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or “mutually agreeable” in the definition 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 sit-ting 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.”

Another important provision of an NDA is that which describes under what circumstances the restricted party may be released from certain con-fidentiality restrictions. One such circumstance is if a party is compelled to disclose certain informa-tion 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 clarified that even without an explicit standstill provision, narrowing the scope of legal requirements that may release a party from confidentiality 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

On Friday, Chancellor Leo E. Strine Jr. of the Delaware Court of Chancery issued a significant 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 Vulcan’s outstanding shares in addition to a proxy contest intended to elect new members to Vul-can’s board of directors at its next annual meeting.

Although the NDA did not contain an express standstill provision, the court’s decision Friday found that Martin’s 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 poten-tial 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 other-wise 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 materi-als 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 clarified 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” (defined as a “possible business com-bination transaction between Vulcan and Martin”). The court found the definition to be ambiguous and stated that if the NDA had included “negotiated”

Tips for entering NDAs in a merger

LOS ANGELES

THURSDAY, MAY 10, 2012

GUEST COLUMN

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stock exchanges. The NDA clearly narrowed legal requirements to those triggered by some form of discovery obligation or affirmative legal process and not those triggered under the securities laws and stock exchanges as a result of unsolicited ac-tion such as Martin’s pursuit of the exchange offer and proxy contest. The court confirmed 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 appli-cable law”, the disclosures similar to those required to pursue Martin’s course of action could be deemed to be included among permissive disclosure permit-ted under such NDA.

Some suggested language for narrowing legal re-quirements 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 informa-tion, 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 benefit 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 office 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.

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.