Depomed, Inc. v. Horizon Pharma PLC: Superior Court of California Enjoins Unsolicited Acquisition Proposal Based on Misuse of Confidential Information, Prompting Withdrawal of the Proposal

Sullivan & Cromwell LLP - November 25, 2015

In a decision issued on November 19, 2015, the Superior Court of California (Santa Clara County) enjoined a hostile bidder from pursuing its acquisition of a target because the Court concluded that it was likely that the bidder, in conducting its bid, was misusing confidential information about the target’s “flagship” drug assets obtained under a confidentiality agreement between the bidder and the prior owner of the assets.
The confidentiality agreement at issue required Horizon Pharma PLC, the hostile bidder, to maintain the shared information in confidence and to use the information only in connection with a potential drug co-promotion arrangement contemplated between Horizon and the then-owner of the target’s drug assets, Janssen Pharmaceuticals, Inc. The co-promotion arrangement never materialized; shortly thereafter, Janssen conducted an auction of one of the drug products that had been the subject of the co-promotion negotiations. Horizon participated in the auction without entering into a new confidentiality agreement. Depomed, Inc., the target of Horizon’s bid, ultimately prevailed in the auction and acquired the “flagship” drug assets. After Horizon made public an unsolicited proposal to acquire Depomed, Depomed sought to enjoin Horizon’s hostile bid, contending that it violated the use restriction of Horizon and Janssen’s confidentiality agreement that Depomed had acquired the right to enforce.
In granting the injunction, the Court rejected arguments that the confidentiality agreement applied only to the earlier co-promotion negotiations between Horizon and Janssen and did not apply to the later auction by Janssen of the drug product. The Court also concluded that it was likely that Depomed had acquired the right to enforce the confidentiality restrictions against Horizon, even though the confidentiality agreement was not on a list of contracts transferred to Depomed when it purchased the “flagship” drug product since “[a] different conclusion would be illogical” and leave Depomed without the right to prevent disclosure of confidential information about its assets.  Lastly, the Court found that Depomed had demonstrated adequately that Horizon misused confidential information in formulating its takeover proposal.

The day after the Court issued its decision, which prevented Horizon from proceeding with its bid pending a trial on the merits, Horizon withdrew its pending tender offer for Depomed’s stock.
Echoing the conclusions of the Delaware Court of Chancery’s post-trial decision in Martin Marietta, in which then-Chancellor Strine enjoined a hostile takeover bid because the bidder violated the use restriction (limiting use to a negotiated transaction) of a confidentiality agreement with the target, the Depomed decision is a reminder about the importance of the language, and especially the use restrictions, in confidentiality agreements.  As in Martin Marietta, the Depomed Court enforced the restrictions of a confidentiality agreement in a context that was considerably different from the context in which the agreement was executed.  Depomed serves as a  reminder of the importance of the choice of language in seemingly routine commercial confidentiality agreements, and in particular the unanticipated and potentially severe limitations that use restrictions may impose on future strategic options.