The Delaware Supreme Court has upheld the
Chancellor’s enjoining of an acquiring company that breached confidentiality agreements
with a target company 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 for four months. A
reasonably tailored injunction was appropriate, reasoned, Chancellor Strine,
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,
July 12, 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 Chancellor 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.
On the facts, noted the en banc Supreme
Court, the Court of Chancery did not abuse its discretion by holding that the
equities favored the target company because the acquiring company’s breaches
prevented the target company from seeking injunctive relief before the
confidential information was made public and the target had been measured in
its request for injunctive relief.
Chancery properly balanced the
need to vindicate the target company’s reasonable contractual expectations
against the delay imposed on the acquiring company as a result of its own
conduct.
The
Supreme Court rejected the contention that the Chancellor’s interpretation
converted the confidentiality agreements into a standstill agreement. Standstill agreements and confidentiality
agreements are qualitatively different, said the Court. A standstill agreement expressly prohibits
specific conduct by a contracting party to acquire control of the other
contracting party. Typically, a standstill agreement will
prohibit a hostile bid in any form, including a hostile tender offer to acquire
stock control of the other contracting party and/or a proxy contest to replace
all or some of its directors. Standstill prohibitions do not require, or in any
way depend upon, a contracting party’s use or disclosure of the other party’s
confidential, nonpublic information. Rather, a standstill agreement is intended
to protect a contracting party against hostile takeover behavior, as
distinguished from the unauthorized use or
disclosure of the other party’s confidential nonpublic information.
In contrast, a confidentiality agreement is
intended and structured to prevent a contracting party from using and
disclosing the other party’s confidential, nonpublic information except as
permitted by the agreement. In that respect it is qualitatively
distinguishable from a prohibition that precludes a party categorically from
engaging in specified hostile takeover activity. Thus, a confidentiality
agreement will not typically preclude a contracting party from making a hostile
bid to acquire control of the other party, so long as the bid does not involve
the use or disclosure of the other party’s confidential, nonpublic information.
A confidentiality agreement is intended to protect a contracting
party’s non-public information, reasoned the en banc Court, not its corporate ownership and control.
The confidentiality agreements in this case
were true confidentiality agreements, emphasized the Supreme Court, not
standstill agreements. They did not categorically
preclude the acquiring company from making a
hostile takeover bid for the target company. What they did was preclude the
acquiring company from using and disclosing the target company’s confidential,
nonpublic information.
The Chancellor
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. Chancery 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 also 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. 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,
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 Chancery, company did the opposite. Although
the company cloaked its decision-making process in privilege, the Chancellor
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 Chancery. 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 revealed little about whether the acquiror had any obligation to
address them in the first instance.