Amongst legal documents in an M&A transaction, the confidentiality agreement plays an important role, as it does in other types of investment transactions (such as private equity), especially when it involves a public listed company. There are two key aspects of interest in any confidentiality agreement, which are also often the bone of contention in negotiations: (i) the scope of information that must be kept confidential; and (ii) various exceptions which may be invoked by the party receiving information and hence placing it outside the application of confidentiality obligations.
While confidentiality agreements are essentially within the purview of contract law, there is limited specificity in India in terms of principles laid down either in statutory law or judicial decisions as to the applicability and enforcement of confidentiality obligations in M&A transactions. Hence, a recent (and perhaps significant) pronouncement of the Delaware Chancery Court in Martin Marietta Materials Inc. v. Vulcan Materials Company (Martin Marietta) could throw some light on the manner in which confidentiality agreements are to be drafted and negotiated by legal practitioners. This decision rules on both of the key aspects discussed above, i.e. (i) the definitional aspects of confidential information and (ii) the availability of one of the exceptions to confidentiality.
The transaction originated as a potential friendly (negotiated) merger between Martin Marietta and Vulcan, both of whom were in the same business. As part of the transaction, both companies negotiated two confidentiality agreements, one a general non-disclosure agreement (referred to as the “NDA”) and another, a common interest, joint defense and confidentiality agreement (referred to as the “JDA”), for sharing of information to facilitate an analysis of the antitrust implications of the merger. Although the confidentiality agreements contained standards clauses relevant to M&A agreements, they did not contain the customary standstill provision (which would prevent a party from making an unsolicited takeover offer on the other party).
After prolonged negotiations, the merger proposal fell through on account of resistance from Vulcan. By then, a substantial amount of information had been shared by Vulcan, which was in Marietta’s possession. Following the failure of merger talks, Marietta initiated a hostile takeover offer on Vulcan combined with a proxy contest. As part of the takeover offer documentation and filings made with the US Securities Commission (SEC), Marietta included information that was subject to confidentiality obligations owed to Vulcan. This included the fact of previous negotiations between the parties towards a possible merger, and also other corporate and financial information regarding Vulcan.
While Marietta approached the Chancery Court seeking a declaration that it can use the information received from Vulcan without a breach of confidentiality obligations, the application was opposed by Vulcan which sought to enjoin Marietta’s hostile takeover.
Issues and Decision
The key issues considered by the Delaware Chancery Court, and its decision, are summarized in the court’s own terms:
This case presents interesting questions regarding the meaning of confidentiality agreements entered into by two industry rivals at a time when both were intrigued by the possibility of a friendly merger and when neither wished to be the subject of an unsolicited offer by the other or a third-party industry rival.
May one of the parties – especially the one who evinced the most concern for confidentiality and who most feared having its willingness to enter into merger discussions become public – decide that evolving market circumstances make it comfortable enough to make a hostile bid for the other and then without consequence freely use and disclose publicly all the information that it had adamantly insisted be kept confidential? In this decision, I conclude that the answer to that question is no and that, consistent with Delaware’s pro-contractarian public policy, the parties’ agreement that the victim of any breach of the confidentiality agreements should be entitled to specific performance and injunctive relief should be respected.
Here, I find that, although the confidentiality agreements did not include an express standstill, they did bar either party from:
• Using the broad class of “evaluation material” defined by the confidentiality agreements except for the consideration of a contractually negotiated business combination transaction between the parties, and not for a combination that was to be effected by hostile, unsolicited activity of one of the parties;
• Disclosing either the fact that the parties had merger discussions or any evaluation material shared under the confidentiality agreements unless the party was legally required to disclose because: (i) it had received “oral questions, interrogatories, requests for information or documents in legal proceedings, subpoena, civil investigative demand or other similar process”; and (ii) its legal counsel had, after giving the other party notice and the chance for it to comment on the extent of disclosure required, limited disclosure to the minimum necessary to satisfy the requirements of law; or
• Disclosing information protected from disclosure by the confidentiality agreements through press releases, investor conference calls, and communications with journalists that were in no way required by law.
The breaching party engaged in each of these contractually impermissible courses of conduct. Because the victim of the breach has sought a temporally reasonable injunction tailored to the minimum period of time that the breaching party was precluded by the confidentiality agreements from misusing the information it had received or making disclosures that were not legally required in the sense defined in the confidentiality agreements, I grant the non-breaching party’s request, which has the effect of putting off the breaching party’s proxy contest and exchange offer for a period of four months.
The first issue pertains to the scope of confidential information. The NDA provides that each party shall use another party’s confidential information (termed in it as “Evaluation Material”) “solely for the purpose of evaluating a Transaction”, and a Transaction is defined as “a possible business combination … between [Martin Marietta] and [Vulcan] or one of their respective subsidiaries”. The key issue was whether the expression Transaction was limited to a negotiated merger between the two companies or whether it can be extended to include a hostile takeover as well. A restrictive meaning of the expression would work in favour of Vulcan as the use of the information for a hostile takeover would be a breach, while an expansive meaning to include a hostile takeover would work in favour of Martin Marietta as the use of confidential information would then be for the purpose of the Transaction. The Chancery Court considered a textual interpretation of the relevant clause, including the argument of Vulcan that since the Transaction was defined to be “between” the two companies, it necessitates a voluntary contractual transaction between them (as opposed to a transaction that is against the will of one of the companies as usually occurs in a hostile takeover). But, the court appears to be persuaded rather by the extrinsic evidence, being the history and evolution of negotiations between Martin Marietta and Vulcan that led to the conclusion of the confidentiality agreements.
The second issue pertains to whether the use of confidential information by Martin Marietta as part of the takeover offer documentation was “as legally required” so as to fall within the exception under the confidentiality agreements. This involves an interpretation as to the scope of the legal requirement exception in confidentiality agreements. While Martin Marietta argued that the disclosure of information in takeover documentation was required by the relevant disclosure rules of the SEC, Vulcan argued that it does not include any party “taking discretionary action to self-impose a disclosure requirement” as an acquirer is entitled to exercise discretion whether to proceed with an offer or not (without any form of imposition that requires disclosures). Even here, the court did not only consider the relevant language in the confidentiality agreements, but it also looked at the extrinsic evidence of negotiations between the parties so as to conclude that Vulcan’s position deserves support.
The Martin Marietta decision is important as it instills life into otherwise mundane clauses of confidentiality agreements, which have acquired overtones of standardization characterized by the exceedingly generous use of templates. It necessitates precise drafting of clauses by transaction lawyers so as to obviate any ambiguity. For example, in the Martin Marietta case, some amount of ambiguity was caused by the lack of uniformity in the definition and scope of confidential information between the two confidentiality agreements, i.e., the NDA and the JDA, although both were between the same parties and pertained to the same transaction.
The Martin Marietta decision is also significant due to the emphasis it places on the history of the drafting and negotiation process as a matter of extrinsic evidence. The court placed weight on the manner in which the clauses were drafted and iterated by the parties during negotiations, and also the enthusiasm displayed by one of them (Martin Marietta) to ensure formidable confidentiality obligations that indeed went on to haunt it in the end when it found itself on the other side of the equation. The lesson: as confidentiality obligations are often reciprocal, what is good for one party will also be good for the other; one must be prepared to be bound by the same terms that it seeks to be benefited by.
Overall, despite the fact-specific nature of the decision, Martin Marietta offers some lessons for M&A practitioners in dealing with confidentiality agreements.For a further analysis of the decision, please see the Harvard Corporate Governance Blog, the Deal Professor and the Race to the Bottom Blog.