Taking a page from Ontario's playbook, highly respected Delaware Chancellor Leo Strine Jr. recently found that a confidentiality agreement could temporarily block a subsequent hostile bid and proxy contest, even in the absence of an explicit standstill provision.
In Martin Marietta Materials, Inc., v. Vulcan Materials Company, Chancellor Strine cited the 2009 decision in Certicom Corp. v. Research in Motion Ltd of the Ontario Superior of Justice to enjoin a $5.3 billion hostile takeover bid involving "the top two rock stars in the aggregates industry". In addition, Marin Marietta was also enjoined from proceeding with a proxy contest in which it sought to elect four new members to Vulcan's board at Vulcan's upcoming annual meeting.
In Certicom, Justice Hoy found that RIM should be blocked from launching a hostile takeover against Certicom, even though the standstill agreement between the companies had expired. Justice Hoy found that RIM had improperly used confidential information it had obtained from Certicom to make its bid.
Similar to Certicom, Chancellor Strine held that the confidentiality agreements between the parties prevented Martin Marietta from using Vulcan's confidential information for any purpose other than a friendly, negotiated transaction.
Specifically, Chancellor Strine found that Martin Marietta breached the confidentiality agreements by using the information it had obtained from Vulcan during their earlier negotiations. He found it had used the information to decide to launch its hostile bid, and to formulate its terms.
The Certicom decision was widely-commented upon when released. With Chancellor Strine's decision, it can be said that what is arguably the most experienced commercial and M&A bench in North America has now reinforced Certicom's conclusion that a confidentiality agreement can operate as an indirect standstill in certain circumstances.
A Reminder of the Significance of Confidentiality Agreements
The confidentiality agreements analysed by both Justice Hoy and Chancellor Strine posed similar challenges to the courts. Chancellor Strine spent eight pages considering the meaning of the word "between."
The word "between" had also vexed Justice Hoy. In his decision, Chancellor Strine noted that he had "no doubt" that Martin Marietta's "experienced and accomplished" general counsel would have been aware of "the widely-commented upon Canadian Court's 2009 decision in Certicom and its implications on the use of the word 'between' in confidentiality agreements."
Chancellor Strine's detailed and technical analysis of the confidentiality agreements serves as a fresh reminder to target companies, potential acquirors and practitioners alike. Confidentiality agreements should not be viewed as "standard," preliminary agreements that can be negotiated or entered into without consequence.
On the contrary, both Certicom and Martin Marietta serve to remind M&A practitioners of the need to proceed with care when drafting confidentiality agreements and understand the constraints they may place on a subsequent transaction, especially in circumstances where interests may no longer be aligned.
Chancellor Strine observed that the agreements could have used different, more direct provisions. Of course, companies may be more explicit in confidentiality agreements by, for example, providing that information may be used for non-friendly actions after a certain period of time, or never. Taking a risk on how a court may interpret an ambiguous agreement is not for the faint of heart.
Sequestering and Firewalls: A Viable Option?
While Martin Marietta had tried to "sequester" confidential information, Chancellor Strine found these efforts had been "awkward and incomplete."
Both Chancellor Strine's decision in Martin Marietta and Justice Hoy's decision in Certicom leave open the possibility that a company which creates a "firewall" and makes complete "sequestering" efforts could launch a hostile bid after obtaining confidential information. Ideally, the efforts would convince a court that confidential information was not used improperly or in contravention of the confidentiality agreement.
Often, a "firewall" may not be a feasible option because senior executives will need to be involved in any significant acquisition. Chancellor Strine noted that Martin Marietta had not created a "clean team" "likely because they could not exclude their CEO and CFO" who had already been "profoundly influenced" by Vulcan's nonpublic information.
Courts View Confidentiality Agreements as Important to Markets
As Justice Hoy did in Certicom, Chancellor Strine stressed the importance of confidentiality agreements from a policy perspective. He wrote, "If the cost of sharing information is to be at the mercy of the other party, who is usually an industry rival with an everyday incentive to eat your lunch, you will, if you are a typical CEO, tend not to risk sharing. The overall costs to investors if the law does not enforce confidentiality agreements might turn out to be quite large in terms of transactions that are not done."
Chancellor Strine enjoined Martin Marietta's hostile bid and proxy contest for four months. This was the minimum period of time that Martin Marietta was precluded by the confidentiality agreements from misusing information it had received. Martin Marietta is thereby precluded from running its slate of directors for election at Vulcan's upcoming annual meeting. This temporary injunction is in contrast to the permanent injunction granted by Justice Hoy in Certicom. >
The Delaware Chancery Court decision is being appealed. In the meantime, at least, Chancellor Strine's analysis and citation of Certicom will no doubt be relied upon by those seeking to apply its principles in future commercial and M&A disputes.
Laura Fric has extensive advocacy experience, specializing in securities litigation and defending class actions. Co-Chair of the Mergers & Acquisitions Specialty Group, Emmanuel Pressman's practice focuses on corporate and securities law matters with an emphasis in mergers and acquisitions and corporate finance. Jeremy Fraiberg is Co-Chair of Osler's Mining Group. His practice focuses on corporate and securities law, with a particular emphasis on mergers and acquisitions and corporate finance.
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