United States: Delaware Court Imposes Four Month Delay To Hostile Bidder’s Exchange Offer And Proxy Contest

Last Updated: May 22 2012
Article by Roland Hlawaty and David Schwartz

Breaches of Confidentiality Agreements Result in Injunction

In a lengthy, highly contextual analysis in Martin Marietta Materials, Inc. v. Vulcan Materials Company1, the Delaware Court of Chancery recently took the extraordinary steps of enjoining – for 4 months – Martin Marietta Materials, Inc. ("Martin Marietta") from conducting a proxy contest, making an exchange or tender offer or otherwise taking steps to acquire control of the shares or assets of Vulcan Materials Company ("Vulcan") as a result of Martin Marietta's breaches of the non-disclosure agreement and the joint defense agreement that it entered into with Vulcan. This decision highlights the extent to which Delaware courts will look to resolve contract disputes by applying the well-settled principles of contract interpretation, and if the contract's words are ambiguous, by then looking to the extrinsic evidence to determine the parties' intent.


Martin Marietta is the "second largest domestic participant in the aggregates industry," mining large rocks and similar materials and processing such materials for roads, buildings, and other infrastructure. Vulcan is the largest domestic participant in the aggregates business.

In the early 2000s, Vulcan's CEO had reached out to Martin Marietta's management on several occasions to express an interest "in talking about a friendly merger." Each time, Martin Marietta's management "eventually balked, largely over the same issue, which was that a merger would raise questions about who would be CEO" of the combined company.

When Martin Marietta's CEO was replaced in 2010, Vulcan's CEO reached out again to Martin Marietta's management "after nearly a decade of empty flirtation" to gauge their interest in a friendly mer ger. This time, partly because of a "better professional relationship" between the two CEOs, a dialogue began in the spring of 2010 about a potential deal.

From the outset, Martin Marietta "emphasized the need for confidentiality" and both companies agreed upon "the need for a confidentiality agreement to cloak any merger discussions between the companies and any information exchanged." The companies, however, failed to discuss or explicitly require a standstill provision in any confidentiality agreement, which the Court noted "likely flowed from both CEOs' evident desire for confidentiality and the shared premise that they were seeking to explore whether a friendly, consensual merger agreement could be reached."

On May 3, 2010, Martin Marietta and Vulcan entered into a non-disclosure agreement (the "NDA") and, to facilitate an antitrust analysis, the companies also entered into a joint defense agreement (the "JDA," and together with the NDA, the "Confidentiality Agreements"). Despite lacking a standstill provision that would have prevented each party from acquiring shares of the other or taking other "unfriendly" actions (such as a proxy contest), the NDA did contain common restrictions. Paragraph (2) restricted either party's use of the other's "Evaluation Material" solely for "the purpose of evaluating a 'business combination transaction'" that was "between the parties" and prohibited disclosure of "Evaluation Material" for purposes other than the evaluation of a transaction. Paragraph (3) restricted a party, subject to paragraph (4), from disclosing that the party had received Evaluation Material or that merger discussions had been or were taking place, unless such party was "legally required" to disclose such information. Paragraph (4) set forth what the Court referred to as the "Notice and Vetting Process" provisions that required a party to provide, after having received interrogatories or subpoenas or pursuant to other legal proceedings (each legal requirement referred to as an "External Demand"), notice to the other party and a chance to seek an injunction to limit its disclosure to "the bare legal necessity."

Following execution of the Confidentiality Agreements, the parties began to exchange non-public information. In particular, the parties shared information regarding key revenue drivers and the potential synergies that the companies could exploit based on "the companies' combined assets with one management team and from the elimination of duplication to perform functions such as human resources, financial management, and so forth, and other economies of scale." The Court focused in on a March 8, 2011 meeting between the parties. Following that meeting, an internal memo was circulated amongst Martin Marietta's management that essentially increased the potential synergies by $100 million more annually than previous internal mid-range estimates, which "meant potential cost savings of $1 billion over a ten year term that had not yet been baked into Martin Marietta's deal analysis." Once this analysis "quickly spread," the "very next day," Martin Marietta's bankers were instructed that there were "'more synergies than realized'" and that the "baseline synergy estimate should move up to $300 million."

