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After years of negotiations, Martin Marietta Materials Inc. changed tactics. Since early 2010, the company had been discussing a friendly merger with Vulcan Materials, a fellow large producer of construction aggregates (e.g., crushed stone, sand and gravel). As the two largest players in the United States, each was concerned about the possibility of a hostile takeover by the other, so they decided to make a deal. But the negotiations dragged on, with varying levels of interest from either side. The back-and-forth was tumultuous. Finally, Martin Marietta had had enough.
Martin Marietta’s new tactic was a bit less friendly: on December 12, 2011, it sent a public “bear hug” letter to Vulcan, disclosing the prior discussions and announcing an unsolicited exchange offer. It followed up a month later with a proxy contest. The disclosure included an in-depth history of the prior friendly merger negotiations and details about potential synergies and divestitures. Martin Marietta filed the documents with the SEC, and then republished the information to the market. This disclosure got the company into trouble.
In response, Vulcan alleged that Martin Marietta had committed numerous breaches under the confidentiality agreements that were still in effect. Vulcan argued that the other company improperly used the information disclosed in the early friendly discussions in its hostile bid. Martin Marietta disagreed.
Both sides presented arguments that hung on the interpretation of specific language (like the meaning of the word “transaction”) in the confidentiality agreements, as well as the necessity of Martin Marietta’s disclosures when the negotiations turned hostile.
Transactional lawyers were interested in this case not just because of the deciding court, but also because Vulcan was essentially arguing for the presence of something that was conspicuously absent between the two companies: a standstill agreement. This kind of agreement is quite common, and is created for exactly this sort of situation. Martin Marietta argued that the absence of such an agreement meant that an effective standstill could not be derived from the other agreements that had been signed.
Chancellor Leo E. Strine Jr., the charismatic and controversial head of the Delaware Chancery Court, also looked beyond the contractual language, taking into account the history of the negotiations, evidence of the parties’ intent, and even Martin Marietta’s seeming efforts during the negotiations to prohibit disclosure of confidential information.
Strine ruled that Martin Marietta had violated its confidentiality arrangements with Vulcan and ordered a four-month halt to its hostile bid. The halt meant that Martin Marietta would lose its ability to follow through with its proxy contest to replace four members of Vulcan’s board at the next annual meeting. Although it wasn’t explicit, the practical effect of the court’s ruling was that Martin Marietta couldn’t pursue its hostile takeover. The confidentiality agreement had become an implied standstill. The Delaware Supreme Court later affirmed and expanded on the decision, clarifying that while Martin Marietta was not prevented from proceeding with a hostile takeover, it was prevented from using confidential information to do so.
In the end, it seems that Martin Marietta’s lawyers did not draft their contracts tightly enough. The ambiguity in terms meant a court could step in and find meaning in the contract based on something other than the contract itself—meaning that had not really been negotiated between the two parties.
This serves as a good reminder for all transactional lawyers that contracts should be carefully crafted. Strine is not the first judge in the last few years to take a dim view of disclosure violations related to mergers. Information sharing is an essential part of M&A work, and so to minimize risk as much as possible, the terms of that sharing should be explicit. For example, if there is a common understanding between the two parties, such as a standstill, that should be included in an agreement somewhere.
In the end, it’s about what you say, not what you mean. It’s up to every lawyer crafting these kinds of agreements to research and understand the options regarding standstills, disclosure rules, and provisions that can keep agreements inside the four corners of the contract.
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