In this memorandum opinion, the Court of Chancery construed two confidentiality agreements executed by direct competitors at the outset of friendly negotiations regarding a possible business combination. Although neither of the agreements contained a standstill provision, the Court concluded the agreements prohibited the use of confidential information in connection with a subsequent hostile bid.
Vulcan Materials Company (“Vulcan”) and Martin Marietta Materials, Inc. (“Martin”) are the largest and second largest domestic participants, respectively, in the aggregates industry, which mines rocks and similar materials for roads, buildings and other infrastructure. Beginning in the mid 2000’s, Vulcan approached Martin on several occasions with offers to engage in a strategic transaction. Martin’s COO and former CEO rebuffed these offers purportedly for entrenchment reasons.
After Martin’s COO took over as CEO in 2010, Martin was more willing to consider a business combination with Vulcan. Martin’s new CEO, however, was wary of any transaction that might jeopardize his leadership position. Moreover, Martin had recently been the target of a hostile takeover attempt after a failed joint venture discussion. Martin, therefore, insisted on confidentiality agreements to prevent public disclosure of the fact that it was in discussions with Vulcan. Martin and Vulcan executed two types of confidentiality agreements. A non-disclosure agreement (the “NDA”) and a joint defense agreement (the “JDA” and together with the NDA, the Confidentiality Agreements”). In negotiating the Confidentiality Agreements, Martin sought to broaden the information subject to restrictions and increase restrictions on the use of confidential material.
The NDA prohibits both parties from using or disclosing the other’s material (the “Evaluation Material”) for any purpose other than “evaluating a Transaction,” and defines a Transaction as a “possible business transaction between [Martin Marietta] and [Vulcan].” The NDA further provides that a party may not “disclose to any other person, other than as legally required, the fact that any evaluation material has been made available hereunder, the discussion or negotiations have or are taking place concerning a transaction or any of the terms, conditions or other facts with respect thereto [(the “Transaction Material”)]….” The NDA further permits disclosure of Evaluation Material if “requested or required” to do so in connection with “legal proceedings, subpoena, civil investigative demand or other similar process” (an “External Demand”). Prior to making any disclosure pursuant to an External Demand, the NDA requires the disclosing party to comply with a “Notice and Vetting Process” that provides the other party an opportunity to comment on the breadth of any disclosure.
After entering into the Confidentiality Agreements, merger negotiations broke down when evolving market circumstances made a transaction less desirable to Vulcan. Martin launched a hostile exchange offer (the “Exchange Offer”) and a proxy contest to unseat four directors from the Vulcan board (the “Proxy Contest”). The Court attributed Martin’s newfound desire to launch its hostile bid, in part, to the Evaluation Material Martin received and considered pursuant to the Confidentiality Agreements.
In connection with the Exchange Offer and the Proxy Contest, Martin filed disclosures with the SEC. Martin bypassed the Notice and Vetting Process set forth in the Confidentiality Agreements, however, and disclosed the history of its negotiations with Vulcan as well as other information derived from the Evaluation Material. The Chancellor concluded that Martin’s disclosures not only exceeded the scope of SEC requirements, but were also framed in a one-sided, self-serving manner.
The Court found that Martin breached the Confidentiality Agreements by using Evaluation Materials to form its Exchange Offer. In doing, the Court considered whether the Exchange Offer constituted a “possible business transaction between [Martin] and Vulcan” within the meaning of the NDA. Vulcan argued the Exchange Offer was not a business transaction between the two companies, because Vulcan’s board had not approved it. Martin argued the Exchange Offer was a business transaction between the two companies, because, if consummated, it will result in a combination of the companies’ respective businesses. After an exhaustive review of the text, the Court concluded the language was ambiguous and both readings were plausible. The extrinsic evidence, however, convinced the Court that Vulcan’s reading of the provision captured the parties’ intent. In particular, the negotiating history demonstrated that Martin’s CEO would not have entered into the Confidentiality Agreements if he believed they permitted either party to launch an unsolicited exchange offer or tender offer.
The Court further held that even if Martin were free to use the Evaluation Materials to formulate the Exchange Offer, the Confidentiality Agreements prohibited public disclosure of the Evaluation Material in connection with it. This holding turned on the Court’s interpretation of “legally required.” Martin argued that, having determined to pursue the Exchange Offer, it was “legally required” by SEC regulations to disclose certain Evaluation Material. Vulcan disagreed, arguing that Martin was not permitted to take discretionary action triggering a legal disclosure obligation. Instead, Vulcan asserted that the NDA limited the meaning of “legally required” to disclosure required as a result of an External Demand. After another exhaustive review of the text, the Court concluded the language was ambiguous and could support both parties’ interpretations. Again, the extrinsic evidence – and in particular, the negotiating history – convinced the Court that Vulcan’s interpretation of the NDA was correct. The Court, therefore, held the Martin’s disclosure of Evaluation Material in connection with its Exchange Offer, even if required by SEC regulations, was not “legally required” and violated the NDA.
The Court rejected Martin’s assertion that enjoining its Exchange Offer would chill merger activity by sending a message to deal counsel that every confidentiality agreement includes a standstill requirement. The Court explained that its holding was merely enforcing the specific expectations that the parties in this case had in negotiating the terms of the Confidentiality Agreements. Failure to enforce the parties’ reasonable expectations would pose a greater risk of chilling merger discussions because it would render confidentiality agreements unreliable.
Vulcan also demonstrated the irreparable harm necessary for an injunction preventing Martin from proceeding with its Exchange Offer and Proxy Contest. The Court based its finding of irreparable harm on the provisions in the Confidentiality Agreements which expressly stated that monetary damages would be insufficient to remedy any breach of the agreement and that a non-breaching party would be entitled to equitable relief, including an injunction.
The Court enjoined Martin’s Exchange Offer and Proxy Contest for four months, as Vulcan requested, while recognizing that the pervasive nature of Martin’s breaches may have warranted a longer injunction. The Court found Vulcan’s request reasonable as it represented the approximate timeframe for which the Confidentiality Agreements precluded Martin’s use of the Evaluation Material.
The full opinion is available here.