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Martin Marietta Materials, Inc. v. Vulcan Materials Co.: Delaware Supreme Court Affirms Four-Month Delay of Hostile Exchange Offer Based on Violations of Confidentiality Agreements

September 5, 2012

In Martin Marietta Materials, Inc. v. Vulcan Materials Co., 2012 WL 2783101 (Del. July 12, 2012), the Delaware Supreme Court affirmed the Court of Chancery’s decision enjoining Martin Marietta Materials, Inc. (“Martin”) from taking any action in connection with its hostile takeover bid for Vulcan Materials Co. (“Vulcan”), including proceeding with its exchange offer and prosecuting its proxy contest, for a period of four months, in order to remedy Martin’s breach of two confidentiality agreements between the companies.

Over a period of several years, Martin and Vulcan occasionally discussed the possibility of a friendly business combination, and in the spring of 2010, those discussions restarted. Because both companies were concerned that disclosure of such discussions could put either company “in play” and subject to a hostile takeover bid, they entered into two strict confidentiality agreements—the non-disclosure agreement (the “NDA”) and the joint defense agreement (the “JDA” and together with the NDA, the “Confidentiality Agreements”). Accordingly, the Confidentiality Agreements protected both companies from disclosure of the fact that negotiations were taking place and also protected the use and disclosure of the companies’ confidential information, except in certain specific circumstances. Both agreements were governed by Delaware law and the NDA contained a Delaware choice of forum provision, though neither company is incorporated in Delaware.

In 2011, with market conditions favoring Martin and negotiations for a friendly business combination with Vulcan stalling, Martin began using Vulcan’s confidential information to evaluate alternatives to a friendly business combination. Shortly thereafter, Martin launched an unsolicited exchange offer for Vulcan’s shares and announced its proxy contest to oust several members of the Vulcan board of directors. In connection with Martin’s hostile takeover bid, Martin disclosed Vulcan’s non-public, confidential information and the existence of the negotiations between Martin and Vulcan regarding a business combination to third-party advisors and to the public in its filings with the Securities and Exchange Commission.

On the same day that it launched its exchange offer, Martin filed an action in the Court of Chancery for a declaratory judgment that it did not breach the NDA in conducting its exchange offer or proxy contest. In response, Vulcan filed a counterclaim for a judgment that Martin’s actions breached the Confidentiality Agreements and for an injunction prohibiting Martin from proceeding with its hostile takeover bid.

Following a trial on the merits, the Court of Chancery found that Martin breached the Confidentiality Agreements by impermissibly using and disclosing Vulcan’s confidential information. The trial court enjoined Martin from proceeding with its exchange offer and proxy contest, from otherwise taking steps to acquire control of Vulcan, and from further violating the confidentiality agreements for a period of four months. As a result, Martin terminated its exchange offer and proxy contest and filed an appeal to the Delaware Supreme Court. In its appeal, Martin challenged the Court of Chancery’s determination that it violated the Confidentiality Agreements and its imposition of injunctive relief.

Before addressing Martin’s substantive claims of error, the Supreme Court addressed Martin’s claim that the trial court’s interpretation of the Confidentiality Agreements improperly and “stealthily” converted those documents into a standstill agreement. As to this issue, the Supreme Court found that Martin’s claim was factually incorrect—the trial court properly interpreted and enforced the agreements as confidentiality agreements—and that Martin’s claim confused the distinction between a standstill agreement (which protects a party from a hostile takeover) and a confidentiality agreement (which protects a party from unauthorized use or disclosure of its confidential information).

Turning to Martin’s substantive claims that the trial court erred in finding that Martin’s use and disclosure of Vulcan’s non-public information violated the Confidentiality Agreements, the Supreme Court affirmed the Court of Chancery’s decision that (i) the JDA prohibited Martin from using and disclosing Vulcan’s confidential information without Vulcan’s consent except “for purposes of pursuing and completing” the transaction being discussed between Vulcan and Martin, which the Court of Chancery found was limited to a friendly business combination; (ii) the NDA prohibited Martin from using and disclosing Vulcan’s confidential information without Vulcan’s pre-disclosure consent except for disclosure in response to certain external demands and only after complying with a notice and vetting process; and (iii) Martin’s actions in connection with its hostile takeover bid breached these disclosure restrictions.

With regard to the trial court’s imposition of an injunction against Martin for a period of four months, Martin claimed not only that the Court of Chancery erred in balancing the equities because there was no evidence that Vulcan suffered any irreparable harm, but also that the scope of the injunction was unreasonable because it would have the effect of delaying Martin’s takeover bid for a period of one year. The Supreme Court affirmed the Court of Chancery’s decision in balancing the equities, finding that Vulcan suffered irreparable harm as a result of Martin’s breach. More specifically, the Supreme Court held that the provisions of the confidentiality agreements that stipulated that a breach of such agreements would entitle the non-breaching party to equitable relief were sufficient to establish irreparable harm for purposes of an injunction and affirmed the Court of Chancery’s factual finding that Vulcan suffered irreparable harm through the loss of its negotiating leverage due to Martin’s breach, which was “exactly the same kind of harm [Martin] demanded the Confidentiality Agreement shield [it] from.” In connection with Martin’s claims regarding the scope of the injunction, the Supreme Court found that, although the expiration date of the NDA combined with Vulcan’s advance notice bylaw provision may prevent Martin from prosecuting its proxy contest for a period of one year, the Court of Chancery had properly balanced the need to vindicate Vulcan’s reasonable contractual expectations with the delay imposed on Martin due to its own conduct.