“But the road to true love seldom runs smooth, even for companies that make paving materials.” [1] This was just one of the memorable remarks from a recent Delaware Chancery Court decision, where Chancellor Leo Strine added a new twist to the way the court construes language in Non-Disclosure Agreements (“NDAs”). The opinion provides a plethora of information about NDAs and reminds law students – who may draft and negotiate these documents during their first years at a firm –that NDAs have significant strategic implications for clients and that standardized terms in these documents could be costly. Strine, in a lengthy opinion, strictly construed language in an NDA to have the effect of a standstill provision and issued an equitable remedy for the breach of the contract.[2]
This dispute began when Martin Marietta, a North Carolina aggregates corporation, entered into friendly discussions with Vulcan Materials (“Vulcan”), a large domestic aggregates corporation headquartered in Alabama.[3] Pursuant to the NDA facilitating these discussions, Martin Marietta could only use information acquired during the discussions for the purpose of considering a “business combination transaction” that was “between” the parties.[4] After discussions broke down, Martin Marietta used information it gained during the friendly talks in SEC public disclosure documents, investor calls, and press releases while it launched an unsolicited exchange offer proposing a deal of 0.5 shares of Martin Marietta for each Vulcan share.[5] Vulcan argued that the language in the NDA meant that any information gained from either side during the initial discussions was limited to use in “a friendly, contractual business combination between the two companies that was negotiated between the existing boards of the two companies, and that was not the product of a proxy contest or other unsolicited pressure strategy.”[6] Martin Marietta argued that the NDA allowed either side to use the information from the friendly negotiations for any type of business combination transaction between the two companies, and that Vulcan was attempting to read a standstill into the agreement even though it did not contain an explicit standstill.[7]
Strine looked to extrinsic evidence to resolve ambiguity in the contract language, focusing on Martin Marietta’s position as a potential target in the merger at the time of the NDA, and their sloppy attempts to gather and silo material gained during the friendly discussions in an effort to claim that information was not used in the hostile bid.[8] Martin Marietta’s changes to the initial NDA were “unidirectional: every one of the proposed…changes had the effect of making the NDA stronger in the sense of broadening the information subject to its restrictions and limiting the permissible uses and disclosures of the covered information.” According to Martin Marietta CEO Ward Nye’s own notes, at the time of the NDA he and his team were “interested in discussing…the prospect of a merger, but not an acquisition whether by [Vulcan] or otherwise.”[9] However, information gathered during discussions led Nye to believe there was an additional $100M each year in synergy potential above his initial estimates.[10] Nye claimed that the team evaluating the deal did not rely on any non-public information, but Strine held that once Nye had this information the deal was tainted. Any evaluation of a hostile bid at that point was an unauthentic attempt at using public information to rationalize synergy estimates derived initially from non-public information.[11]
Finally, the parties had included a clause in the NDA providing for injunctive relief in the event of breach by either side, and Strine held that “[t]he very fact that measuring the precise loss to Vulcan in terms of negotiating leverage, customer relations, and productivity loss from Martin Marietta’s misconduct is difficult to impossible is a reason why the parties’ voluntary agreement that any breach would give rise to injunctive relief should be respected and honored, not gutted by a judge, particularly of a state whose public policy is pro-contractarian.”[12] The injunction reflected the timing spelled out in the NDA restrictions and prevented Martin Marietta from making a hostile bid for four months.[13] While news reports have suggested that a renewed bid for Vulcan is on the table again because the injunction expired on September 15, 2012, the injunction has the practical effect of preventing a hostile bid for much longer.[14] The four month injunction prevented Martin Marietta from running its slate of directors at Vulcan’s June 1, 2012 annual meeting, and since only two Vulcan directors are up for election in 2013, the ruling eliminates Martin Marietta’s chances of taking control of Vulcan’s 10-member board until 2014.[15] Additionally, Vulcan’s position has now strengthened and analysts estimate that Martin Marietta would have to offer 0.7 shares for every share of Vulcan, a costly 40% increase above the previous bid.
Here are just a few takeaways from this decision:
You may not know your client is the target until it is too late
Vulcan entered into the initial NDA thinking it was the potential acquirer, and Martin Marietta ended up using information to turn Vulcan into the target. NDAs have the potential to enable or limit future strategic opportunities for clients, so they should not be viewed just as preliminary agreements that can be entered into without consequence.[16] The client’s position may shift based on information uncovered during friendly discussions and the thinking behind the language in the NDA should contemplate a range of potential outcomes.[17]
Establish a clean team to preserve a hostile takeover bid
Strine suggested that establishing a “clean team” may be a sufficient way to keep open the possibility of a hostile bid after friendly discussions are not fruitful.[18] Sequestering internal personnel, directors and advisors from exposure to confidential information could keep this option open, although in many cases this will not be available because senior executives need to be involved in both potential friendly negotiations as well as any potential hostile bid decisions.[19]
Do not count on a strict construction of the NDA – include a formal standstill to avoid a hostile bid
It is left for us to guess why Vulcan and Martin Marietta did not have a standstill agreement in their NDA. The most plausible reason is that neither party contemplated a hostile takeover bid. Something as simple as a friendship between executives may be a reason that parties do not include standstills in early conversations. But it’s better to be safe than sorry. Friendly relationships can easily sour during negotiations and clients concerned about a potential takeover bid would be wise to include a standstill provision. While a standstill provision may be a contentious issue, negotiating the types of information and the length of time applicable to any restrictive clauses may be a way to provide both sides what they need to fully engage in friendly discussions.[20] Additionally, the process of negotiating these items may uncover whether the other party wants to keep the hostile option on the table.
Do not forget about Injunctive relief
Delaware law allows parties to stipulate elements of a compulsory remedy.[21] While the injunctive relief in this case mirrored the initial timelines set in the NDA on restrictive use of information, there is no guarantee that the court will stick to timelines provided in the NDA when it comes to injunctive relief. Chancellor Strine noted that Vulcan’s request for relief was for the minimum period, and that a longer injunction may have been justified by the pervasiveness of the breaches.[22] It is plausible that the court in future cases could extend injunctive relief for up to a year beyond the NDA timing for the purpose of preventing a party from running directors at an annual meeting, which could then have longer-term implications for gaining board control depending on the timing of board elections.
Think early and often about framing the executive storyline
Strine staged the legal analysis with an extensive account of the facts and particular emphasis on Ward Nye, Martin Marietta’s CEO. Strine noted that “Nye was not at all anxious to find his chance to be a CEO lost in a large synergistic merger, which was a possibility depending on the relative negotiating and financial strength of Vulcan and Martin Marietta in merger talks.”[23] He also noted that “Nye’s own desire to be CEO and to have the headquarters in Raleigh was simply a selfless manifestation of his and Lloyd’s obviously superior management approach and the undisputed fact that an aggregates company should be closer to ACC basketball than SEC football.”[24] Further, Strine wrote “Nye did not want to be demoted, even during a transition period, and evinced a willingness to forego a 20% premium for Martin Marietta stockholders in the exchange ratio to ensure he was slotted as CEO right away.”[25] As if that were not enough, Strine added in a footnote that “[t]he Chinese concept of face is a good one for effective negotiators and public figures to keep in mind. Nye and Lloyd [Martin Marietta’s CFO] seemed to have had the same grasp of that concept as the self-engraved chosen one.”[26] While Strine’s legal analysis regarding ambiguity focused on the circumstances leading to the NDA, we can wonder to what extent the court’s image of Nye may have played a role behind the scenes.
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[1] Martin Marietta Materials, Inc. v. Vulcan Materials Co., 2012 WL 5257252, at *15 (Del. Ch. May 4, 2012) aff’d, 45 A.3d 148 (Del. 2012) and aff’d, 254, 2012, 2012 WL 2783101 (Del. July 10, 2012), as corrected (July 12, 2012).
[2] Jonathan M. Grandon & Christina Bergeron, New Guidance on Confidentiality Agreements, 4 Fin. Fraud L. Rep. 607, 609 (2012). A traditional standstill provision expressly prohibits a party from pursuing any alternative acquisition of its securities or attempting to exert any control over its management or board of directors for a set time period.
Jahangier Sharifi, et al., The Accidental Standstill, Richards Kibbe & Orbe LLP (July 20, 2012), http://www.rkollp.com/assets/attachments/The%20Accidental%20Standstill.pdf.
[3] Martin Marietta Materials, Inc., 2012 WL 5257252 at 1-2.
[4] Id, at 3.
[5] Id, at 3, 25.
[6] Id, at 3.
[7] Id, at 4.
[8] Martin Marietta Materials, Inc., 2012 WL 5257252 at 36-37.
[9] Id, at 37.
[10] Id, at 14.
[11] Id, at 19.
[12] Id, at 58.
[13] Martin Marietta Materials, Inc., 2012 WL 5257252 at 58.
[14] Tara Lachapelle & Thomas Black, Martin Marietta Seen Bumping Vulcan Bid: Real M&A, Businessweek (Sept. 18, 2012), http://www.businessweek.com/news/2012-09-18/martin-marietta-seen-bumping-vulcan-bid-real-m-and-a.
[15] Martin Marietta Materials, Inc., 2012 WL 5257252 at *58; Fraud Report 609.
[16] Marc Kushner & Medard T. Fischer, Corporate E-Review: Strategic Lessons Arising From Canadian and U.S. Judicial Consideration of Confidentiality Agreements, JDsupra.com (October 17, 2012), http://www.jdsupra.com/legalnews/corporate-e-review-strategic-lessons-ar-71002/.
[17] Jonathan M. Grandon & Christina Bergeron, New Guidance on Confidentiality Agreements, 4 Fin. Fraud L. Rep. 607, 612 (2012).
[18] Martin Marietta Materials, Inc., 2012 WL 5257252 at *17
[19] Marc Kushner & Medard T. Fischer, Corporate E-Review: Strategic Lessons Arising From Canadian and U.S. Judicial Consideration of Confidentiality Agreements, JDsupra.com (October 17, 2012), http://www.jdsupra.com/legalnews/corporate-e-review-strategic-lessons-ar-71002/.
[20] Id.
[21] Jonathan M. Grandon & Christina Bergeron, New Guidance on Confidentiality Agreements, 4 Fin. Fraud L. Rep. 607, 611 (2012).
[22] Martin Marietta Materials, Inc., 2012 WL 5257252 at *59
[23] Id. at *5
[24] Id. at *17
[25] Id.
[26] Id. at *17 n.80