Why Draft a Standstill Provision When “Between” is Enough?

Delaware Court Enjoins Hostile Exchange Offer Because of Breach of Confidentiality Agreement Without Explicit Standstill Provision

May 11, 2012

In Martin Marietta Materials, Inc. v. Vulcan Materials Company, the Delaware Chancery Court (“the Court”) found that in pursuing a hostile exchange offer and launching a related proxy contest, a bidder violated a confidentiality agreement that did not contain an explicit standstill provision. Because of the breach, the Court enjoined the bidder from any change of control transaction, acquisition of assets or shares or pursuing any proxy contest with respect to the target company for a four-month period.


For over a 10 year period, Martin Marietta and Vulcan intermittently discussed a negotiated combination of the two companies. In spring 2010, the companies restarted discussions of a potential merger and entered into a confidentiality agreement with a two-year term, as well as a joint defense agreement with no expiration that included confidentiality provisions covering sensitive antitrust related information. The confidentially agreement contained standard provisions prohibiting the use of any confidential information other than for the purpose of evaluating a possible business combination transaction between the two companies, as well as provisions prohibiting the disclosure of the existence of negotiations with respect to a transaction. However, the agreement did not contain express standstill provisions that are frequently included in confidentiality agreements with public companies. (Standstill provisions specifically prohibit the recipient of confidential information from, among other things, pursuing a change of control transaction, purchasing shares, launching a proxy contest or engaging in other unilateral actions with respect to the disclosing party.) A standstill was not discussed in connection with negotiating the confidentiality agreement.

Because the companies were direct competitors, there was a potential for large synergies for a combined company. However, that also created a major antitrust risk, which would require asset divestitures as a condition to obtaining antitrust approval. In the course of discussions, Vulcan shared detailed information regarding potential synergies of the transaction; and the two companies, through their counsel, shared detailed market information, legal analysis and other antitrust related information.

Within a year, discussions cooled due to the relative divergence in stock prices of the two companies. In December 2011, approximately five months before the expiration of the confidentiality agreement, Martin Marietta launched a hostile exchange offer. A month later, Martin Marietta commenced a proxy contest for the upcoming June 2012 meeting to elect representatives to Vulcan’s staggered board that would support the offer.

In the SEC filings with respect to the exchange offer and the proxy contest, Martin Marietta disclosed an estimate of the total synergies for the merger, that counsel to the respective companies did not identify any significant antitrust impediments to the transaction and a detailed discussion of the history of negotiations between the two companies. Martin Marietta also disclosed the information in investor calls and other presentations.

Martin Marietta brought suit in Delaware Chancery Court to seek a declaration that the confidentiality agreement and joint defense agreement did not bar the exchange offer or the proxy contest. Vulcan counterclaimed and sought a temporary injunction against the exchange offer and proxy contest.

Court’s Analysis

In a detailed 138-page opinion, the Court found that Martin Marietta breached the confidentiality agreement and joint defense agreement in multiple ways.

First, the Court found that Martin Marietta’s use of the non-public synergies information to launch a hostile bid and proxy contest was not permitted under the confidentiality agreement. Under the confidentiality agreement, a party was permitted to use confidential information solely for purposes of evaluating a business combination transaction between the two companies. The Court’s analysis turned on whether the word “between” in the phrase “business combination transaction between” meant a mutually negotiated transaction among the two companies or any business transaction involving the companies, hostile or otherwise. Unable to interpret these terms using a plain meaning analysis, the Court turned to the parties’ negotiating history and other evidence of intent to interpret these terms.

The Court concluded that Martin Marietta would never have agreed to exchange confidential information if it thought Vulcan could use the information to launch a hostile bid or proxy contest.1 The Court also cited Certicom Corp. v. Research In Motion Ltd. (2009), a case where a Canadian court interpreted the term “between” as limiting the use of confidential information to negotiated transactions, thereby blocking a party’s hostile bid. Accordingly, the Court found that the phrase meant a contractually agreed upon business combination transaction between the two companies, and thus the confidential information could not be used in the exchange offer or proxy contest.

