September 01, 2012
The dangers inherent in entering into a confidentiality agreement when parties contemplating a merger wish to preserve the flexibility to go hostile have been highlighted by both Canadian and US courts.
Until the Ontario Superior Court’s decision Certicom Corp. v. Research in Motion Limited, most Canadian practitioners would have said that parties were free to make a bid after any existing standstill period expired. But the court found that, while a standstill obligation presumes the use of confidential information and prohibits its use for a short period of time, the confidentiality obligation requires proof of the use of confidential information and normally prohibits its use for a longer period of time.
The result is that confidentiality provisions operate as a standstill in a practical sense, even where there is not a separate standstill obligation in effect when a party commences a hostile bid.
The law in the US, however, wasn’t clear until last May, when Chancellor Leo Strine of the Delaware Court of Chancery released his decision in Martin Marietta Materials, Inc. v. Vulcan Materials Company. Strine followed Certicom and ruled that Martin Marietta had violated confidentiality agreements with Vulcan by using confidential information in the hostile bid that ensued when friendly talks broke down.
“Martin Marietta does not depart from Certicom in any material way,” says James C. Tory of Torys LLP’s Toronto office. "What the decision means is that in both Canada and the US, it will be harder for parties to avoid spelling out what their expectations are in regard to a standstill.”
That may be more complex than it appears. “An acquirer that wants to clarify that it wishes to be free to proceed with a hostile transaction when the standstill expires may lead the target to focus on the risk that their information could be used and disclosed in a hostile transaction,” says Cornell Wright, also a partner at Torys. “One practical consequence may be that targets will demand longer standstills.”
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