[authors: Christopher J. Updike, Benjamin M. Riskin]
In an eloquent account of consensual merger negotiations between Martin Marietta and Vulcan Materials, the two largest players in the domestic aggregates business, Chancellor Leo Strine of the Court of Chancery of Delaware recently prohibited Martin Marietta from using information shared by Vulcan in connection with consensual merger negotiations to pursue a hostile takeover bid and related proxy contest. Martin Marietta Materials, Inc. v. Vulcan Materials Company, 2012 Del. Ch. LEXIS 93 (Del. Ch. May 4, 2012).
The decision offers a real world application of the limitations on use and information gained in non-disclosure agreements. While the court decided this case in the Delaware corporate law context, restructuring parties in and out of bankruptcy frequently obtain information under similar restrictions. Indeed, information may be exchanged in connection with the marketing and sale of assets, or in connection with out-of-court work outs. Recipients of this information should exercise caution when using information obtained consensually to pursue non-consensual or aggressive strategies.
Martin Marietta and Vulcan had considered the possibility of a consensual merger over many years. The parties exchanged drafts of a non-disclosure agreement and a joint defense agreement (to account for potential anti-trust concerns). Pursuant to the NDA, exchanged information was to remain confidential except for use in furtherance of the “business transaction” contemplated by the parties. Notably, Martin Marietta’s counsel proposed changes to Vulcan’s draft NDA that broadened the information subject to its confidentiality restrictions, and limited the permissible uses and disclosures of the covered information absent a party being “legally required” to disclose. In a key draft, Martin Marietta’s counsel modified the definition of “business transaction” under the NDA from a possible transaction involving Martin Marietta and Vulcan to one between the two parties. Importantly, neither the NDA nor the JDA contained a standstill provision whereby each party would have been prevented from making an unsolicited tender or exchange offer. On May 3, 2010, the parties executed the NDA.
As is often the case, merger discussions dissolved and Martin Marietta began to explore non-consensual scenarios whereby it would acquire Vulcan. In December 2011, Martin Marietta launched an exchange offer coupled with a proxy contest by way of a public “bear hug” letter, and an S-4 filing with the SEC disclosing the history of its negotiations with Vulcan, including a host of information which Vulcan believed to be subject to the confidentiality provisions of the NDA. Accordingly, Vulcan brought suit contending that Martin Marietta was not free to use the exchanged information in aid of a hostile takeover, and that even if it was able to use such material, it was not permitted to disclose that information publicly. Martin Marietta took the opposite position; and argued that it was permitted to use such information because its exchange offer and proxy contest constituted a “business transaction” under the NDA, and that Martin Marietta was “legally required” to publicly disclose this information pursuant to SEC disclosure requirements related to its proxy materials.
The Court rejected Martin Marietta’s argument, holding that the terms and drafting history of the NDA were such that a hostile takeover did not qualify as a “business transaction” under the agreement, and that being “legally required” to divulge information did not include disclosure requirements self-imposed by the discretionary actions of one party. Specifically, the Court considered the drafting history of the NDA, and the interpretive gloss provided by the JDA, to find that the use of the word “between” in the definition of “business transaction” contemplates a contractually negotiated path towards merger.
In its holding, the Court started with the plain language of the documents. Finding the concept of “between” to be vague, the Court considered extraneous information including board conduct in contemplating the hostile bid, exchanged drafts of the NDA, and the history of the companies’ negotiations. Such information suggested that throughout the merger negotiations, both parties evidenced an intent that information would only be exchanged to further a consensual merger. Specifically, the Court found that in its course of conduct, Martin Marietta had not only initially sought to strengthen the confidentiality provisions of the NDA by limiting the available uses for the information, but also anticipated that disclosures relating to its hostile bid may be limited by the NDA. Further, Martin Marietta’s incomplete attempts to sequester material it received as part of merger negotiations, and its choice not to use a “clean team” of officers and advisors when considering the hostile bid, proved particularly troubling to its argument that it had not used information subject to the NDA in preparing its hostile bid.
Similarly, the Court held that the carve out for “legally required” disclosures did not contemplate requirements arising from one party’s discretionary action to self-impose a disclosure requirement. Pointing again to blackline documents evidencing Martin Marietta’s proposed revisions to the NDA, the Court highlighted that all of Martin Marietta’s changes made the NDA stronger by narrowing the permissible uses of the exchanged information. Further, treatises addressing the drafting of non-disclosure agreements supported an interpretation excluding self-imposed disclosure requirements from NDA carve-outs. To that end, the Court noted that a bare statement disclosing that merger negotiations had occurred, without revealing the content of such negotiations, would satisfy SEC rules governing hostile bids. Accordingly, the Court found that Martin Marietta breached the NDA and barred them from using information gained from merger discussions to support their hostile bid. Further, the Court noted that specific performance – a remedy expressly provided in the NDA – was exceedingly appropriate and consequently enjoined Martin Marietta’s hostile bid for four months.
Considering the ubiquity of non-disclosure agreements in the context of corporate restructurings, Chancellor Strine’s decision holds particular import. As lenders and bondholders are often recipients of proprietary information in connection with efforts to purchase distressed debt or companies, the decision may set some restrictions on the permissible uses of confidential information. For example, a purchaser who receives information pursuant to a non-disclosure agreement with an eye toward a consensual assets purchase may not be able to utilize that information to purchase a block of debt with the purpose of blocking a plan or taking other non-consensual steps to wield leverage in a bankruptcy. With that in mind, Chancellor Strine’s decision offers a word to the wise: beware and be diligent as exchanged information is accompanied by a specific purpose and a disclosure inconsistent with such purpose may give rise to injunctive relief.