Second, the Court found that Martin Marietta’s disclosure of the negotiating history in its SEC filings breached the confidentiality agreement. The confidentiality agreement separately prohibited the disclosure of the discussions surrounding a business combination except to the extent “legally required.” Noting that the relevant provision cross-referenced a provision in the confidentiality agreement requiring that notice and other procedures must be satisfied prior to disclosure of confidential information pursuant to a subpoena or similar third party process, the Court concluded “legally required” meant compelled by a judicial order or external demand as opposed to general compliance with law. Accordingly, the Court found that Martin Marietta could only disclose the negotiating history in response to an external demand and only after complying with the various notice and vetting procedures. In doing so, the Court acknowledged that this interpretation creates a backdoor standstill restriction because some aspects of prior negotiations are required to be disclosed under SEC rules in connection with hostile bids. However, the Court noted throughout its opinion that the disclosure of the history of the negotiations went beyond what was required by the Securities and Exchange Commission rules and was primarily used as a public relations tool.

Third, the Court found that even accepting Martin Marietta’s position that the negotiating history could be disclosed pursuant to the SEC rules without compliance with the procedures in the confidentiality agreement, Martin Marietta’s disclosure far exceeded what was legally required. The Court believed that a simple recitation of facts was sufficient to comply with the SEC rules. In the Court’s view, the confidentiality agreement puts a burden on the disclosing party to show that each and every piece of disclosure is legally required, both as to subject matter and to specificity.

Finally, the Court rejected the argument that once confidential information was properly disclosed in the SEC filings, Martin Marietta was free to disclose the same information in press releases and other communications. The Court found that this republishing of confidential information was a separate breach under the confidentiality agreement.

The Court granted Vulcan its requested injunctive relief of staying the hostile bid, proxy contest and any other acquisition activity for four months, which is roughly coterminous with the amount of time remaining on the term of the confidentiality agreement when the hostile bid was launched. In doing so, the Court noted an argument could be made that the injunction should be longer because the joint defense agreement, which was also breached, did not have any term.

Practical Implications

Although Martin Marietta has stated that it will appeal Chancellor’s Strine’s decision to the Delaware Supreme Court, the Chancery Court’s opinion provides a clear roadmap for lawyers that will result in an implied standstill even though the confidentiality agreement does not have an express standstill. Although the Court repeatedly emphasized the fact-specific nature of the case, the detailed parsing of the contractual languages leaves little doubt on how these provisions would be construed in future situations.

Previously, lawyers may have embraced the uncertainty in confidentiality agreement language and declined to engage in the contentious task of negotiating an express standstill — the disclosing party was able to maintain an argument that the restrictions on use provisions would effectively function as a standstill and the recipient party was able to maintain an argument that the absence of an express standstill meant no standstill. With Martin Marietta, that uncertainty has disappeared. Accordingly, lawyers should now address the issue up front and clearly draft in detail what standstill restrictions should apply.

Martin Marietta also makes clear that Delaware courts will not countenance a party deliberately taking action to voluntarily impose on itself a public disclosure requirement to take advantage of exceptions in the confidentiality agreement. The recipient party is now forewarned that its ability to proceed in a publicly hostile manner or even purchasing shares of the disclosing party in the public market will be restricted because the Court will not allow the recipient party to make expansive disclosures that may be required by federal securities laws.

Finally, the Court’s broad interpretation of the non-use provisions of a confidentiality agreement also has strong implications outside the context of an acquisition proposal. As the Court noted, “Once things are learned and done, it is difficult to unlearn.” Accordingly, especially in the case of a confidentiality agreement between parties in the same industry, the disclosing party could use the confidentiality agreement as a sword. The disclosing party would argue that its information was used by the recipient party to either further the recipient party’s business or compete against the disclosing party. This effectively could turn a confidentiality agreement into a non-compete. Therefore, the recipient party will need to carefully consider whether it needs to adopt internal procedures to mitigate the risk of this claim, including using clean teams to review the confidential information and segregating and destroying confidential information after use.

Martin Marietta will no doubt result in an exponential increase in negotiations over confidentiality agreements. However, fundamentally, given the breadth of limitations imposed by a confidentiality agreement, the bulk of a recipient’s party protection is provided by the expiration of the confidentiality agreement. Consequently, limiting the term of the confidentiality agreement will now take on additional importance.


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1 Among other things, Martin Marietta’s CEO emphasized that any transaction must be a merger of equals; Martin Marietta’s draft of the confidentiality agreement strengthened the provisions from a prior confidentiality agreement between the companies; and in connection with launching the bid, Martin Marietta’s advisors tried to conceal their use of the confidential material.

This article was originally published by Bingham McCutchen LLP.