A confidentiality agreement ("CA") is typically the
first negotiated document in a purchase transaction. These
agreements are often negotiated by junior members of the
transaction team prior to one (or both) parties engaging outside
legal counsel. CAs set the stage for a transaction and, as recent
cases have shown, can define the playing field in the event that a
deal falls apart. Three cases decided in the last 70 days highlight
the significant effect a CA can have after the parties have decided
not to pursue a transaction.
TAKE-AWAYS
1. CAs will likely be more heavily negotiated in light of recent
decisions.
2. Beware of unintended consequences when entering into CAs
(e.g., certain language in a CA could have the same effect as a
standstill agreement).
3. Different provisions, with slight variances in defined terms,
could significantly impact your bargained-for protections (e.g.,
certain "non-use provisions" might prevent a sponsor from
pursuing an unrelated transaction with a different target that
operates in the same industry vertical as the target with which the
sponsor is negotiating the CA).
On May 4, 2012, the Delaware Court of Chancery issued an opinion
in Martin Marietta Materials, Inc. v. Vulcan Materials Co.
enjoining Martin Marietta's hostile takeover attempt of Vulcan
for four months. The decision was affirmed by the Delaware Supreme
Court on July 10, 2012. Martin Marietta and Vulcan signed two CAs
in connection with discussions regarding a possible merger. While
neither of the CAs included an express standstill, the court found
that the definition of transaction and the CAs' restrictions on
the use and disclosure of confidential information effectively
prevented Martin Marietta from using the confidential information
it received from Vulcan in a hostile takeover. In addition, the
court found that Martin Marietta breached its non-disclosure
obligations in the CAs by disclosing some of Vulcan's
information and information regarding the transaction discussions
in Martin Marietta's SEC filings and that such disclosure was
not permitted by the CAs' exceptions for "legal
requirements " Thus, in certain situations where a party may
not even use the confidential information about a target, a
subsequent event which requires comprehensive disclosure may
require a party to disclose references to discussions regarding the
potential transaction and cause the disclosing party to potentially
be in breach of the CA.
On May 18, 2012, the Delaware Supreme Court issued an opinion in
RAA Management, LLC v. Savage Sports Holdings, Inc.,
finding that a provision in the CA which stated that Savage, the
target, was not making any representations with respect to its
information, together with RAA waiving any claims with respect to
the potential transaction, shielded Savage from liability related
to potentially fraudulent misrepresentation. RAA alleged that
Savage fraudulently stated that it did not have any
"significant unrecorded liabilities" and RAA relied on
this representation when it incurred expenses negotiating the deal
and performing due diligence. The court held that extra-contractual
fraud claims are barred by carefully worded non-reliance
provisions.
On June 25, 2012, the United States District Court for the
Southern District of New York, applying New York law, issued an
opinion in Goodrich Capital, LLC, et al. v. Vector Capital
Corporation that did not dismiss a breach of contract claim
that was based on an alleged violation of a provision in the CA
which limited the use of confidential information. Broadly
construed, a non-use provision under this ruling could prevent
potential buyers from pursuing an unrelated transaction with a
different target in the same industry vertical. Goodrich alleged
that Vector used information provided by Goodrich to evaluate a
target in the same industry (which resulted in a transaction that
was actually consummated). The court found that since Goodrich had
provided Vector with the name of its ultimate target,
Goodrich's claim for breach of the CA's non-use provision
could survive Vector's motion to dismiss.
While each of these cases relates to different facts, a common
thread is that after each potential transaction died, a party sued
on a theory of a breach of the underlying CA. Based on these recent
cases, we expect CAs to be more heavily negotiated. Like all
negotiated documents, parties should carefully parse the language
of the CA and consider potential unintended consequences of the
language used.
Because of the generality of this update, the information
provided herein may not be applicable in all situations and should
not be acted upon without specific legal advice based on particular
situations.
In November 2012, the U.S. District Court for the Eastern District of New York preliminarily approved a settlement agreement in the In re Payment Card Interchange Fee and Merchant Discount Antitrust Litigation.
Twitter
Facebook
Digg 
