On May 4, 2012, Chancellor Leo E. Strine, Jr. of the Delaware Court of Chancery issued an opinion enjoining Martin Marietta Materials, Inc., for a period of four months, from pursuing a hostile exchange offer to acquire all of the stock of rival Vulcan Materials Company and a related proxy contest to have its own slate of directors elected to Vulcan’s board. See Martin Marietta Materials, Inc. v. Vulcan Materials Co., No. 7102-CS (Del. Ch. May 4, 2012). As discussed in the article, Chancellor Strine found that Martin Marietta breached two agreements when it commenced its hostile bid for Vulcan in December 2011. The Delaware Supreme Court affirmed the appeal of the Chancery Court’s decision after an oral argument on May 31, 2012.
In the spring of 2010, Martin Marietta and Vulcan entered into a non-disclosure agreement and a joint defense agreement in connection with confidential merger discussions. Neither of the agreements contained an express “standstill” provision, but each agreement provided that the confidential material was only to be used for the purpose of considering a “business combination transaction” that was “between” the parties. The agreements also prohibited the parties from publicly revealing that the parties were engaged in merger discussions except when disclosure was legally required and then only after providing prior notice to the other party. In December 2011, after the merger discussions between the parties broke down, Martin Marietta launched a public exchange offer to acquire Vulcan in a stock-for-stock transaction and a proxy contest to have its own slate of directors elected to Vulcan’s board. In the process of launching the hostile bid, Martin Marietta disclosed its prior negotiations with Vulcan in its SEC filings as well as in its press releases and on investor calls.
Vulcan commenced litigation and alleged in the Delaware Court of Chancery that Martin Marietta used confidential information obtained during the merger discussions to make the decision to launch, and decide the terms of, its hostile exchange offer and that Martin Marietta publicly disclosed confidential information in breach of both the non-disclosure agreement and joint defense agreement. Martin Marietta argued that Vulcan was attempting to read a standstill into the agreements and that the language in the agreements permitted the use of such information in any transaction regardless of whether the transaction was unsolicited. Chancellor Strine, who considered extrinsic evidence after determining that the phrase “business combination transaction between” the parties was ambiguous, concluded that Martin Marietta breached both agreements by using the confidential information to decide whether to launch, and formulate the terms of, a hostile bid and by publicly disclosing confidential information in its securities filings and other releases. Martin Marietta argued that disclosure of the confidential information was legally required by the SEC’s exchange offer rules relating to disclosure of prior negotiations between the parties; however, the Court concluded that the exception in the agreements for information that was legally required was not triggered by one company’s unilateral decision to pursue a hostile exchange offer. The Court also noted that Martin Marietta failed to comply with the notice requirements in the agreements.
Each agreement expressly provided that money damages were an insufficient remedy for any breach and that an aggrieved party was entitled to an injunction and specific performance. Vulcan requested an injunction against Martin Marietta’s hostile bid and proxy contest for a period of four months, which corresponds to the period between when Vulcan launched its exchange offer and the expiration of the non-disclosure agreement. The Court agreed with Vulcan’s request and granted the four-month injunction, which will have the impact of preventing Martin Marietta from proposing its competing slate of directors at Vulcan’s June 2012 annual meeting and, potentially, from pursuing the hostile offer with Vulcan altogether.
Martin Marietta appealed the Chancery Court’s decision. On May 31, 2012, the Delaware Supreme Court heard the appeal. At oral argument, counsel for Vulcan emphasized that the Chancery Court did not read a standstill into the agreements as was argued by Martin Marietta. Vulcan argued that Martin Marietta was never prohibited by the terms of the agreements from pursuing a hostile bid (similar to a standstill agreement); rather, Martin Marietta was simply prohibited from using the confidential information to launch a hostile bid and disclosing confidential information to win support for the hostile bid. Ultimately, the Supreme Court agreed with Vulcan and affirmed the decision of the Chancery Court.
This decision offers important lessons for companies and practitioners. First, confidentiality agreements negotiated at the beginning of transactions are important, and companies that desire to maintain the flexibility to pursue a hostile acquisition should carefully consider the terms of any confidentiality agreement or whether to enter into a confidentiality agreement at all. If parties intend to preserve the ability to allow unsolicited proposals, the parties should consider clarifying how information related to the transaction discussions may be used, especially when the term of the confidentiality agreement is longer than the term of any standstill provision. Finally, the opinion highlights the Delaware court’s willingness to enforce the terms of confidentiality agreements. Despite suggestions that Vulcan’s stockholders would be harmed by not being permitted to make an investment decision with respect to the exchange offer and proxy contest, the Court upheld the terms of the agreements in favor of honoring the contract between the parties.