LOS ANGELES

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THURSDAY, MAY 10, 2012

GUEST COLUMN

Tips for entering NDAs in a merger

n Friday, Chancellor Leo E. Strine Jr. of the Delaware Court of Chancery issued a signicant ruling that provides some useful guidance to companies entering into a nondisclosure agreement (NDA) in connection with consideration of a possible merger, acquisition or divestiture. The case involved Martin Marietta Materials Inc. and Vulcan Materials Company, two NYSE-listed companies that entered into an NDA in May 2010 in the context of discussing a possible merger. After Vulcan terminated negotiations in June 2011, Martin launched an unsolicited exchange offer to purchase all of Vulcans outstanding shares in addition to a proxy contest intended to elect new members to Vulcans board of directors at its next annual meeting. Although the NDA did not contain an express standstill provision, the courts decision Friday found that Martins actions breached the NDA and enjoined Martin from taking any steps to acquire control of Vulcan shares or assets for four months. Although Martin could appeal the decision, for now there are lessons to draw from the case. Often NDAs entered into in contemplation of a merger between public companies will include a standstill provision in order to prohibit the potential acquirer from seeking to acquire control of the public target other than pursuant to the negotiated transaction subject of such NDA. If a standstill is included, often the party subject to the restriction will be released from the restriction in the event an unrelated third party takes hostile action or otherwise seeks to acquire control of the target during the term of an NDA. In this case neither Martin nor Vulcan insisted upon or otherwise discussed the inclusion of an explicit standstill provision. One of the most important provisions of an NDA entered into in the context of a merger is that which prescribes for what purposes the evaluation materials exchanged in the course of discussions and due diligence may be used. The target will seek to limit usage solely to that which is necessary to evaluate the transaction that is the subject of such NDA (not permitting use for competitive purposes or other unsolicited transactions). The court claried that even without an explicit standstill provision, certain words or phrases limiting the permitted usage of evaluation materials can serve to preclude hostile actions such as the exchange offer and proxy contest initiated by Martin. The NDA limited the use of evaluation materials solely for the purpose of evaluating a transaction (dened as a possible business combination transaction between Vulcan and Martin). The court found the denition to be ambiguous and stated that if the NDA had included negotiated

or mutually agreeable in the denition instead of between, or if the NDA prohibited the parties from using evaluation materials in any way detrimental to the disclosing party, it would have been clear that the parties intended to limit usage to a consensual mingling of the two companies approved by the sitting board of each company. Instead, the court relied upon extrinsic evidence to conclude that the parties intended to limit usage of evaluation materials to negotiated or mutually agreeable transactions, and prohibited usage of such materials in connection with unsolicited or otherwise hostile transactions. Narrowing the permitted use provision can have the similar effect of an explicit standstill provision. Some suggested language for narrowing usage and favorable to the public company target: The parties may use evaluation materials solely for the purpose of evaluating a transaction and may not use evaluation materials in any way detrimental to the disclosing party. For purposes of this agreement, a transaction is a negotiated and mutually agreeable business combination between the parties or their respective subsidiaries.

One of the most important provisions of an NDA entered into in the context of a merger is that which prescribes for what purposes the evaluation materials exchanged in the course of discussions and due diligence may be used.
Another important provision of an NDA is that which describes under what circumstances the restricted party may be released from certain condentiality restrictions. One such circumstance is if a party is compelled to disclose certain information pursuant to a legal requirement. In such case the NDA will also prescribe a notice and vetting procedure designed to ensure that any compelled disclosure is as minimal as possible to satisfy the legal requirement, nothing more. The court claried that even without an explicit standstill provision, narrowing the scope of legal requirements that may release a party from condentiality restrictions and compel disclosure may have the similar effect as a standstill provision. Circumstances often arise in the context of an NDA where a party can be legally required to disclose certain information. Such legal requirements can include requirements generated by external legal process demands (such as subpoenas, interrogatories or civil investigative demands) and also requirements of the securities laws and

stock exchanges. The NDA clearly narrowed legal requirements to those triggered by some form of discovery obligation or afrmative legal process and not those triggered under the securities laws and stock exchanges as a result of unsolicited action such as Martins pursuit of the exchange offer and proxy contest. The court conrmed that where an NDA limits the type of legal requirements that will justify disclosure similar to those found in the NDA, disclosures in furtherance of a hostile bid or other form of unsolicited transaction would not be permitted, regardless of the absence of a standstill provision. In the alternative, if an NDA is broadly written to permit disclosure if required by applicable law, the disclosures similar to those required to pursue Martins course of action could be deemed to be included among permissive disclosure permitted under such NDA. Some suggested language for narrowing legal requirements permitting compelled disclosure under an NDA and favorable to the public company target: If you or your representatives are legally required (by oral questions, interrogatories, requests for information, subpoena, civil investigative demand or similar process) to disclose any evaluation materials... Public and non-public potential acquirers of public companies should be equally as interested in the outcome of this case. As indicated above, often when an explicit standstill provision is included in an NDA, such provision will provide a release from such restriction in the event an unrelated third party takes hostile action or otherwise seeks to acquire control of the target during the term of such NDA. If a potential acquirer is successful in negotiating an explicit standstill provision out of an NDA, yet the language discussed above is included to provide similar effect, the potential acquirer may be bound by an implied standstill restriction without the benet of a release in the event an interloper emerges. What the court said about usage restrictions and permissive disclosure were by no means the only important guidance provided in the opinion. Companies should consider consulting with an experienced corporate attorney about the contents of form NDAs in light of the latest guidance from the Delaware Court of Chancery.
David Smith is a shareholder in the Santa Monica ofce of Stradling Yocca Carlson & Rauth, where he specializes in a wide variety of corporate transactions. He can be reached at (424) 214-7024 or dsmith@sycr.com.

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