Despite Martin Marietta's enhanced exuberance, by spring 2011, Vulcan's management began to cool to "the idea of a combination, in part because [Vulcan] was in a comparatively weaker condition than when the deal dance started." Vulcan was particularly hurt during the recent economic downturn as compared to Martin Marietta largely in part to "Vulcan's concentration in markets affected by the burst housing bubble." As a result, Vulcan's management initially became "distant and uncommunicative" until late June 2011, when the two CEOs finally met in person at which time Vulcan's CEO expressed their lack of interest in further pursuing a merger with Martin Marietta at that time.

However, because "Martin Marietta's stock price had risen in comparison to Vulcan's" which "gave Martin Marietta more power in its dealings with its suitor, Vulcan," the "once-reluctant dance date became more enamored." "Rather than worrying about receiving a premium from Vulcan to merge, Martin Marietta began contemplating being the dominant partner itself by using its own now relatively more valuable currency – its own stock – to buy Vulcan at a premium." In analyzing this potential structure, however, "the increased synergy estimates coming out of the March 8, 2011 meeting were critical, because they provided a basis to conclude that Martin Marietta could offer Vulcan stockholders a premium in a stock-for-stock exchange, and still justify the deal to Martin Marietta's stockholders as one that would not reduce earnings per share and that would produce powerful long-term benefits in the form of higher profits per share."

Eventually, on December 12, 2011, Martin Marietta launched an unsolicited exchange offer to purchase all of Vulcan's outstanding shares, and to "create a Vulcan board more receptive of its offer, Martin Marietta also launched a proxy contest" to elect four new members to Vulcan's classified board at Vulcan's upcoming annual meeting scheduled for June 1, 2012. The exchange offer was conditioned on, among other things, Vulcan entering into a definitive merger agreement with Martin Marietta – a condition that was waivable by Martin Marietta. That same day, Martin Marietta also filed a Registration Statement on Form S-4, that "included a host of details that constitute Evaluation Material under the Confidentiality Agreements,"2 and brought suit to obtain a declaratory judgment that its exchange offer and proxy contest did not violate the provisions of the Confidentiality Agreements.

As the Court noted, "the road to true love seldom runs smooth, even for companies that make paving materials."

Legal Analysis


Vulcan alleged that neither the exchange offer nor proxy contest qualified as "a Transaction" under the NDA or "the Transaction" under the JDA. In the NDA, the term "Transaction" is defined as "'a possible business combination transaction between [Martin Marietta] and [Vulcan] or one of their respective subsidiaries (emphasis added).'" In the JDA, a slightly different definition is used to define "the Transaction": "a potential transaction being discussed by Vulcan and Martin Marietta or one or more of their divisions, subsidiaries, or related companies, involving the combination or acquisition of all or certain of their assets or stock (emphasis added)." Based on the foregoing, Vulcan alleged that Martin Marietta was excluded from conducting either the exchange offer or the proxy contest because "(i) neither is a 'business combination transaction' that is 'between' Martin Marietta and Vulcan for purposes of the NDA in the sense that the sitting board of Vulcan has not contracted to consummate the transaction; and (ii) the only transaction 'being discussed' by the parties was a consensual, contractual merger of equals and thus the Exchange Offer and Proxy Contest are not 'the Transaction' referred to throughout the JDA." Accordingly, based on the following interpretations, Vulcan alleged that Martin Marietta breached the Confidentiality Agreements:

  1. The Confidentiality Agreements limited use of Evaluation Material solely to use relating to a business combination transaction between Vulcan and Martin Marietta – in other words, a "voluntary contractual decision between the governing boards of the companies, and not....to engage in an unsolicited exchange or tender offer to the other party's stockholders."
  2. The Confidentiality Agreements prohibited disclosure of Evaluation Material or the fact that the companies were in merger discussions. A party's ability to make disclosure of any of the foregoing because it was "legally required" was limited, in Vulcan's view, only to respond to External Demands, rather than any voluntarily imposed requirements to comply with disclosure requirements under the securities laws governing Martin Marietta's exchange offer or proxy contest.
  3. Even if Martin Marietta was "legally required" to make disclosures in response to securities laws relating to its exchange offer and proxy contest, Martin Marietta "went well beyond any legal requirement" and instead disclosed information that "was tactically advantageous to itself rather than upon the contractual standard" in the NDA, "which limited disclosures to the bare legal necessity."
  4. Martin Marietta's various soliciting materials (e.g., investor calls) that were in addition to the Form S-4 and proxy statement were not "legally required."

