By Elizabeth J. Goldstein
Special to the Legal
In the recent case of Martin Marietta v. Vulcan Materials, 2012 WL 1605146 (Del. Ch. May 4, 2012), the Delaware Chancery Court went to great lengths in pursuing the language of a nondisclosure agreement (NDA) to determine whether “between” referred to a benign cooperative transaction rather than a hostile takeover. The case arose when Martin Marietta launched a hostile takeover bid for Vulcan after determining the viability of the merger by examining the documents exchanged through the NDA. The NDA only allowed the parties to use the documents exchanged by the parties in order to consider a “business combination transaction between the parties.”
Vulcan argued that a business combination “between” the parties must be a friendly one. The court lent credence to this interpretation by proposing an extreme example. The court explained that a “transaction between A and B involving the sale of A’s house” cannot be reasonably interpreted to mean that B can murder A to obtain the house. Vulcan also argued that because “between” immediately followed “transaction,” it only modified this word and not “business combination.” This placement suggests that there must be a voluntary transaction between the parties with affirmative participation by both parties rather than unilateral participation by one.
However, the court also recognized that Martin Marietta had a valid argument that the relevant provision did not provide that the contemplated transaction had to be negotiated or mutually agreeable to the parties. Moreover, if the parties would have included a standstill provision, the parties would have been prohibited from launching a hostile takeover while friendly merger talks proceeded. Thus, “between” could also be plausibly read to only require the eventual combination of the two parties’ assets.
The court also struggled to find a singular meaning of a “business combination transaction.” It rejected statutory definitions offered by both parties, finding that neither party intended to incorporate these formal definitions into the NDA. When looking at the “plain meaning,” the court found a multitude of definitions. Ruling that both “between” and “business combination transaction” could plausibly be interpreted both as Martin Marietta and Vulcan had suggested, the court ruled that the phrase was ambiguous. The court examined how the negotiation history of the parties evidenced the intent of the parties. The court found relevant that Martin Marietta’s general counsel’s negotiated revisions to the NDA all strengthen the confidentiality provision. In addition, the court cited Martin Marietta’s own pre-takeover behavior as supporting an interpretation that “business combination transaction between the parties” did not include hostile bids. When Martin Marietta decided to launch a hostile bid, it took actions signaling that it believed it would be in breach of the NDA by using the exchange documents. Namely, Martin Marietta’s general counsel attempted to gather all of the exchange documents and put them in her office. She told company employees and consultants not to use these documents for the takeover bid. The court, finding that pre- and post- negotiation behavior of the parties supported that the exchange documents were only intended to be used to support friendly transactions, ruled that Martin Marietta breached the agreement by using the exchange documents in aid of the hostile takeover. To remedy the situation, it enjoined Martin Marietta from taking steps to unilaterally acquire Vulcan for four months.
One lesson learned from this case is to be careful what you use as your base document to draft your agreement. In this case, Martin Marietta’s general counsel proposed the first draft of the NDA, basing it on a prior confidentiality agreement between the parties relating to an asset swap transaction. Both counsel apparently missed that an NDA for a possible merger should have an added provision relating to standstills. In this case, it would have been better to start fresh by reviewing some model form NDA agreements specifically drafted for potential merger agreements. A second lesson is to try to minimize actions and words that can later be construed by the opposing party as an admission that you are in violation of the agreement. As one famous Vulcan might put it, to do otherwise would be most illogical.
This posting is for informational purposes and should not be construed or interpreted as either legal advice on any matter or as in any way creating an attorney-client relationship.