Delaware Court of Chancery Chancellor Leo E. Strine Jr. tackled a pervasive but rarely litigated aspect of M&A practice in May in a 138-page opinion where he delved into the drafting of confidentiality agreements. The judge barred Martin Marietta Materials Inc. from continuing with its $4.9 billion hostile bid for Vulcan Materials Co. because the bidder violated two confidentiality agreements the companies signed in May 2010, more than a year and a half before Martin Marietta launched its offer last December.
The decision has forced lawyers to re-examine how they write confis, which allow companies to exchange information to help them evaluate a potential transaction. Confis limit ways in which companies may use information, and may contain standstill provisions that bar hostile bids and other unwanted activities for a given period of time.
Confis generally receive far less attention than merger agreements. The key confi in the Vulcan case, for example, was only five pages long and negotiated entirely by the general counsel at the two companies with no input from outside counsel. A typical merger agreement can run to 80 pages or more, and its key terms are the product of extensive negotiations by highly specialized lawyers. Both Vulcan general counsel Robert Wason IV and Martin Marietta counterpart Roselyn Bar have been at their companies for many years, and veteran in-house lawyers often see little need to bring in outside counsel for advice on a confi.
The Vulcan decision may change that. The two confis at issue in the case did not contain standstill provisions and were silent on whether one company could use the information exchanged under the agreements to make a hostile bid for the other. Martin Marietta emphasized the latter point, while Vulcan argued that restrictions in the confi on how the information exchanged thereunder could be used to effectively bar a hostile bid, a view that many M&A lawyers rely upon in drafting confis.
Indeed, Strine noted in his opinion that Lou Kling and Eileen Nugent, M&A partners at Skadden, Arps, Slate, Meagher & Flom LLP, wrote in a 2001 treatise that "drafting a narrow 'use' provision can serve as a 'backdoor' way to impose a standstill on the buyer." Skadden represented Martin Marietta on its bid, though neither Kling nor Nugent was involved. Strine adopted that position in the Vulcan decision, which means suitors that want to preserve the ability to make a hostile bid will need to draft their confis accordingly. One lawyer noted that many large serial acquirers refuse to accept standstills, which on occasion kills merger negotiations before they start.
For that reason, some companies and lawyers avoid haggling over the inclusion of a standstill in a confi. In such situations, says Neil Whoriskey, a partner at Cleary Gottlieb Steen & Hamilton LLP in New York, a company that wants to preserve the right to make a hostile bid may find that "the most practical approach may be to simply try to limit the confidentiality obligation to one year, assuming that a backdoor standstill of that duration would be acceptable." The confi at the heart of the Vulcan case had a two-year obligation.
Damien Zoubek, a partner at Cravath, Swaine & Moore LLP, says potential buyers also don't want to be prevented from responding if an interloper makes a hostile bid for a company with which the potential buyer has signed a confi or the company signs a friendly deal with another party. The potential buyer may ask for a provision that voids the standstill provision in the confi in those events.
Many potential sellers are more concerned about protecting proprietary information than preventing a hostile bid, says Michael Ringler, a partner at Wilson Sonsini Goodrich & Rosati PC in Palo Alto, Calif. "Instead of demanding standstills, these sellers will be very judicious at the outset of the process about sharing any highly proprietary information" in these situations, he says. "You'll see highly sensitive information provided to the buyer only after the buyer makes a greater commitment to a deal, particularly a price commitment." Ringler says this may take some pressure off the standstill discussion.
Such responses to the Vulcan decision may be more practical than intense negotiations on precise terms, which do little to increase the level of trust between two companies about to embark upon negotiations they hope will lead to a friendly deal. And the minuscule number of judicial decisions on confis, hundreds of which are signed every year, shows that lawyers' fears about their inadequacy almost never come to pass.
David Marcus covers legal matters for The Deal magazine.