Wednesday, May 09, 2012

Finding Breach of Confidentiality Agreements, Delaware Chancellor Enjoins Acquiring Company from Making an Exchange or Tender Offer

An acquiring company that breached confidentiality agreements with a target company was enjoined by the Delaware Chancery Court for four months from prosecuting a proxy contest, making an exchange or tender offer, or otherwise taking steps to acquire control of the target’s shares or assets.  A reasonably tailored injunction was appropriate, reasoned Chancellor Strine in a lengthy opinion, since rewarding the breaching party would have underscored the unreliability of confidential agreements as a risk-reducing device enabling parties to more readily consider voluntary, value-maximizing M&A transactions. Consistent with Delaware’s pro-contractarian public policy, said the Chancellor, the parties’ agreement that the victim of any breach of the confidentiality agreements should be entitled to injunctive relief should be respected. (Martin Marietta Materials, Inc. v. Vulcan Materials Company, Civil Action No. 7102-CS, May 4, 2012)

The confidentiality agreements were entered into at a time when both companies were intrigued by the possibility of a friendly merger and when neither wished to be the subject of an unsolicited offer by the other or a third-party industry rival. The court emphasized that one of the parties, especially the one who evinced the most concern for confidentiality, should not be permitted to later decide that evolving market circumstances made it comfortable enough to make a hostile bid for the other and then without consequence freely use and disclose publicly all the information that it had adamantly insisted be kept confidential.

The court rejected the acquiring company’s contention that all of its disclosures were legally required because otherwise the S-4 and the proxy statement would not have provided a full and fair description of all material facts related to its exchange offer and proxy contest. The court agreed with the target company’s claim that the company could have complied with SEC requirements with far more limited disclosure and could have started with a barebones recitation in the S-4 and waited for the SEC to ask for more.

The Chancellor noted that the acquiring company went beyond any definition of legally required by over-disclosing when it could have satisfied SEC requirements with a much simpler recitation of the facts in its S-4. In the court’s view, SEC regulations did not require that the acquiring company reveal more than the fact that the parties discussed a merger, that they entered into the confidentiality agreements, and that they ultimately could not come to terms on the utility of doing a deal.

Instead, said the court, the acquiring company viewed the SEC requirements as an opportunity to work with what the Chancellor said were ``its public relations flacks on a propaganda piece in aid of the Exchange Offer.’’ Despite being obliged under the confidentiality agreements to take a begrudging, minimal approach to disclosing information, continued the court, the company did the opposite. Although the company cloaked its decision-making process in privilege, the court found that the disclosure decisions were heavily guided and influenced by public relations advisors, who advised the company to portray the target company’s decisions for not proceeding with a deal in a bad light.

The fact that SEC’s comment letters asked for additional information in response to the acquiring company’s preliminary S-4 did not aid the company’s argument, said the court. The SEC was responding to a highly opinionated S-4 that provided a stark struggle between champions of stockholder value, the acquiror’s  management and board and entrenchment-motivated abettors of plush corporate payrolls, the target’s management and board. That the SEC was asking for balance or further context about topics and information that the acquiring company intended to discuss and disclose, said the court, revealed little about whether the acquiror had any obligation to address them in the first instance.