Monday, November 23, 2015

Confidentiality Agreements in M&A Transactions

In May 2012, we had discussed the case of Martin Marietta wherein a confidentiality agreement was enforced in the context of an M&A transaction. Now, a California court has similarly enforced a confidentiality agreement in the case of Depomed, Inc. v. Horizon Pharma, PLC (accessed via the website of Wachtell, Lipton, Rosen & Katz).

The facts of the case are summarized in the ruling:

Depomed asserts that, for approximately the last five months, Horizon has engaged in a campaign to take over Depomed through an acquisition proposal that significantly undervalues Depomed. Depomed contends Horizon knows its proposal is inadequate because it has detailed confidential and non-public information about Depomed’s flagship product, NUCYNCTA. Depomed states that Horizon obtained this information pursuant to a confidentiality agreement (the “MNDA”) entered into as part of a competitive bidding process to acquire NUCYNCTA from Janssen Pharmaceuticals, Inc. (“Janssen”) – a process in which Depomed was the winning bidder earlier this year. Depomed argues that Horizon is required under the MNDA to maintain this information in “trust and confidence” and use it only in connection with a potential deal with Janssen for NUCYNCTA, but Horizon is now misusing this confidential information to take control of Depomed.

In other words, Depomed and Horizon were competing bidders to acquire NUCYNCTA from Janssen. Horizon obtained confidential information in relation to NUCYNCTA but did not succeed in acquiring it. Now, it sought to use that information to stage a takeover of Depomed, which was the successful bidder.

After considering the facts and legal issues involved, the Court issued a preliminary injunction against Horizon.

The first issue related to whether the MNDA that bound Horizon pertained to its proposed acquisition of NUCYNCTA. After considering the relevant evidence, the Court came to the conclusion that it was indeed the case.

The second issue was whether Depomed lacked standing to bring the action because it was not a party to the MNDA, which was between Horizon and Janssen. It was argued that Depomed was only a third-party beneficiary. However, the Court found that Janssen’s rights under the MNDA were transferred to Depomed as a part of its acquisition of NUCYNCTA. Janssen therefore had no interest in the protection of the confidential information.

Finally, Depomed succeeded in showing that the information used by Horizon in its bid for Depomed came from Janssen and that it was not publicly available. Hence, Depomed was likely to prevail in a breach of contract claim.

Based on a consideration of these issues, the Court came to the conclusion that “[w]ith regard to the relative interim harm to the parties from the issuance of an injunction, the harm to Depomed from not issuing an injunction would be greater than the harm to Horizon from issuing an injunction”. Hence, Depomed was able to succeed in the action.

The outcome in this case is similar to that in Martin Marietta wherein the plaintiff was able to succeed in a claim for breach of confidentiality in a hostile takeover although the confidentiality arrangement itself was entered into in connection with a past transaction. In Martin Marietta, while the confidentiality agreement was entered into between the bidder and the target company (albeit for a different transaction), in the present case Depomed was not even a party to the confidentiality agreement, the benefits of which it acquired from Janssen as part of its NUCYNCTA acquisition.

Although these cases are set in the US context, they would have some relevance to parties in conceptualizing and drafting confidentiality agreements in Indian M&A transactions.


RNR said...

After 4 years, Law in Perspective on your Blog Roll finally has a post dated 7th November, 2015! Why this long gap!

vswami said...

Attention is drawn to the published article, -
Dual-Track M&A/IPO Gain Popularity in Health Care Sector
The dual-track process has been growing in popularity among health care companies, since the IPO process can be helpful... READ MORE »

The subject write-up herein, on the other hand, discusses the trend of opinion lately being given by courts on the significantly novel idea of ‘confidentiality agreement (s)’ in relation to M &A transactions.
On the first blush that is seen to deal with the propriety or legality, so much so its enforceability in a court of law, of any such agreement of ‘confidentiality’, in order to become operative and being acted upon outside / independent of the commonly known, - regular and normally entered into legal documents, for effectuating any ‘merger and acquisition’ in the corporate world. As independently viewed, to say the least, this is another instance of corporate deciding to ‘test-the-waters’. The idea, howsoever strikingly odd that be, is noted to have passed the muster, if were to infer from the judicial thinking , as observed from the cited court cases.
In this context, one perforce comes to think of like past instances in which the very basic, and fundamental , ideals of the age-old concept- ‘contract’- have been attempted, also successfully in a limited way, tweaked, mangled, and gone ahead with. For example, consider stipulations, in-built though, cryptically described as ‘agreement to agree’ (possibly implying, - ‘agreement not to agree’, as well). For more, look-up , -
INDIAN CORPORATE LAW: Agreements to Agree

In this scenario, obviously, it is now wholly left to the judiciary to decide, on a case to case basis, as to whether to permit, and within what parameters, such attempts to make inroads into the concept of ‘contract’ as originally conceived of and historically covered in the statutory or common law governing contracts. It is here that the judiciary will be faced with the onerous task of calling to aid and prudently applying, besides any other, the broad rule of interpretation, “Updating Construction”.

To dilate:
Statutory interpretation by Francis Bennion, 2nd Edn. section 288, with the heading ‘Presumption that updating construction to be given’ states one of the rules thus (page 617):
It is presumed that Parliament intends the court to apply to an ongoing Act a construction that continuously updates its wording to allow for changes since the Act was initially framed (an updating construction). While it remains law, it is to be treated as always speaking. This means that in its application on any date, the language of the Act, though necessarily embedded in its own time, is nevertheless to be construed in accordance with the need to treat it as current law.
The (concluding) suggestive observation, - “Although these cases are set in the US context, they would have some relevance to parties in conceptualizing and drafting confidentiality agreements in Indian M&A transactions.”, cannot be taken seriously, without having regard to the foregoing and other related aspects, particularly obtaining in the current scenario; and in any case, has to be considered and taken forward, if so tempted, with the utmost circumspection as warranted.