In a prior blog this week, I made reference to this recent decision, and I tried to explain why its appearance will be so significant in the world of mergers and acquisitions, business acquisitions and dispositions, and other transactions.
This blog will focus on the Martin Marietta - Vulcan decision itself, rendered May 4, 2012, by the Delaware Chancery Court. Other commentators more familiar than I with the court and with this judge specifically have written insightful blogs on this case, and I will try to post links to their blogs where I have permission to do so.
All I will try to do in this blog is summarize key points made in the court decision. In a subsequent blog, I will offer my thoughts on how the court opinion will affect confidentiality agreements -- especially in the M&A arena -- going forward.
Contrary to some bloggers, I don't find the decision a legal stretch at all; I would find it troublesome had the court NOT determined that Martin Marietta had breached its agreement and imposed a sufficiently harsh remedy for that misconduct.
The factual background is common enough here: Martin and Vulcan were in the same line of business and thus competitors. For some time, there had been overtures about a merger or similar business combination but those casual talks had never progressed far. In the first half of 2010, the CEOs of the two companies began to talk seriously about a merger and on May 3 entered into a confidentiality or nondisclosure agreement (NDA), which appears, from the judge's detailed summary of its essential provisions, to have been a rather typical instrument of the kind. (As the court later observed in its VERY lengthy opinion, there is no "standard" confidentiality agreement as each is the product of negotiation between the parties, BUT over time the basic terms, and even the commonly used language of those terms, has coalesced into some well-established patterns, an "industry custom" that I can attest to myself from hundreds of confidentiality negotiations and agreements.) In addition, the parties subsequently entered into a joint defense and confidentiality agreement about two weeks later, in connection with their Hart Scott antitrust filing for the proposed combination. But I am more concerned here with the original NDA, as was the court.
The in-house counsel for both companies worked out the NDA between them, with the court taking EXTREME pains to emphasize that it was Martin's management which insisted on tighter terms than Vulcan wanted at first; clearly Martin was the party more concerned initially with guarding against disclosure or misuse of proprietary, privileged, nonpublic or confidential information. Both companies were public, so the NDA was an especially important requirement for each.
Eventually the merger negotiations stopped but Martin's interest in a merger did not. Instead of licking its wounds and SIMPLY WAITING until the NDA, by its own terms, expired (alternately, where a NDA does not state an expiration date, the bound parties wait until the confidential information exchanged "goes stale" and essentially useless, a clear concept in theory, but often a little difficult to apply in practice, unless the information has been subsequently disclosed by a public company), Martin in late 2011 decided to launch a hostile exchange offer for Vulcan stock. At the same time, Martin fired off a second offensive weapon, a proxy contest designed to put Martin directors on Vulcan's board at the latter's June 2012 annual meeting.
This is where the plot thickens, because until Martin commenced its two-front public takeover battle against Vulcan, neither Martin nor Vulcan had any claim against the other for breach of their NDA. But when Martin unveiled its blitz attack, it did so viciously, and in the court's opinion, knowingly and undoubtedly used in its tender offer and proxy materials key confidential information it had received from Vulcan pursuant to the NDA. The court went to great lengths to explain how it arrived at that decision and to summarize the great weight of evidence on the subject. I read that to mean that this judge recognized that the losing party in this case would appeal and he wanted the appeals court to have before it his court's exhaustive findings of fact, to preempt efforts by the appealing party to challenge the trial court's decision based on gaps in the factual record.
Then the judge went further to explain very carefully his legal reasoning for holding against Martin. If the appeals court decides to overturn the Chancery Court, it will do so because of an error of law, not a question of fact.
But I do not think the appeals court will disturb the lower court's finding that Martin violated the NDA. Frankly, nearly all of the arguments of Martin's attorneys -- Skadden Arps -- are, in my opinion, laughable, and the court appears to struggle to restrain itself from mocking them. (In defense of Skadden, a preeminent law firm, all I can say is that they probably did their best with the facts and equities against them, and I seriously doubt they were at fault in creating this mess: good lawyers have to deal with the disaster their client hands them. Speaking of that -- I will be looking for the fallout to Martin management from this fiasco).
