Confidentiality Agreements in M&A Transactions: Lessons from Delaware

Amongst legal documents in an M&A
transaction, the confidentiality agreement plays an important role, as it does
in other types of investment transactions (such as private equity), especially
when it involves a public listed company. There are two key aspects of interest
in any confidentiality agreement, which are also often the bone of contention
in negotiations: (i) the scope of information that must be kept confidential;
and (ii) various exceptions which may be invoked by the party receiving information
and hence placing it outside the application of confidentiality obligations.
While confidentiality agreements are
essentially within the purview of contract law, there is limited specificity in
India in terms of principles laid down either in statutory law or judicial
decisions as to the applicability and enforcement of confidentiality obligations
in M&A transactions. Hence, a recent (and perhaps significant)
pronouncement of the Delaware Chancery Court in Martin
Marietta Materials Inc. v. Vulcan Materials Company
(Martin Marietta) could throw some light on the manner in which confidentiality
agreements are to be drafted and negotiated by legal practitioners. This
decision rules on both of the key aspects discussed above, i.e. (i) the
definitional aspects of confidential information and (ii) the availability of
one of the exceptions to confidentiality.
The transaction originated as a potential
friendly (negotiated) merger between Martin Marietta and Vulcan, both of whom
were in the same business. As part of the transaction, both companies
negotiated two confidentiality agreements, one a general non-disclosure
agreement (referred to as the “NDA”) and another, a common interest, joint
defense and confidentiality agreement (referred to as the “JDA”), for sharing
of information to facilitate an analysis of the antitrust implications of the
merger. Although the confidentiality agreements contained standards clauses
relevant to M&A agreements, they did not contain the customary standstill
provision (which would prevent a party from making an unsolicited takeover
offer on the other party).
After prolonged negotiations, the merger
proposal fell through on account of resistance from Vulcan. By then, a
substantial amount of information had been shared by Vulcan, which was in
Marietta’s possession. Following the failure of merger talks, Marietta
initiated a hostile takeover offer on Vulcan combined with a proxy contest. As
part of the takeover offer documentation and filings made with the US
Securities Commission (SEC), Marietta included information that was subject to
confidentiality obligations owed to Vulcan. This included the fact of previous negotiations
between the parties towards a possible merger, and also other corporate and
financial information regarding Vulcan.
While Marietta approached the Chancery Court
seeking a declaration that it can use the information received from Vulcan
without a breach of confidentiality obligations, the application was opposed by
Vulcan which sought to enjoin Marietta’s hostile takeover.
and Decision
The key issues considered by the Delaware
Chancery Court, and its decision, are summarized in the court’s own terms:
This case presents interesting questions
regarding the meaning of confidentiality agreements entered into by two
industry rivals at a time when both 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.
May one of the parties – especially the one
who evinced the most concern for confidentiality and who most feared having its
willingness to enter into merger discussions become public – decide that
evolving market circumstances make 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?  In this decision, I conclude that the answer
to that question is no and that, consistent with Delaware’s pro-contractarian
public policy, the parties’ agreement that the victim of any breach of the
confidentiality agreements should be entitled to specific performance and
injunctive relief should be respected.
Here, I find that, although the
confidentiality agreements did not include an express standstill, they did bar
either party from:
• Using the broad class of “evaluation
material” defined by the confidentiality agreements except for the
consideration of a contractually negotiated business combination transaction
between the parties, and not for a combination that was to be effected by
hostile, unsolicited activity of one of the parties; 
• Disclosing either the fact that the parties
had merger discussions or any evaluation material shared under the
confidentiality agreements unless the party was legally required to disclose
because: (i) it had received “oral questions, interrogatories, requests for
information or documents in legal proceedings, subpoena, civil investigative
demand or other similar process”; and (ii) its legal counsel had, after giving
the other party notice and the chance for it to comment on the extent of
disclosure required, limited disclosure to the minimum necessary to satisfy the