Martin Marietta countered with two key arguments that its exchange offer and proxy contest constituted a "business combination transaction" for purposes of the NDA: "(i) they are transactions that qualify as a 'business combination' under usages of that term in certain legal contexts, like the securities regulation context; or, (ii) in the alternative, they are related transactions designed to give Martin Marietta the power to ultimately cause an integration of Vulcan and Martin Marietta." In other words, the exchange offer and the proxy contest are "business combination transactions 'between' Martin Marietta and Vulcan in the sense that an ultimate combination of the businesses will be 'between' the two companies." With respect to the JDA, Martin Marietta also countered with two arguments: (i) Martin Marietta, as an evidentiary matter, disputed that the "only transaction 'being discussed' was a friendly one" and (ii) the NDA definition should prevail because "the JDA includes a provision providing that the terms of the JDA shall not 'affect or limit' the NDA."

Court's Analysis

Noting that this was "a purely contractual case" not to be "confused with cases where a board has faced a claim that its fiduciary duties require it to waive contractual rights so as to further the best interests of the company's stockholders," the Court applied the well-settled principles of contract interpretation in an effort to enforce the plain and unambiguous terms of the Confidentiality Agreements "as the binding expression of the parties' intent," and where the words of the Confidentiality Agreement were ambiguous, the Court looked to "extrinsic evidence to determine the parties' intent." In particular, the Court focused heavily on the "the drafting history of the NDA, Martin Marietta's own conduct, and the interpretative gloss provided by the JDA bear on the interpretative question."

Beginning with the JDA, the Court concluded, without resorting to extrinsic evidence, that the terms of the JDA were unambiguous on their face and that there was "no question that the one Transaction being discussed by the parties when they entered into the JDA was a negotiated one."

Turning to the Court's contractual interpretation of the NDA, Chancellor Strine determined that both "Vulcan and Martin Marietta's interpretations of the phrase 'business combination transaction between' Vulcan and Martin Marietta [were] reasonable." The Court noted that "one cannot confidently say that the term business combination transaction has a single, clear meaning. The usages in analogous contexts are too varied....to conclude that the term as used in the NDA means one thing and one thing only."

As a result, the Court turned to the extrinsic evidence to resolve the dispute, finding that "Vulcan has the better of the argument here" and that neither the exchange offer nor the proxy contest were a business combination transaction "between" Vulcan and Martin Marietta because "neither was a step taken as a component part of a contractual, transactional agreement between Martin Marietta and Vulcan to effect a business combination."

In the Court's view, the "record is replete with evidence of [Martin Marietta's] expressed desire to make sure that nothing that Martin Marietta shared with Vulcan, including the very fact of discussing a merger, could be revealed publicly, because that might facilitate an unsolicited bid by an interloper." At the time the Confidentiality Agreements were entered into, Martin Marietta strongly emphasized the need to maintain confidentiality with respect to the parties' discussions or sharing of information as support for an understanding that any "business combination transaction that was between the parties would be a transaction signed up by the sitting boards of Martin Marietta and Vulcan. The last thing that Martin Marietta would have wanted to allow would be a gunpoint transaction entered into after an unsolicited exchange offer and proxy contest." The Court also noted that, based on the extrinsic evidence, Martin Marietta "would never have agreed to exchange confidential information if [it] thought that one of the parties to the NDA was free to launch an unsolicited exchange or tender offer or a proxy contest under the terms of the Agreement." In short, the Court noted that Martin Marietta's actions at the onset of discussions back in the spring of 2010 when the Confidentiality Agreements were entered into are "squarely at odds with the one Martin Marietta adopts in this litigation."

The Court then parsed through the key provisions of the NDA and its drafting history to determine how best to reflect the parties' intent. The Court concluded that "Vulcan's reading of the NDA is one that harmonizes all the relevant provisions of the agreement by coming up with a single, workable scheme." The Court was persuaded by Vulcan's reading because it ensured that both the Evaluation Material itself and the fact that such material was made available and that merger discussions were ongoing would all be subject to the Notice and Vetting Process. Under Martin Marietta's reading, however, there would be two independent regimes under the NDA: (i) one "triggered by an External Demand" requiring a party to "satisfy the Notice and Vetting Process" before making any disclosure and (ii) one where a party that does not face an External Demand can take "unilateral action that it concludes triggers a legal requirement to disclose." Based on the extrinsic evidence, the Court stated that the "notion that [Martin Marietta's] obsessive concern with confidentiality did not extend to a situation when Vulcan itself would decide to launch a hostile bid, impose on itself an arguable legal requirement to disclose, and use that as a blank check to dump in the public domain the broad classes of information that Martin Marietta had itself asked to be treated as confidential under the NDA is one that a rational, disinterested mind could not accept as plausible."