The only Skadden argument that, in my opinion, was worth serious consideration, was the peculiar fact that the NDA did NOT contain a standstill provision, which is a fairly common provision found in an NDA between two public companies. Skadden tried to persuade the court that the parties' intent must not have been to preclude either side from making a tender offer or engaging in a proxy contest for control of the other, because had that been their mutual desire, they would have included a commonly used standstill provision in the NDA. This argument for interpreting a contract by what it OMITS instead of what it CONTAINS is not bogus, at least not entirely, and especially where the parties are sophisticated.
Ultimately, however, Skadden's argument failed, because it "proved too much," to coin a phrase. Follow the argument: Martin cannot disclose or use confidential information about Vulcan sourced from Vulcan for any purpose other than a negotiated, contractual business combination transaction between Vulcan and Martin (trust me, I am skipping over at least 50 pages of factual summary and legal analysis here, to the court's conclusion about what the parties meant by using such words as "between" and "business combination"); yet Martin may use the same information for a unilateral offer to Vulcan's shareholders, thus bypassing Vulcan's board entirely, and this point is obviously clear BECAUSE OF SOMETHING NOT IN THE AGREEMENT. Seems a little crazy to say that information is so vital and private and confidential that it would not be disclosed to another party without the latter's absolute solid agreement not to further disclose any of it and not to use it for any purpose other than a mutually agreed transaction between the parties, except that the recipient of the information may voluntarily and unilaterally use it against the provider and disclose the information (like most NDAs, this one said that confidential information included the fact that Martin and Vulcan were discussing a business combination) in a filing with the SEC (where it is available to anyone with an Internet connection) and publish it in a thick book mailed to ALL of the other party's shareholders, and incidentally make the information available to all of Vulcan's creditors, suppliers, vendors, customers and competitors.
That is what the court concluded, too, and decided it was not going to let Martin make a mockery of the NDA. In the end, the Chancery Court decided that the NDA must mean something and that the companies that executed it, must live by it.
The exact remedy imposed by the court -- a four month injunction against Martin's offensive -- received short discussion in the opinion, and Martin on appeal will probably focus on its punishment as much or more than the adjudication of "guilt or innocence." But it appears only Vulcan proposed to the court what a fitting remedy would be if the court ruled against Martin, and Martin placed all of its hopes on the court determining there had been no violation (or at least no substantial breach) of the NDA, and so the court adopted Vulcan's recommendation (which the court considered reasonable and not overly severe under the circumstances).
I believe Martin is appealing the decision, and I will be interested in watching the course of that appeal. I think the Chancery Court's comprehensive and detailed findings and conclusions will make that a very tough appeal to win.
I want to close with some language from the opinion itself, found near the end:
To the extent that Martin Marietta argues that confidentiality agreements should be read carefully and courts should not lightly imply limitations on a party’s ability to make an unsolicited acquisition offer, I embrace its position and have done my best to read the Confidentiality Agreements in this case closely and to enforce them only to the extent I am convinced that they were intended to preclude certain action. But to the extent that Martin Marietta suggests that courts should not enforce confidentiality agreements as they do other contracts on the ground that to do so is necessary to protect stockholders, I see no warrant in our law for such adventurism and no empirical basis to move our common law of contracts in that direction....
By respecting contract rights, our courts give parties in commerce the confidence that they can rely upon the contracts they execute to reduce risks and transaction costs. In the context I now address, that translates into a willingness on the part of wary day-to-day competitors to share information in aid of determining whether a mutually beneficial business combination might make sense. If the message is sent that the confidentiality and other agreements that control the downside risks of such engagement will not be respected, then one can rationally expect such competitors not to be as prone to considering such transactions....
The best way to address Martin Marietta’s legitimate concerns is not for courts to fail to enforce confidentiality agreements as written. It is for the parties who enter into them to be clear about their terms, and for a party unwilling to honor a contractual promise to not make it in the first place. An examination of all the evidence here convinces me that Martin Marietta is not being held to any promise it did not make. Rather, it is being held to exactly the bargain it successfully sought to impose on Vulcan as a condition to sharing information and having merger talks....
It is of course common for a party to a contract who has received the benefits flowing from the contract to wish to forsake the burdens it accepted to obtain them. But the refusal of American contract law to indulge that natural human desire is critical to the important economic and social value generated by voluntary contracts. Unless both parties to a contract have their reasonable expectations respected by the courts, then contracts will not serve their intended purpose. Ultimately, disrespecting contracts seems to threaten far more harm to investors in a capitalist economy than it does good.