Similar to the recent Ontario Superior Court of Justice decision in RIM v. Certicom, on May 4, 2012 the Delaware Court of Chancery issued an injunction against a hostile take-over bid by Martin Marietta Materials, Inc. for Vulcan Materials Company after finding that the making of the offer by Martin Marietta breached the terms of a confidentiality agreement between the two companies; this despite the absence of a “standstill” provision in the confidentiality agreement.
Martin Marietta and Vulcan had entered into a mutual confidentiality agreement. The confidentiality agreement provided that the parties would use each other’s confidential information “solely for the purposes of evaluating a Transaction”. The agreement defined “Transaction” as “a possible business combination between” Martin Marietta and Vulcan. After discussions between the parties for a possible business combination ceased, Martin Marietta made a hostile take-over bid for Vulcan. At the time of the making of the hostile bid by Martin Marietta 4 months remained on the term of the confidentiality agreement. Vulcan applied to the Delaware Court for an injunction preventing the hostile bid on the basis that Martin Materials violated the terms of the confidentiality agreement.
The Delaware Court considered the provisions of the confidentiality agreement that restricted the bidder’s use of confidential information. The Delaware Court concluded that Martin Marietta had used Vulcan’s confidential information to evaluate the offer. Martin Marietta argued that it was entitled to use Vulcan’s confidential information in connection with the hostile bid because its offer contemplated a “combination of” Martin Marietta and Vulcan, which would be a business “combination between” those two companies. Martin Marietta also pointed to the absence of a standstill as evidence that the parties did not intend the confidentiality agreements to preclude unsolicited transactions. Vulcan argued that a transaction “between” contemplates a consensual transaction (i.e. one that both parties agree to) and that Martin Marietta could not use the confidential information to evaluate any transaction other than a consensual transaction between the two companies. The Delaware Court agreed with Vulcan. A similar decision, for similar reasons, was reached by the Ontario Superior Court of Justice in the Certicom case and this was cited by the Delaware Court in the Vulcan case.
The Delaware Court then determined that an injunction was an appropriate remedy noting, among other factors, that such relief was explicitly contemplated by the confidentiality agreement. The Delaware Court ordered that the hostile bid be enjoined for four months, being the remaining term of the confidentiality agreement from the time Martin Marietta launched the hostile bid.
The key lesson: The absence of a standstill provision is not sufficient to conclude that a party to a confidentiality agreement is allowed to commence a hostile bid. Companies and their counsel should carefully consider the specific restrictions on the use of confidential information contemplated by confidentiality agreement and the possible limitations such restrictions may impose upon alternative courses of action if the parties are not able to reach a consensual agreement for a business combination.
If you would like to discuss a possible merger or acquisition (including the making a hostile bid or potential defenses to a hostile bid), the drafting of a confidentially agreement for any purpose, or any other business law matter, please do not hesitate to contact one of the lawyers in the “Business Law” group at SNC Law.
Note that the foregoing is for general discussion purposes only and should not be construed as legal advice to any one person or company. If the issues discussed herein affect you or your company, you are encouraged to seek proper legal advice.