New Guidance on Confidentiality Agreements

by Ropes & Gray LLP

A recent opinion regarding the enforcement of certain provisions commonly found in confidentiality agreements in the context of a hostile takeover provides important guidance on the drafting process of such agreements. In Martin Marietta Materials, Inc. v. Vulcan Materials Company, C.A. 7102-CS (Del. Ch. 2012), the Delaware Court of Chancery (Chancellor Strine) found that the use of information received by Martin Marietta Materials, Inc. (“Martin Marietta”) under a confidentiality agreement in pursuit of a hostile bid to acquire Vulcan Materials Company (“Vulcan”) violated that confidentiality agreement. The companies are the two largest construction materials suppliers in the United States. After a long history of discussions about a potential merger, Martin Marietta and Vulcan entered into a nondisclosure agreement (the “NDA”), and a common interest, joint defense and confidentiality agreement (the “JDA,” together with the NDA, collectively, the “Confidentiality Agreements”) in the spring of 2010. The Confidentiality Agreements did not contain an explicit standstill provision, but there was a restriction that the confidential information be used “solely for the purpose of evaluating” a “possible business combination transaction between [Martin Marietta] and [Vulcan] or one of their respective subsidiaries.” The history of the negotiations between Martin Marietta and Vulcan demonstrated that Martin Marietta was at least as concerned as Vulcan regarding the potential misuse of confidential information, including the possibility that the disclosure of confidential information such as the existence of negotiations might put Martin Marietta “in play.”

Negotiations between Martin Marietta and Vulcan broke down, and on December 12, 2011, Martin Marietta launched an unsolicited exchange offer in which it sought to purchase all of Vulcan’s outstanding shares. Martin Marietta also launched a simultaneous proxy contest, seeking to elect four new members to Vulcan’s classified board at its annual meeting on June 1, 2012. In connection with both the exchange offer and proxy contest, Martin Marietta was required to file certain statements with the U.S. Securities and Exchange Commission (“SEC”), which filings contained confidential information received by Martin Marietta under the terms of the Confidentiality Agreements. Martin Marietta brought a suit to obtain a declaration that nothing in the Confidentiality Agreements barred the exchange offer or proxy contest. Vulcan responded with counterclaims seeking a determination that Martin Marietta breached its contractual obligations to Vulcan by improperly using and publicly disclosing information in aid of the exchange offer and proxy contest and that it should be temporarily enjoined from proceeding with both.

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