- New Confidentiality Agreement Developments under Delaware Law
- September 7, 2012
- Law Firm: Oppenheimer Wolff Donnelly LLP - Minneapolis Office
Recently, the Delaware Supreme Court upheld the Delaware Court of Chancery decision written by Chancellor Leo Strine enjoining Martin Marietta's hostile exchange offer for Vulcan Materials Co. based on provisions contained in a non-disclosure and confidentiality agreement (NDA) and a joint defense agreement (JDA). The NDA and JDA were executed to facilitate discussions towards a potential business combination between the parties. There was external evidence provided that at the outset of these discussions, it was anticipated that Martin Marietta was only interested in a negotiated, friendly deal and not an unwanted acquisition of Martin Marietta by Vulcan. Unexpectedly, Martin Marietta launched a hostile exchange offer for Vulcan and sought declaratory relief in Delaware that nothing in the NDA or JDA barred the hostile exchange offer or related proxy contest.
Interestingly, neither of these agreements contained standstill provisions. The agreement did provide that the parties were only permitted to use confidential information for the purpose of considering a "business combination transaction" that was "between" the parties or for the purpose of pursuing and completing the transaction that was "being discussed" by the parties. The agreements also prohibited disclosure of confidential material and the fact that merger discussions had taken place, subject to certain exceptions for "legally required" disclosure and compliance with a "notice and vetting" process to the disclosing party if any disclosures were required.
While much of Chancellor Strine's opinion addressed the specific intentions of the parties after he found certain language in the NDA and JDA to be ambiguous, the opinion is very instructional with respect to drafting confidentiality agreements generally, and in the context of hostile tender offers, specifically. Chancellor Strine's opinion also highlights Delaware's pro-contractarian public policy and its recognition of the value of confidentiality agreements to M&A activity.
There are many practical implications for clients resulting from this decision. These include:
- A reaffirmation that the Delaware Court attaches significance to confidentiality agreements and will enforce their provisions as a matter of contract law, regardless of fiduciary duty arguments raised by parties.
- As with all good drafting principles, where NDAs and JDAs are both used in a deal, the same terms should be used in both agreements (e.g., the same definition of "transaction," etc.)
- If exceptions to non-disclosure (e.g., "legally required" disclosures vs. disclosures required by formal judicial or governmental proceedings) are to be governed by different standards, these standards must be clearly articulated.
- If parties desire that confidential information shared pursuant to a confidentiality agreement be used only in connection with a negotiated, friendly deal, they should define the term "transaction" in the confidentiality agreement accordingly.
A confidentiality agreement without express standstill provisions can have the effect of
- a standstill agreement if not properly drafted.