Martin Marietta Materials, Inc. v. Vulcan Materials Company: Delaware Chancery Court Enjoins Hostile Bid that Used Confidential Information in Breach of Confidentiality Agreements

Sullivan & Cromwell LLP - May 9, 2012
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In its recent Martin Marietta decision, the Delaware Chancery Court enjoined Martin Marietta’s hostile bid for Vulcan on the basis that Martin Marietta’s use of information it obtained from Vulcan in pursuing its hostile bid breached its non-disclosure and joint defense agreements with Vulcan. Concluding in large part that the language of the confidentiality agreements was susceptible to both Martin Marietta’s and Vulcan’s competing interpretations (although generally favoring Vulcan’s interpretations), Chancellor Strine relied on extrinsic evidence to find that, despite the absence of an express standstill, the parties intended the definition of “Transaction” in the main non-disclosure agreement (“a possible business combination transaction . . . between” the parties or one of their respective subsidiaries) to encompass only a negotiated transaction between the then-sitting boards of both companies, and that, therefore, both the confidentiality agreements prohibited the use of “Evaluation Material” for purposes other than such a consensual transaction.

The Court also found that even if the definition of “Transaction” in the non-disclosure agreement permitted Martin Marietta to use “Evaluation Material” in considering whether to launch a hostile offer, Martin Marietta’s disclosure (e.g., in the S-4 and proxy statement) did not fit within the “legally required” exception to non-disclosure of information pertaining to the “Transaction,” because the obligation arose out of federal securities laws disclosure requirements applicable to the exchange offer and the proxy solicitation triggered by Martin Marietta’s self-initiated course of conduct – as opposed to specific external legal demands such as interrogatories and subpoenas. In so finding, the Court distinguished between permissible use of “Evaluation Material,” i.e., in determining to launch a hostile bid, and permissible disclosure of “Evaluation Material” in the non-disclosure agreement, making clear that even if the “Transaction” definition specifically included a hostile bid, the non-disclosure agreement did not permit the public disclosure of that information. The Court next determined that even if Martin Marietta’s use and disclosure were “legally required,” and thus permissible, Martin Marietta breached the confidentiality agreements both because it failed to follow the confidentiality agreements’ notice and vetting procedures with respect to “Evaluation Material,” and because the scope of its disclosures far exceeded the minimum that was required by law. Finally, the Court found that even if disclosure was “legally required” in the first instance, Martin Marietta was not permitted to make subsequent non-required public disclosure of the already public information unless such disclosure also was “legally required.”

Although the Martin Marietta decision does not break new legal ground, it reinforces the fact that Delaware will enforce confidentiality agreements as a matter of public policy, and in its detailed textual analysis of the particular confidentiality agreements at issue and its careful consultation of extrinsic evidence, the decision serves to focus the M&A community on the potential pitfalls of ambiguous contractual language in confidentiality agreements, the way in which the parties’ course of conduct can influence the interpretation of that language, and the difficulty a bidder who has obtained confidential information faces when its strategy changes from being friendly to being hostile.