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Strine thwarts Martin Marietta takeover bid for Vulcan

by David Marcus | Published May 7, 2012 at 9:17 AM

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Martin Marietta Materials Inc. sought to rally support for its $4.9 billion hostile bid for Vulcan Materials Co. by depicting Vulcan CEO Don James as a poor CEO on the verge of retirement whose company would be far better off in the hands of his younger, more efficient counterpart at Martin Marietta C. Howard "Ward" Nye. But that strategy backfired on Friday when Delaware Chancellor Leo E. Strine Jr. barred the Raleigh, N.C.-based construction materials company from proceeding with its proxy fight against Birmingham, Ala.-based Vulcan.

The judge held that in crafting the bid Martin Marietta improperly used information that it gained from Vulcan under two confidentiality agreements the companies signed in May 2010. Martin Marietta has nominated a slate of four directors who will seek election to the Vulcan board at the target's June 1 annual meeting.

The bidder issued a statement saying that it is "in the process of reviewing the ruling and considering its options." Martin Marietta could appeal the decision to the Delaware Supreme Court.

Vulcan sued in Delaware almost immediately after Martin Marietta launched its hostile bid on Dec. 12, and Strine presided over a week-long trial that began Feb. 27. The judge also heard a full day of post-trial arguments in the case on April 9, which is unusual in the Court of Chancery and highlights the challenging nature of the case for Strine. Both James and Nye testified at the trial.

In a 138-page opinion, Strine analyzed the confidentiality agreements on which it turned. When Martin Marietta general counsel Roselyn Bar and her Vulcan counterpart Robert Wason negotiated the confidentiality agreements, Strine found, Nye had recently been promoted to CEO and wanted badly to keep the job.

"Nye emerges in the record as being preoccupied with his own future as a public company CEO as much as, if not more than, James," the judge wrote. Nye did not want to give up his post even for a relatively short time after the close of a potential merger between the two companies. Nye, Strine wrote, even "evinced a willingness to forgo a 20% premium for Martin Marietta stockholders in the exchange ratio to ensure he was slotted as CEO right away."

Nye would have been fearful of a hostile approach from Vulcan because at the time Martin Marietta had "recently been the target of a hostile takeover attempt by a European company that made its move after talks of a joint venture between it and Martin Marietta fell apart," Strine wrote. The bidder abandoned its attempt because the financial crisis eliminated its ability to finance the deal.

But as a result of the experience, the judge found, "[h]ad Nye had the least inkling that the discussions and information exchange that were being proposed could be used in pursuit of a hostile bid by Vulcan, he would have halted any further discussions immediately."

That perspective permeated Strine's reading of the confi and his account of how it was negotiated. "It was Nye who was most scared of disclosure and facing an unsolicited bid," he wrote. Strine looked at the drafting history of the confidentiality agreements and found that "every one" of the changes proposed by Bar "broadened the information subject to its restrictions and limited the permissible uses and disclosures of the covered information."

Martin Marietta wanted those restrictions when the companies opened talks in 2010, but its stock fared much better than Vulcan's over the next year, and James ended the merger talks between the companies last June. Martin Marietta began plotting its bid for Vulcan in August. The judge found that the bidder's estimate of the potential synergies in a combination derived in significant part from information Vulcan CFO Dan Sansone shared with Martin Marietta CFO Anne Lloyd in March 2011.

"The evidence reveals that Martin Marietta did use evaluation material in forming its hostile bid," Strine wrote. He enjoined the bidder from proceeding with its proxy fight. Should the ruling stand, Marin Marietta would have to wait until next year to renew its proxy fight. Vulcan has a staggered board, so Martin Marietta couldn't take control of the board until 2014.

At the end of the opinion, Strine emphasized the policy considerations that supported his decision. "If the cost of sharing information is to be at the mercy of the other party, you will, if you are a typical CEO, tend not to risk sharing. The overall cost to investors if the law does not enforce confidentiality agreements might turn out to be quite large in terms of transactions that are not done."

Robert Zimet of Skadden, Arps, Slate, Meagher & Flom LLP was the lead trial lawyer for Martin Marietta, with William Savitt of Wachtell, Lipton, Rosen & Katz for Vulcan. Wachtell's Edward Herlihy and Igor Kirman led the corporate side for Vulcan, and Strine cited Kirman's 2008 book "M&A and Private Equity Confidentiality Agreements Line by Line" frequently in the footnotes along with a treatise by Skadden partners Lou Kling and Eileen Nugent, Negotiated Acquisitions of Companies, Subsidiaries and Divisions. Kling and Nugent did not advise Martin Marietta, which tapped its longtime outside counsel Peter Atkins of Skadden.

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