Last week, the Delaware Court of Chancery issued an interesting opinion where it enjoined a party from prosecuting a proxy contest and proceeding with a hostile bid for its industry competitor as a remedy for breach of the parties’ NDA. This pretty extreme remedy was issued even though the parties did not enter into a standstill agreement. Courtesy of John Reed, a partner in DLA Piper’s Delaware office, below is a brief summary of the case and a few questions raised by this recent decision. The full text of the case is available here: Martin Marietta Materials, Inc. v. Vulcan Materials Co., C.A. 7102-CS (Del. Ch. May 4, 2012).
For some time, Vulcan Materials had expressed interest in a friendly transaction with Martin Marietta and the parties eventually entered into two confidentiality agreements to facilitate merger and antitrust discussions. The Delaware court reviewed extrinsic evidence to construe the agreements and found that the agreements protected the companies’ confidential information, as well as the fact that the parties had merger discussions, from disclosure. Importantly, the Delaware court also found that both parties wanted to avoid being the target of a hostile offer by the other or by another buyer when they entered into the confidentiality agreements – of course, if that is what these two sophisticated parties wanted, they should have entered into a standstill agreement, and because they did not, they should have had no expectation that they were protected from a hostile bid or that the remedy for breach of their NDA would be the same as a remedy for breach of a standstill. However, the Delaware court did not see it that way.
The Delaware court found that when Martin Marietta formulated its hostile bid for Vulcan Materials and launched its proxy contest for seats on Vulcan Materials’ staggered board, it used confidential information in breach of the NDA. The Delaware court found the parties intended that the information was only to be used in an agreed-to business combination. The Delaware court connected a lot of dots to reach that conclusion. The Delaware court held that even though the NDA did not contain a standstill provision, Martin Marietta’s breaches entitled Vulcan Materials to specific performance of the agreements and an injunction. The Delaware court enjoined Martin Marietta, for four months, from prosecuting a proxy contest, making an exchange or tender offer, or otherwise taking steps to acquire control of Vulcan Materials’ shares or assets.
All of this raises a lot of questions. For example, even if the NDA expressly stated that the agreement was in no way intended to create a standstill, what would be the remedy for a breach other than a backdoor standstill? Crafting language to avoid the result here might not be that difficult (e.g., language in the NDA that says it does not create a standstill and that any remedy, equitable or otherwise, cannot include a request to enjoin an offer), but will parties be reluctant to sign it?
One final thought. The stockholders seem to be left out in the cold here. Breach of an NDA usually involves the use of customer information or business plans to enter a new market, etc., and injunctions for such breaches are the preferred remedy. But how are the stockholders (or the company) harmed by a premium offer? To state the obvious, an NDA is not a standstill and if a party wants a standstill, it should enter into one. From a stockholder’s perspective, if I understand the difference between an NDA and a standstill and I know my company has entered into the former and not the latter, my expectation would be that I will not be precluded by a court from entertaining a tender offer. Worse yet, in this case the NDA expired one day before the opinion was issued, yet Martin Marietta is barred for four more months. Anyone else can now review all the information that is in the opinion and formulate an offer, but the party that is in the best position to do it cannot.