Martin Marietta Materials, Inc. v. Vulcan Materials Co.

Supreme Court of Delaware
68 A.3d 1208 (2012)

ELI5:

Rule of Law:

Using confidential information obtained under confidentiality agreements (NDA and JDA) during friendly merger negotiations to launch a hostile takeover bid constitutes a breach of those agreements when their terms restrict the use of such information solely to the consensual transaction being discussed.

Facts:

Martin Marietta Materials, Inc. ('Martin') and Vulcan Materials Company ('Vulcan') are the two largest competitors in the U.S. construction aggregates industry.
In 2010, the CEOs of Martin and Vulcan began discussions for a potential friendly, consensual merger.
Martin's CEO, Ward Nye, explicitly stated that Martin was only interested in a consensual deal, not a hostile acquisition, and that all discussions must be kept strictly confidential.
To facilitate the exchange of information, the parties executed a Non-Disclosure Agreement (NDA) and a Joint Defense Agreement (JDA).
The NDA permitted the use of 'Evaluation Material' solely for evaluating a 'Transaction,' defined as a 'possible business combination transaction ... between' the parties.
The JDA allowed the use of 'Confidential Materials' solely for 'pursuing and completing the Transaction,' defined as the 'potential transaction being discussed' by the parties.
After receiving confidential information from Vulcan that helped it value potential merger synergies, Martin's friendly talks with Vulcan stalled.
Martin then used Vulcan's confidential information to plan and launch an unsolicited hostile takeover bid, consisting of a public exchange offer and a proxy contest to replace Vulcan's directors, publicly disclosing Vulcan's information in regulatory filings and investor communications.

Procedural Posture:

Martin Marietta Materials, Inc. ('Martin') sued Vulcan Materials Company ('Vulcan') in the Delaware Court of Chancery, seeking a declaratory judgment that its hostile takeover did not violate their confidentiality agreements.
Vulcan filed counterclaims for breach of contract, seeking an injunction to stop Martin's hostile bid.
Following an expedited trial, the Court of Chancery found that Martin had breached both the NDA and the JDA.
The Court of Chancery entered a final judgment, enjoining Martin for four months from proceeding with its exchange offer and proxy contest.
Martin, as the appellant, appealed the final judgment of the Court of Chancery to the Delaware Supreme Court, with Vulcan as the appellee.

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Issue:

Does a company breach its confidentiality agreements by using nonpublic information obtained during friendly merger negotiations to launch a hostile takeover bid and publicly disclosing that information without following the contractually mandated procedures?

Opinions:

Majority - Jacobs, Justice

Yes. A company breaches its confidentiality agreements by using nonpublic information for a purpose, such as a hostile takeover, that falls outside the scope of the specific, consensual transaction for which the information was shared. The JDA unambiguously restricted the use of 'Confidential Materials' to the 'transaction being discussed,' which the factual record established was a friendly, negotiated merger, not a hostile bid. Similarly, the NDA's disclosure provisions were violated because Paragraph 4 provided the exclusive means for disclosing 'Evaluation Material,' which required an external legal demand (e.g., a subpoena) and a specific notice-and-vetting process, neither of which occurred here. Martin's public disclosures in its SEC filings and to investors, made without following this process, were a clear breach of the NDA.

Analysis:

This decision reinforces the enforceability of 'use' and 'disclosure' restrictions in confidentiality agreements, particularly in the M&A context. It clarifies that even without an explicit 'standstill' provision, a carefully drafted confidentiality agreement can effectively prohibit a hostile takeover if the acquirer needs to use confidential information obtained during friendly talks. The ruling signals that courts will narrowly construe the permitted 'purpose' or 'transaction' based on the parties' actual negotiations, preventing a party from weaponizing information shared in good faith. This precedent provides significant protection for target companies entering into merger discussions and serves as a strong deterrent against 'stalking horse' bids disguised as friendly talks.

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