language allowed Martin to disclose confidential information in pursuing its hostile takeover because it was "legally required" to do so by federal securities laws. 

First, the Court found that a broader carve out in paragraph 3 of the NDA prohibiting disclosure of information regarding the merger discussions "other than as legally required" did not apply to the confidential information.  The subject of paragraph 3 was only information regarding merger discussions, not the disclosure of confidential information, so Martin could not avail itself of the more general "other than as legally required" exception for disclosing confidential information.  The Court held that the only exception for disclosing confidential information was to be found in paragraph 4 of the NDA.

Turning to the specific language of paragraph 4 quoted above, the Court held that this exception was only available in the event of an external demand for information, and did not contemplate a process initiated by Martin.  Thus, the Court held that Martin violated the NDA by both disclosing confidential information in a process initiated by Martin versus as a result of an external demand, and by failing to give notice to Vulcan and follow the vetting procedures of paragraph 4 of the NDA.

Lessons to be learned:

  • The Court's interpretation of the NDA highlights the need to scrutinize the disclosure carve outs of non-disclosure agreements to ensure they are broad enough to encompass any circumstances in which you might reasonably expect to disclose the confidential information without the other party's consent. 
  • Consider general language such as "except if legally required" versus the quoted language from paragraph 4 of the NDA above, or additional legal or non-legal circumstances when disclosure is allowed, such as if required by securities law or the rules of a securities exchange. 
  • Make sure any carve outs apply to disclosures of both confidential information and information regarding the transaction negotiations. 
  • Finally, consider minimizing or simplifying the notice and vetting requirements in any exception, and in the event of a necessary disclosure, ensure you comply with any procedures you do include.

Link to this opinion: