On May 4, 2012, the Delaware Court of Chancery held in Martin Marietta Materials, Inc. v. Vulcan Materials Company that Martin Marietta Materials, Inc. (Marietta) breached two confidentiality agreements it entered into with Vulcan Materials Company (Vulcan) when it initiated a hostile bid against Vulcan and commenced a proxy contest using confidential information acquired during its merger negotiations with Vulcan, even though neither confidentiality agreement included an express standstill provision. Because both confidentiality agreements provided for equitable relief, including injunction and specific performance, in the event of a breach by one of the parties, the Court enjoined Marietta from pursuing its hostile bid for a period of four months.

This case highlights the importance of careful drafting. In particular, if a buyer is able to negotiate a confidentiality agreement without a standstill provision, it needs to be careful that the other provisions in the confidentiality agreement (such as the use and disclosure provisions) do not otherwise restrict its ability to make an unsolicited bid. Although the court ultimately based its decision on extrinsic evidence, both the narrow definition of "Transaction" in the use provision and the narrowly defined exception for legally required disclosures prohibited Marietta from initiating a hostile bid or proxy contest.

In early 2010, Marietta and Vulcan, the two largest aggregates businesses in the US, began discussing a possible merger and entered into two confidentiality agreements:

Neither the NDA nor the JDA contained a standstill provision. For an example of a standstill provision, see Standard Document, Confidentiality Agreement: Mergers and Acquisitions: Section 9.

The parties initially negotiated with the assumption that Vulcan would be the acquirer. However, as negotiations progressed, Marietta's relative economic strength grew compared to Vulcan. In December 2011, Marietta launched an unsolicited exchange offer to purchase all of Vulcan's outstanding shares and commenced a proxy contest to elect four new members to the Vulcan board, using information it had obtained during its earlier merger negotiations. It subsequently filed a Form S-4, as required by SEC rules governing exchange offers, that detailed extensively the confidential information acquired during its negotiations with Vulcan as well as details of the negotiations themselves. This information was later relayed publicly again by Marietta in a variety of push pieces and investor calls.

Vulcan's board made clear that it believed Marietta's conduct violated the confidentiality agreements. On the same day that it launched its exchange offer, Marietta brought suit, seeking a declaration that the confidentiality agreements did not bar their exchange offer or proxy contest. Vulcan counterclaimed, seeking to enjoin Marietta from proceeding with its exchange offer and proxy contest.

The main issue before the court was whether Marietta breached either of the two confidentiality agreements when it initiated the hostile bid and proxy contest using confidential information obtained during its merger negotiations with Vulcan, even though neither confidentiality agreement included an express standstill provision. At the core of this issue was whether the definition of the term "Transaction" under the two confidentiality agreements was limited to a friendly, negotiated merger between the parties.

The court also addressed whether Marietta's disclosure of confidential information in its SEC filings, including details about the merger negotiations, was permitted under the exception for legally required disclosure when Marietta voluntarily subjected itself to the legal requirement by initiating the hostile bid and proxy contest. Additionally, the court considered whether Marietta was permitted to continue disclosing the confidential information contained in the SEC filings in other communications that were not legally required (such as press releases and investor calls).

Both confidentiality agreements restricted the use of confidential information. The NDA only permitted confidential information to be used for evaluating "a Transaction," which was defined as "a possible business combination transaction between" Marietta and Vulcan. The JDA only permitted confidential information to be used for pursuing and completing "the Transaction," which was defined as "a potential transaction being discussed by" Vulcan and Marietta. Vulcan argued that both agreements excluded the exchange offer and proxy contest because the definition of "Transaction" in both agreements was limited to a consensual transaction. Marietta countered that its exchange offer and proxy contest qualified as a "business combination," as that term is defined in the securities regulation context, and that the term "between" did not require the transaction to be consensual since the ultimate combination of the businesses would be between the two companies.

Although the Court found Vulcan's arguments more compelling, after a thorough review of the language in the confidentiality agreements, it felt that there was enough ambiguity in the agreements that it could not base its decision on the language of the agreements alone and looked to extrinsic evidence. The Court found that the extrinsic evidence supported Vulcan's argument because at the time that Marietta entered into the confidentiality agreements, Marietta was concerned about being acquired not only by third parties, but by Vulcan as well. The negotiations over the language in the confidentiality agreements all resulted in a strengthening of protections, including replacing the word "involving" with "between" in the NDA, which had the effect of requiring negotiations between the parties.

Finally, the court disagreed with Marietta's arguments that it was permitted to disclose confidential information in its SEC filings because the disclosures were legally required and therefore permitted under the confidentiality agreements. The language in the agreements was again found to be ambiguous and the court had to rely on extrinsic evidence. The court found that both parties intended for the exception for legally required disclosure to only be triggered by external demands, such as subpoenas, and not by discretionary acts by a party (such as the exchange offer and proxy contest) that trigger disclosure obligations. Similarly, the court disagreed with Marietta's argument that once it had been legally required to publicly disclose confidential information, it was free to continue disclosing that information in other non-legally required contexts.

After finding that Marietta had breached both confidentiality agreements, the court enjoined Marietta for four months from pursuing its exchange offer and proxy contest. The court, invoking a specific performance remedy, based the injunction on the amount of time that would have lapsed from when Marietta commenced its hostile bid to the expiration of the NDA.

Marietta has announced that they will pursue an appeal of the court's decision.

Although the court had to rely on extrinsic evidence, this case demonstrates how certain provisions in a confidentiality agreement can be used to restrict a party from initiating a hostile bid despite the absence of a standstill provision. Both the narrow definition of "Transaction" and the narrowly defined exception for legally required disclosures effectively prohibited Marietta from initiating a hostile bid or proxy contest. If a buyer can negotiate a confidentiality agreement without a standstill provision, it needs to be careful that the use and disclosure provisions do not otherwise restrict its ability to make an unsolicited bid if it wants to preserve that flexibility in the future.

Additionally, this case highlights the importance of consistent drafting when there are multiple agreements covering the same matter. In this case, there were two agreements governing the treatment of confidential information, but the use provision, including the definition of "Transaction," in each agreement was a bit different. Although it was not a factor in this case, inconsistency between agreements governing the same matter can create ambiguity which requires a court to look to extrinsic factors rather than relying solely on the language contained in the agreements. If parties want to ensure that their agreement is enforced as intended, they need to carefully draft their agreements to make their intentions clear.

For more information on confidentiality agreements, see Practice Note, Confidentiality Agreements: Mergers and Acquisitions and Standard Document, Confidentiality Agreement: Mergers and Acquisitions.