The confidentiality agreement -- or confi -- is a ubiquitous part of M&A practice that generally attracts little attention. Companies sign confis to be able to exchange confidential information, which is often a first step toward a merger agreement. Confis limit ways in which companies may use information and may contain standstill provisions that bar hostile bids and other unwanted activities. Because they're usually signed at the start of talks and are, well, confidential, confis are subjected to much less analysis than merger agreements.
But confis figure prominently in two current takeover battles, offering a rare glimpse at the drafting issues such agreements raise. Especially important are their ability to limit one party from making an unwanted approach, behavior that many confis try to prevent with the inclusion of standstill provisions.
Two confis are at the center of the litigation before Delaware Chancellor Leo E. Strine Jr. arising from Martin Marietta Materials Inc.'s $4.9 billion bid for Vulcan Materials Co. The terms of a possible confi are also at issue in Westlake Chemical Corp.'s $1.2 billion unsolicited offer for Georgia Gulf Corp.
In the Vulcan case, the target argues that the confis signed in May 2010 should prevent Martin Marietta from making a hostile bid. The companies signed one agreement on May 3, and after realizing the antitrust hurdles to a deal might be significant, they signed another on May 18 that provided for sharing of information between not just the companies, but their outside lawyers. Delaware law governs both contracts, which have been disclosed in the litigation.
|Hostile bids for U.S. companies|
|announcement date by year||Deal value ($m)||No. of deals||successful||percent successful|
Martin Marietta general counsel Roselyn Bar and her Vulcan counterpart, Robert A. Wason IV, signed both agreements. Martin Marietta's antitrust counsel, Raymond Jacobsen Jr. of McDermott Will & Emery LLP in Washington, and Vulcan's lawyer, Joseph Larson of Wachtell, Lipton, Rosen & Katz, signed the May 18 confi. Wachtell's Edward Herlihy and Igor Kirman, who in 2008 published a book on confis, are Vulcan's corporate lawyers, with William Savitt on litigation. (Standstill pacts are the subject of the longest section of Kirman's 108-page paperback.) Martin Marietta is using a team from Skadden, Arps, Slate, Meagher & Flom LLP led by Peter Atkins on corporate and Susan Saltzstein, Robert Zimet and Robert Saunders on litigation.
Martin Marietta and Wachtell emphasize different aspects of the agreements. The bidder notes that the May 3 agreement "does not contain a standstill provision prohibiting either party from making a public offer, or any agreement by Martin Marietta to limit its holdings of Vulcan's shares." Kirman's book contains a "typical seller-proposed standstill provision" with comments a prospective buyer is likely to have, and the May 3 agreement indeed does not contain any such clause. Martin Marietta also says it used only publicly available information, a claim Vulcan contests but which if found to be true would moot the issue.
Vulcan counters that the May 3 confi "prohibited disclosure of nonpublic information received from the other party, as well as the existence of the talks themselves, for a two-year period, and restricted the use of any information to that necessary to evaluate a consensual deal." The target advances a similar argument based on the May 18 agreement.
The dispute between Westlake and Georgia Gulf was focused on the drafting rather than interpretation of a confi before an unconventional move from Westlake on Feb. 1.Westlake wanted more information about Georgia Gulf before it hiked its bid. In exchange, Georgia Gulf wanted Westlake to sign a confi with a standstill that would have limited its ability to pursue a hostile bid. Five of the target's eight directors are up for election this spring, and Georgia Gulf reportedly served up a confi that in Westlake's view would have unreasonably limited its ability to talk to shareholders and win a proxy fight. But on Feb. 1, Westlake raised its bid from $30 to $35 a share and said it would not run a proxy fight because it wants to do a friendly deal. Maybe it will start with a confi.
David Marcus covers legal matters for The Deal magazine.