Delaware court enjoins tender offer based on confidentiality agreement without standstill provision

Mergers and Acquisitions Alert


In a 138-page post-trial opinion in Martin Marietta Materials, Inc. v. Vulcan Materials, Co., C.A. No. 7102-CS (Del. Ch. May 4, 2012), the Delaware Court of Chancery found that Martin Marietta Materials, Inc. breached confidentiality agreements it signed with Vulcan Materials, Co. by disclosing nonpublic information to aid its hostile tender offer and proxy contest. 


As a remedy for the breach, Chancellor Leo E. Strine enjoined Martin Marietta for a period of four months from taking any steps to further its hostile tender offer or prosecute its proxy contest even though the parties’ agreements did not contain a standstill provision. 


In its decision, the court meticulously examined the language of the confidentiality agreements and the parties’ course of conduct in negotiating the agreements to determine the intended meaning of their key terms.  The decision highlights the importance for practitioners to draft confidentiality agreements with extreme care, using specific language to ensure the parties’ intended meaning is respected and understanding the potential consequences even when terms are intentionally excluded or issues are intentionally avoided. 


Vulcan floats the idea of a merger to Martin Marietta’s newly anointed CEO


The facts discussed here are derived solely from the court’s Opinion.  The so-called dance between Martin Marietta and Vulcan began over a decade ago when Vulcan’s CEO, Don James, expressed interest to Martin Marietta’s management in discussing a potential friendly merger.  Soon thereafter, Ward Nye joined Martin Marietta as COO with an eye towards becoming CEO.  Until that happened, however, Nye was reluctant to engage in any merger discussion.  In 2010, Nye took over as CEO of Martin Marietta and, with the assistance of Vulcan’s financial advisor (Goldman Sachs), the parties began more serious talks. 


In these initial discussions, the court determined that Nye was a “nervous” CEO who did not want to put himself in a vulnerable position to lose control and was insistent on ensuring that nothing was made public so as to encourage an unsolicited bid against Martin Marietta by Vulcan or another party.  It was against this backdrop that the court evaluated the parties’ negotiations of the terms of two confidentiality agreements – a non-disclosure agreement (NDA) and a joint defense agreement (JDA) so the parties could discuss potential anti-trust issues – that would form the basis of the parties’ merger discussions. 


Martin Marietta insists on highly restrictive confidentiality agreements to protect against unwanted suitors


The confidentiality agreements were negotiated between the parties’ respective general counsels.  The negotiation of the NDA started with a previous NDA executed between the parties, and the court found that Martin Marietta’s revisions were all designed to help assuage Nye’s concerns by strengthening the information and disclosure restrictions.  Under the NDA, non-public information exchanged between the parties could only be used to evaluate a “Transaction,” defined as “a possible business combination [] between [Martin Marietta] and [Vulcan].”  The NDA further provided that a party may not disclose non-public information “other than as legally required” and provided that notice was first provided to the other party.  The parties did not, however, execute a separate standstill agreement, and the confidentiality agreements did not contain a standstill provision that would have prevented either party from launching a hostile takeover attempt.    


As Vulcan cools to the idea of a merger, Martin Marietta becomes the aggressor and launches a hostile exchange offer


Vulcan initially pursued a potential combination with Martin Marietta, but when the parties’ financial conditions changed, Martin Marietta emerged as the more dominant partner.  Armed with synergy estimates that were higher than expected and other confidential information obtained through the exchange of nonpublic information, Martin Marietta concluded that it could offer Vulcan a premium in a stock-for-stock exchange.  With Vulcan cooling to the idea of a friendly merger, Martin Marietta formulated a hostile takeover strategy and launched an exchange offer on December 12, 2011, accompanied by a proxy contest.  In SEC filings associated with the exchange offer and investor calls and presentations, Martin Marietta disclosed information that it obtained through the NDA. 


After analyzing the express language of the confidentiality agreements and the extensive extrinsic evidence, the court found a hostile offer did not constitute a transaction “between” the parties


The court scrutinized the language of the confidentiality agreements and determined that Martin Marietta breached those agreements by using non-public information in connection with its hostile bid.   The court held that a hostile offer did not constitute a “Transaction,” defined in the NDA as “a possible business combination [] between [Martin Marietta] and [Vulcan],” which was the only permitted use for the non-public information.  The court focused on and construed the word “between” in the NDA’s use clause, which did not contain typical language that would limit use of nonpublic information to a “negotiated” or “agreed to” transaction. 


