Martin Marietta Materials, Inc. v. Vulcan Materials Co., No. 254, 2012 (Del. Supr., July 12, 2012). Our blurb about the Supreme Court’s Order of May 31, 2012 in this case is available here. Highlights of the 138-page Court of Chancery opinion on these pages is available here.
Whether a violation of a confidentiality agreement can be a basis to preclude a hostile tender offer.
Short Answer: Yes. The Delaware Supreme Court affirmed the decision of the Delaware Court of Chancery in this expedited appeal.
This was an expedited appeal from the May 14, 2012 judgment of the Court of Chancery. Appellate briefing was completed within a mere two weeks and oral argument was heard on May 31, 2012. That same day, after deliberating, the High Court of Delaware entered an order affirming the decision of the Court of Chancery for reasons that are now explained in this opinion. Readers familiar with the typical timetables of most courts will agree that the speed of the decision from the Delaware Supreme Court was “lightening fast” as was the timetable from the date the complaint was filed, through trial, and the issuance of a 138-page post-trial opinion.
Discussions between Martin Marietta and Vulcan Materials about a possible combination were based on the express condition precedent by the recently installed CEO of Martin Marietta, Ward Nye, that a non-disclosure and confidentiality agreement be entered into first. Nye was concerned about being displaced as CEO if the merger were hostile or less than consensual. The NDA prohibited both the use and the disclosure of material provided by Martin Marietta.
The parties also signed a joint defense and confidentiality agreement (“JDA”) which also prohibited and limited the use and the disclosure of enumerated information exchanged by the parties in their negotiations.
After the friendly negotiations floundered, in mid-August 2011, Martin Marietta’s board formally authorized management to pursue alternatives to a friendly deal, and four months later, Martin Marietta launched an unsolicited offer.
Both before and after Martin Marietta commenced its hostile takeover bid, it disclosed non-public information about Vulcan to its advisors and later to the general public without the prior consent of Vulcan and in violation of the NDA.
The same day that Martin Marietta launched its hostile takeover bid, December 12, 2011, it also commenced a declaratory judgment action in the Court of Chancery, seeking a determination that the NDA did not bar Martin Marietta from pursuing its hostile takeover. Vulcan counterclaimed with a mirror image declaratory judgment claim that Martin breached the NDA, as well as the JDA (the related confidentiality agreement).
In the trial court, this case also proceeded on an expedited basis and a trial took place between February 28, 2012 and March 2, 2012. On April 9, 2012 the Court heard post-trial oral arguments and on May 4, 2012, the Court issued its post-trial opinion. On May 14, 2012, the Chancellor entered the final order. Notably, neither Martin Marietta nor Vulcan are Delaware corporations, but they agreed that Delaware law would control the NDA. The parties also agreed that the Chancery action would proceed ahead of related litigation in both Alabama and in New Jersey.
The Court of Chancery determined that Martin Marietta breached both the NDA and the JDA by impermissibly using and disclosing confidential materials. As a remedy and penalty, the Court required Martin Marietta to delay its hostile takeover.
Issues on Appeal
Martin advanced four specific claims of error on appeal: (1) Martin Marietta contended that the trial court erred in going beyond the plain language of the NDA; (2) Martin Marietta claimed that the court erroneously interpreted the NDA as prohibiting the disclosure of information about merger discussions; (3) Martin Marietta argued that the trial court’s interpretation of the confidentiality agreement (JDA) was erroneous; and (4) Martin Marietta claimed that the Court of Chancery erred by improperly balancing the equities and granting injunctive relief without proof of actual injury.
Before beginning its primary analysis, the Court addressed the distinction between the concept of a confidentiality agreement and a standstill agreement, but also acknowledged that one agreement can have both standstill provisions and confidentiality provisions, and that an agreement denominated as a standstill agreement can have confidentiality provisions, and vice versa.
Conventionally, a standstill agreement is intended to protect the contracting party against hostile takeover behavior as distinguished from the unauthorized use or disclosure of the other party’s confidential non-public information.
By contrast, a confidentiality agreement is typically intended to protect a contracting party’s non-public information. See footnote 46.
In any event, the Court found that the argument that the Court of Chancery treated the confidentiality agreement as a standstill agreement was both incorrect and irrelevant to an analysis of the issues presented.
The Court explained that the NDA unambiguously prohibited the use of confidential materials without the consent of Vulcan except for purposes of a consensual transaction. The Court also found no reversible error, based on a de novo review standard, with the holding that the only transaction contemplated in the JDA (confidentiality agreement) was a negotiated merger.
The Court reviewed the contract interpretation principles applied by the trial court and agreed with the reasoning of the trial court.
The Court agreed with the application in particular of the canon of construction for contracts that requires: “all contract provisions to be harmonized and given effect where possible.” See footnote 58 and cases cited therein.
Review of the Equitable Remedy Granted based on the Abuse of Discretion Standard
Martin Marietta argued that it was reversible error to balance the equities and grant injunctive relief to Vulcan without any evidence that Vulcan was threatened with, or suffered, actual irreparable injury, in connection with an injunction that prohibited Martin for a four month period from going forward with its hostile offer or otherwise taking steps to control Vulcan’s assets, or from further violating the NDA and the JDA.
Delaware Law on Injunctive Relief for Contract Violations
The Delaware Supreme Court observed that under Delaware law it has long been held that: “Contractual stipulations as to irreparable harm alone suffice to establish that element for the purpose of issuing injunctive relief.” See footnote 64 and cases cited therein. Both parties stipulated in the NDA that money damages would not be a sufficient remedy for any breach by either party and that the non-breaching party shall be entitled to equitable relief for any breach. The JDA had a similar provision.
In any event, the trial court did make a finding of “actual” and irreparable injury because it found that Vulcan was suffering from exactly the same kind of harm that was the basis of the prerequisite that confidentiality agreements be entered into as a condition of exchanging confidential information. For example, Vulcan explained that the disclosure of the confidential information and the fact itself of the negotiations taking place, put the company “in play” at a time when they did not want to be put in play. The disclosure of confidential information was also a concern for employees and a distraction for the executive team.
The Delaware Supreme Court concluded that the trial court properly balanced the need to vindicate the reasonable contractual expectations of Vulcan against the delay imposed on Martin Marietta as a result of its own violations.