hostile takeover

 

Martin Marietta Materials, Inc. (NYSE:MLM) sued Vulcan Materials Company(NYSE:VMC) in Delaware Chancery Court on December 11, 2011, seeking a declaratory judgment that the non disclosure agreement (NDA) they had signed did not prohibit Martin Marietta from making a hostile offer for Vulcan shares. The companies certainly knew how to draft an NDA if they wanted to agree to a standstill preventing the hostile offer. However, it seems as if the parties had not even discussed the idea of a standstill, which led to a number of ambiguities in its opinion. Therefore, the court had to resort to extrinsic evidences to figure out the intent of both parties.

Virtually all the extrinsic evidence that the court used favored Vulcan’s argument that the companies wanted the NDA to serve as a backdoor standstill.

The two most significant questions examined by the court, both resulting from contractual ambiguities, were the following:

1. Whether restricting the use of confidential information to evaluation of a “Transaction” effectively prohibited the use of the confidential information for the purpose of evaluating an unsolicited transaction?

2. Whether the exception to confidentiality, permitting the disclosure of confidential information as “legally required,” permitted disclosure of confidential information “legally required” to be disclosed solely as a result of Martin Marietta’s own decision to launch a hostile offer?

Martin Marietta Disclosed Confidential Information

The court discovered that Martin Marietta had used confidential information while evaluating and launching its hostile offer. The confidential information was used to prepare Martin Marietta’s estimates of cost synergies. It is worth noticing that synergies estimate would be legally required as a disclosure matter in the context of a hostile exchange offer. Worse, Martin Marietta’s S-4 had confidential information about the views of the Vulcan CEO on synergies, alternative deal structures and tax leakage.

A critical question is whether a company can evaluate or make a hostile offer without using the material and relevant confidential information from the target. It would seem to be exceedingly difficult to “unring the bell” in cases where material and relevant confidential information (like the synergies estimates in this case) have been learned and materially affected the bidder’s decision to bid.

The Meaning of “Transaction”

After deciding that Martin Marietta had indeed used confidential information, the court went on to analyze if using this information to make a hostile offer constituted a breach. Whether the legal definition of transaction “a possible business combination transaction between the parties” limits the use of confidential information, or the hostile bid also fits in the definition of “transaction.” Usually the deal lawyers put the word “negotiated” before “business transaction” to limit the use of confidential information only to consensual deals. Had the word “negotiated” appeared in that particular spot, the ambiguity would not exist.

Therefore, the court found that hostile bid is not a constituent of “Transaction” as defined in the NDA, and by using the confidential information “in deciding upon, formulating and selling its” hostile bid, Martin Marietta had breached its obligation to use the confidential information “solely’ for the purpose of evaluating’ a ‘Transaction.”

Self-imposed Legal Requirements do not Fall Under “Legally Required”

Vulcan argued that even if the confidential information could be used for evaluating a hostile bid, the information was still confidential and could only be disclosed if “legally required.” The ambiguity here is whether “legally required” should include self-imposed legal requirements, such as those that arose when Martin Marietta launched its bid.

Due to unclear and somewhat uncommon language, the court may well have “construed broadly” the “legally required” disclosure exception to confidentiality. However, it is unclear whether “legally required” would have been construed to be so unambiguous as to prevent recourse to extrinsic evidence. Accordingly, the question lying dormant in thousands of confidentiality agreements across the country – does the “legally required” exception include self-imposed legal requirements.  While answered in this case, remains more generally unanswered.

Final Verdict

The court granted a four month injunction against Martin Marietta’s hostile bid. The four month period roughly matched the period between the date when the hostile offer was launched (December 12, 2012), and the expiration of the NDA (May 3, 2012), meaning that the hostile offer was stayed by during a period equivalent to the period during which the hostile offer was in violation of the NDA. The court emphasized that the four month stay, which was the relief sought by Vulcan, could have been longer, given the “pervasiveness of Martin Marietta’s breaches.”

Reference: Harvard Law School Victor I. Lewkow, Cleary Gottlieb Steen & Hamilton LLP