On May 4, 2012, Chancellor Strine of the Delaware Court of Chancery issued a decision (Martin Marietta Materials, Inc. v. Vulcan Materials Company) enjoining Martin Marietta from pursuing a hostile transaction to acquire its rival Vulcan Materials for four months. Chancellor Strine found that Martin Marietta had violated confidentiality agreements with Vulcan by launching a hostile transaction when their friendly merger talks broke down. Martin Marietta is appealing the decision. The decision has attracted significant attention in the United States and is a reminder for any company wishing to preserve the flexibility to go hostile that the decision to enter into a confidentiality agreement, and the terms of any agreement, must be carefully considered.
Martin Marietta follows the Ontario Superior Court of Justice 2009 decision in Certicom v. Research In Motion in interpreting confidentiality agreements that did not contain a standstill provision as effectively precluding a hostile transaction. The confidentiality agreements in Martin Marietta were entered into in the context of friendly merger discussions where each party was concerned to protect against misuse of information shared with a competitor. The agreements permitted each party to use the other’s confidential information solely for the purpose of a "business combination transaction" that was "between" the parties.
As in Certicom, Chancellor Strine in Martin Marietta interpreted the use limitation in the agreements as permitting use only for a consensual transaction, which had the practical effect of imposing a standstill obligation even though the agreements did not contain an explicit standstill provision. Interestingly, Chancellor Strine was not able to reach these legal conclusions on the basis of an analysis of the relatively standard language in the agreements in question, which he found ambiguous. He therefore undertook an extensive review (in a decision of 138 pages) of the parties’ negotiations, drafting and conduct to determine their intent.
Here are some key take-away points from the decision.
- Consistent with the learning from Certicom, companies that wish to preserve the flexibility to proceed with a unilateral hostile initiative must carefully consider whether to enter into a confidentiality agreement and, if so, on what terms. Critically, this applies whether or not the agreement includes an explicit standstill provision.
- The exact terms of confidentiality agreements – in particular, the length of the obligations they impose – are key. Many confidentiality agreements include a standstill that sunsets before the expiry of the confidentiality obligations. An acquiror may want to clarify that it is free to proceed with a hostile transaction when the standstill expires. Of course, this may lead targets to focus on the risk that their information could be used and disclosed in a hostile transaction. One practical consequence may be that targets will demand longer standstills.
- A party subject to customary "use" restrictions in a confidentiality agreement will face an uphill battle persuading a court that it has not made use of the target’s confidential information in launching a hostile transaction. Some commentators have raised the theoretical possibility of walling off a designated team to work on the negotiated transaction, limiting access to the target’s information to team members so that other individuals would be free to work on a potential hostile transaction. But we think this would be unworkable in practice since senior management and the board of directors are ultimately going to have to make fully informed decisions regarding both transactions.
- A party mounting a hostile bid may also face challenges when claiming reliance on the exceptions to the prohibition on disclosure that are typically contained in confidentiality agreements. In Martin Marietta, the bidder made extensive disclosures about its negotiations with the target in an effort to discredit management and published synergy estimates that were based on the target’s confidential information. Chancellor Strine rejected the bidder’s assertion that the disclosure was "legally required" because the disclosure had been triggered by the bidder’s own unilateral action. This conclusion turned in part on the broad drafting of the disclosure prohibition in question, which permitted disclosure only where mandated by a court or other legal proceeding and made no distinction between business information derived from the target and facts about the negotiations that had taken place between the parties.
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