Print | Share | Reprint

Reconsidering NDAs

by contributors Abbe L. Dienstag, Ernest S. Wechsler and Joseph Satorius, Kramer Levin | Published June 18, 2012 at 1:38 PM

On May 4 Chancellor Leo E. Strine Jr. of the Delaware Court of Chancery ruled that Martin Marietta Materials Inc. had violated a pair of confidentiality agreements with Vulcan Materials Co. and issued a four-month temporary injunction suspending Martin Marietta's hostile exchange offer for Vulcan and related proxy contest. Martin Marietta has appealed the court's decision to the Delaware Supreme Court. The case -- which was decided by the court as a pure contract case (and not as a fiduciary duty case) -- has important implications for drafting transactional nondisclosure agreements.

In the spring of 2010, Martin Marietta and Vulcan began discussing a merger of equals and soon thereafter entered into nondisclosure commitments covering the information to be exchanged in the negotiation. The parties engaged in friendly discussions for over a year before Vulcan called off the merger talks in the summer of 2011. Not wanting to give up the pursuit, Martin Marietta seized the advantage of its relatively more valuable currency (its own stock) and launched a hostile exchange offer and proxy contest for Vulcan in December 2011. In the disclosure filings filed with the Securities and Exchange Commission and other communications, Martin Marietta discussed the history of -- and other details relating to -- the merger negotiations.

Vulcan claimed that Martin Marietta's use of confidential information in formulating its hostile bid and the disclosure of the parties' discussions in its SEC filings constituted a breach of Martin Marietta's obligations under the parties' reciprocal confidentiality agreement. Accordingly, Vulcan requested the court to enjoin the hostile bid.

The court found that Martin Marietta had clearly used and relied on confidential information in deciding to launch its hostile bid. It noted that the confidential information provided Martin Marietta with insight into the potential value of a combination and that further acts of Martin Marietta executives and advisers confirmed that confidential information most likely played a role in the decision to go hostile.

Martin Marietta argued that, even if it had used confidential information in formulating its hostile bid, such use was permissible because the confidentiality agreement allowed confidential information to be used "solely for the purpose of evaluating a Transaction" and that the definition of "Transaction" (a "business combination transaction between Martin Marietta and Vulcan") included a hostile exchange offer. The court found the language of the agreement to be ambiguous. Based on extrinsic evidence, however, the court concluded that the parties intended the definition of "Transaction" to refer only to a transaction that was consented to by the boards of both companies.

Martin Marietta also argued that the disclosure of the parties' negotiations in its SEC filings was permitted because the disclosure was "legally required" by the SEC tender offer rules. The court again looked to the parties' intent and concluded that the term "legally required" was only intended to include disclosure that was in response to an external demand (such as a subpoena). Martin Marietta's optional course of action -- its hostile bid -- which gave rise to SEC disclosure obligations, did not qualify as "legally required" disclosure.

The court enjoined Martin Marietta's hostile bid for a period of four months, consistent with the remedies provision of the confidentiality agreement. In doing so, the court rejected Martin Marietta's argument that an injunction would chill M&A activity. It instead noted that in order for companies to exchange information and explore potential transactions, the parties need to have faith that confidential information and discussions would indeed be protected.

The court's decision serves as a wake-up call to practitioners that confidentiality agreements negotiated in the early stages of a deal can have significant consequences down the road. The decision suggests revising certain standard language to avoid ambiguity, as well as various other takeaways:

Confidentiality agreements typically open with a statement of the purpose for which confidential information is being exchanged and often, as in Martin Marietta v. Vulcan, with reference to a "Transaction," as defined. Strine's decision is a reminder to pay greater attention to this definition, since it is this definition that drives the use restriction on the confidential information. Specifically, the definition should be explicit in its limitation to a consensually negotiated transaction.

Strine's opinion demonstrates that use restrictions in confidentiality agreements have teeth and will be enforced. Nonetheless, he had to contend with the argument of Martin Marietta -- which he found contrived -- that the information it received from Vulcan was of no consequence to its decision to commence its hostile bid. The party desiring protection for the confidential information may wish to consider adding a presumption to its form, shifting to the receiving party the burden of proof on the issue of use. On the other hand, the decision indicates that in proper circumstances, the receiving party might succeed in demonstrating that it did not in fact utilize the confidential information in violation of the parties' agreement, notwithstanding contrary appearances.

There would have been no case had the parties included standard standstill provisions in the confidentiality agreement. Even where parties are in discussion for a merger of equals and hostile overtures are furthest from their minds, there is no reason not to include reciprocal standstill provisions.

The legally compelled disclosure exception to confidentiality is standard fare for nondisclosure agreements, and the negotiation over these provisions is narrowly confined, usually over the extent to which reliance on advice of counsel is required. Martin Marietta's argument that a party could bootstrap its way to compelled disclosure by voluntarily injecting itself into a circumstance of SEC mandated reporting would have been rejected by most practitioners. After Martin Marietta v. Vulcan, this argument should no longer be left to the vagary of judicial inferences. Henceforth, nondisclosure agreements should explicitly negate the ability of a party to bootstrap its way to compelled disclosure.

Vulcan is a New Jersey corporation, while Martin Marietta is a North Carolina corporation. The parties chose to govern their confidentiality agreement by Delaware law with jurisdiction in the Delaware courts, a choice that appears to have worked well for Vulcan. Indeed, choice of law and forum may be outcome determinative. This suggests the advisability of considered attention to these boilerplate provisions, with Delaware -- at least for now -- appearing to be a jurisdiction of choice for a party on the delivering end of sensitive information.

Strine emphasized that he was not reaching the issue of whether the Vulcan board had a fiduciary duty to waive provisions of the confidentiality agreement to allow the hostile bid of Martin Marietta to proceed. As a New Jersey corporation, the fiduciary duties of the Vulcan board were governed by New Jersey law, and Strine limited himself to interpreting the terms of the parties' confidentiality agreement, which was governed by Delaware law. Nonetheless, parties should be aware that the Delaware courts have ruled, or intimated, that in appropriate circumstances, the board of a Delaware corporation may have a duty to waive the provisions of a standstill agreement to facilitate a transaction in the best interests of shareholders. The same may apply to the use restrictions of confidentiality agreements.

Abbe L. Dienstag and Ernest S. Wechsler are partners in the corporate practice at Kramer Levin Naftalis & Frankel LLP. Joseph Satorius is an associate in the firm's corporate practice.

Share:

Industrials

Reconsidering NDAs

Free preview

Meet the journalists

Movers & Shakers

Video

Coming back for more

Sectors