requirements of law; or
• Disclosing information protected from
disclosure by the confidentiality agreements through press releases, investor
conference calls, and communications with journalists that were in no way
required by law.
The breaching party engaged in each of these
contractually impermissible courses of conduct. 
Because the victim of the breach has sought a temporally reasonable injunction
tailored to the minimum period of time that the breaching party was precluded by
the confidentiality agreements from misusing the information it had received or
making disclosures that were not legally required in the sense defined in the confidentiality
agreements, I grant the non-breaching party’s request, which has the effect of
putting off the breaching party’s proxy contest and exchange offer for a period
of four months.
The first issue pertains to the scope of
confidential information. The NDA provides that each party shall use another
party’s confidential information (termed in it as “Evaluation Material”) “solely
for the purpose of evaluating a Transaction”, and a Transaction is defined as “a
possible business combination … between [Martin Marietta] and [Vulcan] or one
of their respective subsidiaries”. The key issue was whether the expression
Transaction was limited to a negotiated merger between the two companies or
whether it can be extended to include a hostile takeover as well. A restrictive
meaning of the expression would work in favour of Vulcan as the use of the
information for a hostile takeover would be a breach, while an expansive
meaning to include a hostile takeover would work in favour of Martin Marietta
as the use of confidential information would then be for the purpose of the
Transaction. The Chancery Court considered a textual interpretation of the
relevant clause, including the argument of Vulcan that since the Transaction
was defined to be “between” the two companies, it necessitates a voluntary
contractual transaction between them (as opposed to a transaction that is
against the will of one of the companies as usually occurs in a hostile
takeover). But, the court appears to be persuaded rather by the extrinsic
evidence, being the history and evolution of negotiations between Martin
Marietta and Vulcan that led to the conclusion of the confidentiality
The second issue pertains to whether the use
of confidential information by Martin Marietta as part of the takeover offer
documentation was “as legally required” so as to fall within the exception
under the confidentiality agreements. 
This involves an interpretation as to the scope of the legal requirement
exception in confidentiality agreements. While Martin Marietta argued that the
disclosure of information in takeover documentation was required by the
relevant disclosure rules of the SEC, Vulcan argued that it does not include any
party “taking discretionary action to self-impose a disclosure requirement” as
an acquirer is entitled to exercise discretion whether to proceed with an offer
or not (without any form of imposition that requires disclosures). Even here,
the court did not only consider the relevant language in the confidentiality
agreements, but it also looked at the extrinsic evidence of negotiations between
the parties so as to conclude that Vulcan’s position deserves support.
The Martin
decision is important as it instills life into otherwise mundane
clauses of confidentiality agreements, which have acquired overtones of
standardization characterized by the exceedingly generous use of templates. It necessitates
precise drafting of clauses by transaction lawyers so as to obviate any
ambiguity. For example, in the Martin
case, some amount of ambiguity was caused by the lack of
uniformity in the definition and scope of confidential information between the
two confidentiality agreements, i.e., the NDA and the JDA, although both were between
the same parties and pertained to the same transaction.
The Martin
decision is also significant due to the emphasis it places on the
history of the drafting and negotiation process as a matter of extrinsic
evidence. The court placed weight on the manner in which the clauses were
drafted and iterated by the parties during negotiations, and also the
enthusiasm displayed by one of them (Martin Marietta) to ensure formidable confidentiality
obligations that indeed went on to haunt it in the end when it found itself on
the other side of the equation. The lesson: as confidentiality obligations are
often reciprocal, what is good for one party will also be good for the other;
one must be prepared to be bound by the same terms that it seeks to be
benefited by.
Overall, despite the fact-specific nature of
the decision, Martin Marietta offers
some lessons for M&A practitioners in dealing with confidentiality

For a further analysis of
the decision, please see the Harvard
Corporate Governance Blog
, the Deal
and the Race
to the Bottom Blog

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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