There was a time in my life when I negotiated, I'm going to say, 100 confidentiality agreements in three months. I got what I thought was good at it, by which I mean I knew about a lot of issues and tricks and things and could often get the - often pretty junior - lawyer on the other side to agree to things that I thought were pretty tricky. But I know now that I couldn't have been that good because (1) when I represented sellers I tried to get a standstill and (2) when I represented bidders I negotiated back against standstills without ever noticing that confidentiality agreements are standstills all on their own. That is tricky:
A Delaware judge on Friday blocked Martin Marietta Materials for four months from pursuing its proxy fight and hostile bid for Vulcan Materials.
Unless overturned on appeal, the halt would effectively thwart Martin Marietta’s effort to get four directors elected to Vulcan’s board at that company’s annual meeting of shareholders on June 1.
In granting an injunction, Chancellor Leo E. Strine Jr. of the Delaware Chancery Court found that Martin Marietta had breached confidentiality agreements between the two companies. While those agreements did not expressly call for a standstill between the two companies, they did prohibit Martin Marietta from using information that had been previously exchanged between the companies to decide, formulate and sell its offer and proxy challenge, he wrote.
The opinion is great - ignore the legal sections, which drag, and focus on the blow-by-blow of the MLM-VMC negotiations - and chock-full of Strinery, including "the road to true love seldom runs smooth, even for companies that make paving materials" and this:
In a move that is cute in a non-Zooey Deschanel way, Martin Marietta asserts that because it has currently said it would only close its Exchange Offer if the Vulcan board signs a merger agreement with it, the business combination transaction it proposes is actually one consistent with Vulcan’s own reading, even though the Vulcan board that would sign this “consensual” agreement would be one that has been changed by Martin Marietta’s Proxy Contest.
Exactly. Wait, what?
Anyway the decision is sort of obviously right:
(1) MLM and VMC agreed that they wouldn't tell anyone about their negotiations except after signing a negotiated merger;
(2) MLM couldn't have launched a hostile offer without telling everyone about the negotiations, because the law requires complete disclosure of the background of any tender offer;
(3) it did, and it did;
(4) VMC sued to basically ask a judge to make it as though MLM hadn't disclosed all this stuff;
(5) which actually turns out to be kind of hard, but you can at least make it like they didn't do the other thing they did, viz. launch a hostile offer, by making it impossible for them to complete the hostile offer;
(6) and the judge did that.
There are other bits that are also probably right but more philosophically troubling, like the fact that MLM not only agreed not to disclose that it was having talks with VMC, but also agreed not to use anything it learned in those talks for anything other than a negotiated bid. So because it learned some things - about cost synergies and antitrust risk - and then formulated a hostile bid without removing those things from its brain,* it can't pursue that hostile bid (yet).
Deal Professor Steven Davidoff thinks that the remedy - enjoining Martin Marietta's offer for Vulcan for four months - sort of comes out of nowhere and might be reversed on appeal. I dunno. If you stick with the basic principle that Vulcan and MLM agreed that no one could know about their negotiations, on pain of injunctive enforcement, and if there was no way for MLM to bid for Vulcan without telling everyone about the negotiations (and there wasn't!), then enjoining MLM's bid is in some sense the least that Strine could do.
But he's certainly right about this:
[S]mall confidentiality agreements negotiated at the beginning of deals — mostly by in-house lawyers — can make a big difference, so be careful with the language. The judge’s ruling will probably provide broad grounds for target companies in other cases to seek the same relief in future breaches, so agreements should be worded to avoid that situation.
That is a polite way of putting it. Here the agreements were in fact negotiated by in-house lawyers; just as often they're viewed as administrative trivia in starting an M&A process, with the negotiations done by junior outside lawyers or bankers based on a hastily approved form. And then those halfhearted negotiations slowly grow into a feature of the deal, while the junior person sits very still and hopes no one notices that he was just sort of winging it. The court here makes much of the fact that Martin Marietta, at the beginning of negotiations, was concerned about confidentiality and didn't want a hostile deal:
On the evidence, I am persuaded that [MLM CEO Ward] Nye would never have agreed to exchange confidential information if he thought that one of the parties to the NDA was free to launch an unsolicited exchange or tender offer or a proxy contest under the terms of the Agreement. In May 2010, when Martin Marietta and Vulcan entered into the NDA, Martin Marietta anticipated that any transaction between the companies, if accomplished, would be some version of a consensual merger of equals.
So, yeah, maybe true - but the way a CEO who was actually paranoid about an "unsolicited exchange or tender offer or a proxy contest" would assuage his paranoia would be by including a standstill prohibiting an unsolicited offer or proxy contest. You can actually do that pretty easily; there are lawyers who will do it for you. Of course he wanted a negotiated transaction. The question is, what did he intend to happen if, a year and a half after negotiations started, he decided to go hostile - would the NDA-without-standstill prevent that, or not? The only possible answer was "he had no idea." In fact, the lawyers who wrote the NDA likely had no idea. (It is, after all, a novel case of Delaware law requiring a 139-page opinion.) My guess is that no one thought about the fact that a ban on disclosing confidential information would operate as a ban on a hostile offer that would require disclosures in the offer document.
Cases like this are what make M&A law fun. Here you can read 139 pages about the blow-by-blow of the negotiations, and peer deep into the mind of Martin Marietta's CEO and his hopes and dreams for a negotiated transaction. But lurking in the background of that view of the respective CEOs' hopes and dreams is the occasionally rushed or sloppy or conducted-at-4am work of an army of bankers and lawyers and other agents doing their imperfect best to make the deal work. And it's entertaining for outsiders - and terrifying for them - when their work becomes the public focus of the deal.
Martin Marietta Materials, Inc., v. Vulcan Materials Company [scribd]
Judge Halts Martin Marietta Bid for Vulcan Materials [DealBook]
Lessons From the Vulcan Materials Ruling [DealBook / Deal Professor]
* Which is easier to do when you're a company, and have many brains, than when you're a person and have only one. But still not easy:
Notably, as was the case throughout, Martin Marietta made no attempt to use a so-called “clean team” of officers and advisors who were not thoroughly steeped in Evaluation Material, likely because they could not exclude their CEO and CFO, who were key decision-makers and whose strategic calculations were profoundly influenced by the nonpublic information they got from Vulcan.