Delaware court ruling impacts confidentiality agreements and merger and acquisition negotiations.
Merger and acquisition (M&A) activity in the healthcare field, including the long-term care sector, has been strong, with high reported deal volume and values. The dynamic created by healthcare reform in the U.S. is certainly a major force behind the move to greater consolidation, as well as factors such as the uncertainty resulting from downward pressure on reimbursement, challenging economic conditions, the looming fiscal cliff and the possibility of a less favorable future tax environment.
Against that backdrop, in Martin Marietta Materials, Inc. v. Vulcan Materials Co., the Delaware court handed down an important decision that will likely impact M&A strategy and the negotiation of agreements at the front end of the M&A process. Confidentiality or nondisclosure agreements (“NDAs”) are typically the first documents that are considered and executed by parties to a potential M&A transaction. This would normally be followed by a due diligence investigation, with the target providing the potential acquirer with confidential and proprietary information.
In healthcare deals, an NDA would typically include specific provisions mandating that the recipient of information agree to comply with the Health Insurance Portability and Accountability Act (“HIPAA”) and the Health Information Technology for Economic and Clinical Health Act (the “HITECH Act”) and take appropriate steps to maintain the confidentiality of protected health information (“PHI”).
Regulations under HIPAA include an exception for the use of PHI for a party’s own “healthcare operations,” which would include certain possible merger or combination transactions and information sharing between potential buyers and sellers. There are also exceptions in the HITECH Act that help facilitate the M&A process.
In the Martin case, Martin Marietta Materials, Inc. (“Martin Marietta”) and Vulcan Materials Company (“Vulcan”), the two largest aggregate companies in the U.S. and fierce competitors, decided in the spring of 2010 to explore the possibility of a friendly merger. The parties signed a two-year NDA, and, subsequently, a separate joint defense and confidentiality agreement allowing the exchange of competitively sensitive information. Martin Marietta in particular insisted upon strict confidentiality.
Unfortunately, these agreements were different and inconsistent. The definitions of confidential information and the permitted uses of that information were not the same. The agreements were not clear regarding whether the information could be used only in connection with a friendly deal. The circumstances that would permit disclosure in response to a legal requirement were not easily ascertained.
As Vulcan’s share price dropped in 2011, it became less interested in pursuing a Martin Marietta deal. However, in December 2011, Martin Marietta launched a hostile takeover bid valued then at over $4.5 billion, representing a 15 percent premium to Vulcan’s shareholders. Martin Marietta filed documents with the SEC that included Vulcan’s confidential information and described the parties’ prior negotiations. Martin Marietta also filed a lawsuit seeking a declaration that the confidentiality agreements did not prevent the hostile bid.
In May 2012, the Delaware Court of Chancery issued a lengthy 138-page opinion agreeing with Vulcan’s claims in the lawsuit that Martin Marietta breached the confidentiality agreements, and that Martin Marietta could only use Vulcan’s confidential information in the context of a friendly negotiated deal – and not as part of a hostile takeover.
In addition, the court took the extraordinary step of issuing an injunction preventing Martin Marietta from pursuing its hostile bid for Vulcan for a four month period, which as a practical matter would delay Martin Marietta for at least a year. The Delaware Supreme Court affirmed this decision.
Do Sweat the Small Stuff
So what are the lessons to be learned? First, although telling yourself not to sweat the small stuff may be one of the keys to happiness in life, it can lead to awful outcomes in the M&A world. It is critical that you pay close attention to the details, and all of your deal documents need to be reviewed thoroughly and tailored to the particular parties and the transaction. Definitions and cross references need to be precise, accurate and consistent. Individual documents in a complicated transaction cannot be drafted in a vacuum, without due regard to other agreements.
It may be tempting when pressed for time to sign an NDA without a thorough review. Perhaps you receive assurances from the other side that the NDA is “standard” or “boilerplate.” The Martin case helps illustrate some of the dangers, regardless of whether it’s an M&A deal or a more common commercial transaction between two parties. For example, even if the underlying business deal is never consummated, could you unwittingly be subject to nonsolicitation or noncompete obligations that are buried in the NDA? Are there unfavorable provisions affecting your intellectual property rights?
In the Martin case, the agreements did not include a standstill obligation, and the record is clear that the parties never even discussed such a contract term. Such a provision, which would have specifically prevented Martin Marietta from pursuing an unsolicited tender or exchange offer for Vulcan, would likely have been heavily negotiated. However, the court’s injunction effectively imposed those obligations on Martin Marietta.
The Delaware courts are highly influential in matters pertaining to business law, and the message here is that contracts will be enforced as written. As the Martin court stated, “a party unwilling to honor a contractual promise [should] not make it in the first place.”
Another lesson is that the parties and their advisers need to be careful in documenting their negotiations and deliberations. Courts generally will enforce the plain and unambiguous terms of a contract and accept that those terms reflect the parties’ intent. However, if the court finds the contract terms to be ambiguous, then it will look to extrinsic evidence – evidence outside the four corners of the contract – to determine the parties’ intent.
This can lead to an extensive review and analysis of the history of negotiations between the parties. Consequently, your notes from various meetings and phone calls that you may believe are private may ultimately be presented to a judge or jury in the event a dispute arises. Obviously the same is true of emails and other communications. Prior drafts of NDAs and other documents may be examined to help determine intent.
In deciding in Vulcan’s favor, the court devoted significant attention to the parties’ internal preparations and communications. For example, it noted that Martin Marietta’s own team of advisers believed that it was on shaky legal ground in using Vulcan’s information to help prepare the hostile bid, but continued to do so. The court cited a damaging internal email from a Martin Marietta banker that stated, “I do not think that we can (or should) be using this information.”
Attention to detail and tight drafting are critical when considering entering into an NDA, whether in connection with an M&A deal or otherwise. No matter how widespread the use of NDAs and similar documents pertaining to privacy and confidentiality may be in healthcare or other fields, this case serves as an important reminder that it can be hazardous to let down your guard.
Brian A. Cromer is a member of Stites & Harbison PLLC in Louisville.
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