Canada: Confidentiality Agreement Impedes Hostile Take-Over Bid

In Martin Marietta Materials, Inc. v. Vulcan Materials Company, Chancellor Strine of the Delaware Court of Chancery enjoined a hostile take-over bid on the ground that confidentiality agreements between Martin Marietta, the bidder, and Vulcan, the target, prevented the bid. The judgment temporarily prevents Martin Marietta from acquiring Vulcan pursuant to a US$5.3-billion hostile bid, and from pursuing a proxy contest in which Martin Marietta was seeking the election of four of its nominees to Vulcan's board of directors. In support of his decision, Chancellor Strine cited the 2009 Ontario Superior Court of Justice decision, Certicom Corp. v. Research in Motion Ltd. In that decision, following an application brought by Blakes on behalf of Certicom, the Court enjoined RIM's hostile bid for Certicom as a result of RIM's breach of its confidentiality agreements with Certicom. Martin Mariettaserves as a reminder that confidentiality agreements should only be entered into after careful consideration, as they may have the effect of a standstill.

The Decision

During the course of negotiations for a friendly merger, Martin Marietta and Vulcan entered into a non-disclosure agreement (NDA) and a joint defence agreement (collectively, the Confidentiality Agreements). The NDA limited the parties' rights to use the information obtained during the due diligence process solely for the purpose of evaluating a business combination transaction "between" the parties. After the parties broke off negotiations, Martin Marietta prepared to launch a hostile bid for Vulcan. The same key personnel and advisers of Martin Marietta that were involved in the friendly discussions participated in the preparation of its bid. Following Martin Marietta's launch of its hostile bid, Vulcan brought an action seeking an injunction precluding Martin Marietta from misusing information obtained pursuant to the Confidentiality Agreements, which would have the effect of preventing Martin Marietta from proceeding with the bid.

Similar to the Court's findings in Certicom, Chancellor Strine ultimately held that the Confidentiality Agreements prohibited Martin Marietta from using information provided under the Confidentiality Agreements for any transaction other than a contractually negotiated business combination between the parties, thereby prohibiting Vulcan's hostile take-over bid. The decision prevented Martin Marietta from continuing with the take-over bid and acquiring the shares of Vulcan, effectively operating as a standstill despite the Confidentiality Agreements containing no standstill provision.

In Martin Marietta, the injunction was issued for only four months, commensurate with the time between the launch of Martin Marietta's hostile bid and the expiration of the NDA, and the amount of time requested by Vulcan. The Delaware Court noted that a longer injunction could have been justified. In Certicom, RIM was enjoined permanently from taking any steps to advance its hostile take-over bid for Certicom. The remedy of a permanent injunction in Canada for a breach of a negative covenant is well established under Canadian case law (for example, Aurizon Mines Ltd. v. Northgate Minerals Corp. and McDonald's Restaurants of Canada Ltd. v. West Edmonton Mall Ltd.).

Key Lessons of Certicom and Martin Marietta

  • While negotiating a confidentiality agreement, parties should consider the possible constraints that such agreement may impose upon a subsequent transaction and ensure that the terms of any confidentiality agreement entered into are drafted with care. Parties should note that if the wording of a confidentiality agreement is vague or ambiguous, a Court may look to factors outside of the written agreement, i.e., a party's proposed revisions in the course of drafting the confidentiality agreement, positions put forth in the negotiations and other forms of extrinsic evidence, to determine the intent of the parties when negotiating the agreement.
  • Parties need to carefully consider the wording of the "permitted use" provision – the provision that details what use each party may make of the confidential information. In both Certicom and Martin Marietta, the courts found that because the permitted use provision limited the use of confidential information for a transaction between the parties, that meant that the transaction had to be a negotiated transaction, and that the use of the word "between" would prevent use of confidential information in connection with a hostile take-over bid.
  • The length of the confidentiality obligations imposed by the agreement should be carefully considered as such term may impose a standstill, even if the standstill provision itself has expired or no standstill provision has been included. Bidders should consider whether to explicitly state that the bidder is not constrained from pursuing a hostile bid after a standstill has expired, or at all if there is no standstill in the first place. This consideration would need to be weighed against the target responding by requesting a longer standstill period or simply refusing to enter into a confidentiality agreement.
  • "Permitted disclosure" exceptions in confidentiality agreements may be strictly construed. Confidentiality agreements typically permit disclosure that is "legally required" – an exception to the obligation not to disclose the information acquired under the confidentiality agreement. In Martin Marietta, the Delaware Court interpreted the concept of "legally required" disclosure narrowly, holding that any disclosure by the parties must be made in response to an external demand, such as a court order or other legal proceeding, and any disclosure may then only be to the extent legally required. As a result, information filed by Martin Marietta with the SEC in connection with its hostile bid that was otherwise protected by the Confidentiality Agreements was not considered to be a permitted disclosure.
  • If a party subject to a confidentiality agreement wants to preserve the ability to launch a hostile bid, it should consider the use of a "clean team" – persons who were not involved in the friendly negotiations and have had no access to, and are prevented by ethical walls and security procedures from accessing, the confidential information. However, bidders should be cautioned that targets are still likely to challenge any hostile bid by such a party, and such a bidder may have difficulty both assembling a clean team – as often its senior executives and board of directors will have been involved in both the friendly and the hostile transactions – and convincing a court that no confidential information was used in the preparation of a hostile bid.

Martin Marietta is appealing the Delaware Court of Chancery's decision. However, the principles discussed in the Martin Mariettaand Certicom decisions should be considered by parties contemplating both friendly and hostile acquisitions.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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