Accordingly, the Court held that Martin Marietta breached the NDA by:

  1. Having the Form S-4 spill "ten single-spaced pages worth of the parties' negotiating history that was clearly information covered by" Paragraph (3) of the NDA" and not filed in response to an External Demand;
  2. Failing to adhere to the Notice and Vetting Process with respect to the information contained in the Form S-4; and
  3. Broadly disclosing information in the Form S-4, the proxy statement and in its communications with investors and the press without adhering to the Notice and Vetting Process (the Court concurred with Vulcan's assertions that Martin Marietta could have complied with SEC requirements "with far more limited disclosure...with a much simpler recitation of the facts" instead of using the Form S-4 "an opportunity to work with its public relations flacks on a propaganda piece in aid of the Exchange Offer").

Finally, in response to Martin Marietta's assertion that if enjoined, "a chill on M&A activity will result, harming stockholders and lowering share values," the Court noted that if it were to agree with Martin Marietta and send a message "that the confidentiality and other agreements that control the downside risks" of engagements "will not be respected, then one can rationally expect such competitors not to be as prone to considering such transactions." The Court continued, noting that U.S. M&A markets are among the most vibrant globally because of "the freedom given to corporations to use contracts to limit the very real business risks attendant to exploring M&A transactions. By respecting contract rights....courts give parties in commerce the confidence that they can rely upon the contracts they execute to reduce risks and transaction costs."

Injunctive Relief Granted

To obtain injunctive relief, the Court noted that Vulcan had to not only prove "'actual success on the merits,' but also 'irreparable harm' and that 'the harm resulting from a failure to issue an injunction outweighs the harm to [Martin Marietta] if the court issues the injunction.'"

While noting that the "distraction to pushing forward with its day-to-day business plans when its employees cannot help but be preoccupied by Martin Marietta's Exchange Offer and Proxy Contest and its contractually improper selective revelation of nonpublic Vulcan information" was "hard to measure," the Court did assert that such harm would be "difficult for any objective mind to deny as real." Moreover, the Court noted that "[i]f 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 cost 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."

In view of these realities, the Court held that the "equities favor enforcing the Confidentiality Agreements as written and vindicating Vulcan's reasonable expectations." The Court viewed Vulcan's request for a four month injunction as "measured" and a "responsible" period that would preclude Martin Marietta from running its slate of directors for election at Vulcan's upcoming annual meeting. In the Court's view, "an argument can be made that a longer injunction would be justified by the pervasiveness of Martin Marietta's breaches."

The Court closed in noting that any delay caused to Martin Marietta's plans is "one that is the result of its own conduct." The Court further justified its extraordinary actions by noting that "Martin Marietta is not being held to any promise it did not make. Rather, it is being held to exactly the bargain it successfully sought to impose on Vulcan as a condition to sharing information and having merger talks" in the first place.


The Vulcan decision is a direct reminder that Delaware courts will look to resolve contract disputes by applying the well-settled principles of contract interpretation, and if the contract's words are ambiguous, by looking to the extrinsic evidence to determine the parties' intent. Accordingly, deal makers should take care to ensure that contractual provisions specifically address the desired results. In this context for example, despite some commentators' views that a prohibition on using Evaluation Material could be interpreted as tantamount to a "back-door standstill," Vulcan could have insisted on an explicit and express standstill provision in the NDA to ensure that its intent was unambiguously reflected in the contract itself, rather than subjecting itself to the Court's examination of the extrinsic evidence.


1 C.A. No. 7102-CS (Del. Ch. May 4, 2012).

2 For example, the Court noted the synergies disclosure: "there is no logical explanation for the jump in Martin Marietta's synergy estimates from $200 million to $300 million other than that the information it received during the March 8, 2011 meeting justified a huge increase in Martin Marietta's base case assumptions about achievable synergies."

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