In construing the “between” language, the court engaged in a detailed textual analysis, followed by an evaluation of the drafting history and extrinsic evidence, to determine that the NDA referred to a consensual contractual agreement between the two companies.   In reaching this conclusion, the court:


(1) found that the use of the term “transaction” signaled that there would be an agreement on how the combination would occur


(2) cited the holding of the Ontario Supreme Court of Justice in Certicom Corp. v. Research in Motion Ltd (2009) 94 O.R. 3d 511 (Can. Ont. Sup. Ct. J.), in determining that the word “between” required reciprocal action on the part of the parties, which could not be met by an exchange offer


(3) held that the extrinsic evidence demonstrated Martin Marietta “demanded and understood that any business combination transaction . . . would be a transaction signed up by the sitting boards” and


(4) determined that the general use prohibitions in the NDA prohibited the use of confidential information in making a hostile bid, even in the absence of an express standstill provision 


Under this interpretation of the confidentiality agreements, the court determined that Martin Marietta breached its contractual obligations by using non-public information in formulating a hostile takeover strategy and disclosing protected information in SEC filings related to its exchange offer.


The court also rejects argument that Martin Marietta’s disclosure was “legally required” under the federal securities laws

Another important issue in the case concerned whether Martin Marietta was “legally required” to make the public disclosures it made.  In launching its exchange offer and proxy contest, Martin Marietta was required to make certain public disclosures of confidential information under the federal securities laws and SEC rules.  Martin Marietta argued that the language in the NDA that permitted disclosure if a party was “legally required” to disclose information was not intended to limit disclosure to circumstances when a party received an external demand, such as a subpoena, but should be read to include any time that disclosure was legally required. 

In rejecting that argument, the court held that the NDA contained specific qualifying language that restricted disclosure only to situations where it was “requested or required (by oral questions, interrogatories, requests for information or documents in legal proceedings, subpoena, civil investigative demand or other similar process).”  The court further held, however, that even if the phrase “legally required” was intended to apply to securities filings, Martin Marietta disclosed more than was legally required in its filings and further breached the NDA when it subsequently disclosed the same information to investors and the media.

The court enjoins Martin Marietta from pursuing its hostile exchange offer or proxy contest for four months

As a remedy for breaching the confidentiality agreements (which expired the day before the court issued its decision), the court granted Vulcan’s request for an injunction, which prevented Martin Marietta from either pursuing its hostile bid or prosecuting its proxy contest for a period of four months.  In balancing the equities and harms involved, the court noted that Vulcan was suffering from exactly the same kind of harm Nye demanded the confidentiality agreements shield Martin Marietta from, such as loss in terms of negotiating leverage, customer relations and productivity due  to Martin Marietta’s misconduct.  The court also found that the cost to investors of failing to enforce confidentiality agreements (namely, the potential reduction of managers’ willingness to explore M&A transactions) weighed in favor of granting an injunction.  The court was also careful to note that this was purely a breach of contract case and did not concern whether the Vulcan board may have breached its fiduciary duties by failing to waive certain contractual protections, which is the subject of pending litigation in New Jersey.

Key takeaways

Martin Marietta has filed an appeal, and thus the Delaware Supreme Court will likely weigh in on the issue.  In the meantime, however, the decision has wide-ranging implications on the drafting of confidentiality agreements.  Corporate practitioners are advised to evaluate existing agreements to determine whether revisions are necessary and/or whether potential breaches may have already occurred.  As the court warned, “Where a confidentiality agreement does not contain an express standstill provision, transactional lawyers are advised that restricting the scope of legally required disclosures to those that arise in the context of some sort of discovery obligation or affirmative legal process may have the effect of creating a backdoor standstill restriction.”

Even if the confidentiality agreements contained provisions expressly stating that they were in no way intended to create a standstill agreement, in dealing with the type of breach that occurred here, there appears to be no effective remedy other than a backdoor standstill.  Crafting language to avoid having to litigate over the meaning of a confidentiality agreement, or to avoid the result of the Martin Marietta case, might not be that difficult.  For example, a confidentiality agreement can include language that it is not intended to create a standstill, or the use provisions can limit the use of confidential information to a “negotiated” or “agreed to” transaction.  The language can go even further by stating that the phrase “legally required” applies to securities filings (voluntary or mandatory), or that any remedy, equitable or otherwise, cannot include a request to enjoin an offer; however, many parties may be reluctant to sign such an agreement.

It is also important to focus on the constituency that is not a party to confidentiality agreements – i.e., the stockholders, who are standing on the sidelines and who may initiate litigation against the company’s board of directors.  Stockholders may assert that confidentiality agreements are designed to protect customer information, business plans and other proprietary information, to prevent harm to either party in the event no deal materializes, and that a premium offer to them is not the type of harm (and not a harm to the company) expected to be covered.  A clear agreement, with a record that demonstrates precise provisions were bargained for, can help defeat a stockholder action against the board requesting that they waive the pertinent terms of an ambiguous agreement like the one in the Martin Marietta case.  That type of action is what Vulcan is currently facing in New Jersey. 

It is also noteworthy that the NDA between Martin Marietta and Vulcan expired one day before the opinion was issued, yet Martin Marietta is now barred for four more months from pursuing its hostile offer.  Anyone else can now review the information that is discussed in the opinion and formulate an offer, but the party that is best situated to do so cannot.  All of these types of circumstances and consequences must be evaluated with care before signing a confidentiality agreement.

For more information about the impact of this decision on your business, please contact:

John L. Reed