Canada: M&A Defensive Tactics: Using A Confidentiality Agreement To Stop A Hostile Takeover Bid

On January 19, 2009, the Ontario Superior Court of Justice permanently prohibited Research In Motion's hostile bid to buy Certicom, on the basis of RIM's breaches of non-disclosure agreements. The Court found that the confidentiality provisions of their non-disclosure agreements had the effect of a standstill provision and independently prevented the bidder from making its hostile bid. The ruling led RIM to withdraw its bid. Another suitor, VeriSign, has now entered into an agreement to buy Certicom on a friendly basis.

The Court's ruling highlights the significance of the specific wording of a confidentiality agreement and demonstrates the importance of purchasers considering their future plans when negotiating the terms of a confidentiality agreement and using confidential information provided by a target.

The Facts and Ruling

In 2007 and 2008, RIM and Certicom entered into non-disclosure agreements in connection with a possible friendly transaction. The 2007 agreement contained a standstill provision that prohibited RIM from commencing a hostile bid for Certicom for 12 months. At RIM's insistence, the 2008 agreement did not contain a standstill provision. Both non-disclosure agreements limited the purposes for which RIM could use confidential information it received under the agreements. Under the 2007 agreement, RIM was permitted to use the confidential information to assess a business combination between the parties. Under the 2008 agreement, RIM was permitted to use the confidential information to establish or further a business or contractual relationship between the parties.

RIM and Certicom could not agree on deal terms. The standstill obligation in the 2007 agreement lapsed. In December 2008, RIM, through a subsidiary, commenced a hostile bid for Certicom. Certicom asked the Court to stop RIM from continuing its bid, alleging that RIM breached the non-disclosure agreements in using confidential information to assess the desirability of launching a bid for Certicom and then in making its hostile bid.

The Court agreed. With respect to the 2007 agreement, RIM was permitted to use the confidential information to assess a business combination between RIM and Certicom. The Court determined, however, that a hostile takeover bid is not a business combination between RIM and Certicom. Similarly, a hostile takeover bid is not a business or contractual relationship between RIM and Certicom, and was therefore not a permitted use of confidential information under the 2008 agreement either.

The result of the Court's interpretation is that the confidentiality provisions in the non-disclosure agreements had the effect of a standstill, even though there was no valid ongoing separate standstill obligation in effect at the time the hostile bid was commenced.

The Court found that parties can agree to standstill obligations and confidentiality obligations separately and both can have the effect of prohibiting a hostile takeover bid, albeit that they operate differently and for different periods of time. The Court concluded that a standstill obligation presumes the use of confidential information and prohibits its use usually for a short period of time; the confidentiality obligation, on the other hand, requires proof of the use of confidential information and prohibits its use normally for a longer period of time. Although the standstill in the 2007 non-disclosure agreement had expired, the Court found that (i) the parties had agreed that RIM continued to be limited in using confidential information and (ii) RIM could not use that information in making a hostile takeover bid.

RIM was found to have used confidential information in connection with the hostile bid, in breach of the non-disclosure agreements. Members of the RIM team who had access to the Certicom information had been involved in planning the bid and no walls had been used internally to protect against the use of the information. After weighing a number of public policy issues, the Court determined that a permanent injunction was an appropriate remedy. The Court considered whether it was contrary to public policy to deprive Certicom's shareholders of the opportunity to accept RIM's offer. The Court found that another bid may emerge from the auction process Certicom had underway and also noted that RIM was not prevented from entering into a friendly transaction with Certicom or from making a hostile bid that did not make use of confidential information obtained under the non-disclosure agreements; but the Court acknowledged that the latter alternative was likely not practicable in RIM's circumstances. The Court also held that there is a public policy rationale in favour of enforcing confidentiality agreements in order to foster value-maximizing transactions and to provide certainty to parties in the M&A process.

The Lessons of this Decision

Any non-disclosure agreement should be clear about the way confidential information can and cannot be used. Do not accept boilerplate agreements without first assessing what future actions may be and whether the language allows for it. It is particularly important for those receiving confidential information to fully understand any limitation on unfriendly transactions. Do not assume once a standstill obligation ends that you are free to go hostile – confidentiality obligations, if not carefully worded, may also create practical restrictions.

Process also matters. If you are a potential purchaser, consider erecting walls within your organization to limit access to the confidential information to a defined, preferably small, group of people who require the information to assess the proposed transaction. If possible, keep another team of your people "untainted" by the information so that if discussions do not proceed as expected, they may make decisions about next steps without improperly using that information. Document who has access to the confidential information and where practical, have them confirm in writing their compliance with the wall. Keep the confidential information in restricted access locations, including in computer directories.

If erecting ethical walls is not practical, potential purchasers should attempt to negotiate survival periods for confidentiality obligations that are as short as possible given the nature of the information involved, and only as long as necessary to protect against misuse of the information received.

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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