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
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.