Martin Marietta CEO’s ambition doomed policy argument in Vulcan case
Sometimes it seems as though Chancellor Leo Strine of Delaware Chancery Court is more excited about analyzing the exercise of corporate power than he is about the fine points of Delaware law. It’s not that Strine isn’t committed to the business litigation regime for which he is cheerleader-in-chief. But in some recent major rulings, including his 2010 decision upholding Barnes & Noble’s poison pill, his award of about $3 billion to Southern Peru Copper shareholders last October, and his ruminations on Kinder Morgan’s acquisition of El Paso Corp in March, Strine lets loose the rhetorical reins when he discusses power: who has it, who wants it, and how it influences corporate dealmaking.
We can now add Strine’s 139-page decision enjoining Martin Marietta Materials’ hostile bid for its rival Vulcan Materials to that list. Friday’s ruling appears to be the first time in a quarter century that a Delaware judge has barred a hostile takeover; Strine said that when Martin Marietta launched its tender offer for Vulcan shares last December, it breached a pair of 2010 confidentiality agreements the two companies entered into when they were contemplating a friendly deal. He extended the 2010 agreements, which expired early this month, by four months to punish Martin Marietta for its breach. Martin Marietta announced Monday that it will ask the Delaware Supreme Court to stay Strine’s ruling and expedite its appeal. But, unless the state high court agrees to do so, Strine’s decision will effectively end Martin Marietta’s exchange offer for Vulcan shares and its proxy war for seats on the Vulcan board, since Vulcan’s annual shareholder meeting takes place in June.
The most powerful argument Martin Marietta and its lawyers at Skadden, Arps, Slate, Meagher & Flom made in defense of the Vulcan takeover bid was a matter of policy. The 2010 agreements between Vulcan and Martin Marietta – a non-disclosure agreement and a joint defense agreement that addressed some of the antitrust concerns that might arise in a merger – did not contain standstill provisions explicitly precluding either of the companies from making an uninvited bid for the other. Martin Marietta said that Strine could not impose such a reading on the 2010 confidentiality contracts, and if he did, he’d chill M&A activity by assuming a standstill where none was agreed to. As Strine explained: “In its starkest form, Martin Marietta’s argument is that a loss for Martin Marietta in this litigation will turn every confidentiality agreement into a standstill, even though standstills are a common contractual provision.” (According to Vulcan, between one-quarter and one-third of M&A-related confidentiality agreements do not contain standstills.)
Strine threw the argument back at Martin Marietta, holding that M&A suffers when corporations can’t rely on courts to uphold contracts. “Ultimately, disrespecting contracts seems to threaten far more harm to investors in a capitalist economy than it does good,” Strine wrote. “To the extent that Martin Marietta suggests that courts should not enforce confidentiality agreements as they do other contracts on the ground that to do so is necessary to protect stockholders, I see no warrant in our law for such adventurism and no empirical basis to move our common law of contracts in that direction. To do so might well disadvantage investors in a material way.”
To determine what the confidentiality agreements between Martin Marietta and Vulcan actually required – no easy question, according to a ruling that spends several pages discussing various definitions of the word “between” and resorts to the phrase “cute in a non-Zooey Deschanel way” to describe one of Martin Marietta’s contorted interpretations – Strine said that he had to consider what was happening within the two companies as they negotiated the agreements and attempted to reach a friendly merger in 2010 and 2011.
And then Strine concluded that the ambitions of Martin Marietta CEO Ward Nye colored not only the drafting of the confidentiality agreements but also his company’s conduct in the aftermath of merger talks, when Martin Marietta decided to launch its hostile takeover bid. That conduct, in turn, led Strine to hold that Nye’s company breached the 2010 agreements.
As you might imagine in a case that inspired a 139-page ruling, the facts are complicated and nuanced, and Vulcan’s lawyers at Wachtell, Lipton, Rosen & Katz deserve kudos for framing arguments in a way that engaged the chancellor so thoroughly. The two companies are No. 1 and 2 in the U.S. materials business. (Strine called them “rock stars” – get it?) As Strine told the story, Vulcan’s longtime CEO, Don James, made several approaches over the years to his wary Martin Marietta counterpart, Steve Zelnak. Neither was eager to step down in favor of the other in a combined company, so talks never really began. By 2010, however, Marietta had a new CEO, Nye, who was more amenable to talking merger, particularly because his company had been targeted by an erstwhile European joint-venture partner. After years of waiting for “the best office and leather chair at an aggregates company,” Strine said, Nye wanted desperately to hold on to his job.
In the spring of 2010, Vulcan and Martin Marietta entered friendly merger talks and negotiated confidentiality agreements premised on a “business combination transaction” between the companies. Strine said Nye had the most to gain from obtaining access to confidential materials. Nye had staked his leadership on the Vulcan deal, which he believed would lead to enhanced shareholder value for Martin Marietta. At the time, Vulcan had a stronger share price, so it would be paying a premium to Martin Marietta shareholders. He told his board that Vulcan wasn’t as lean as Martin Marietta, and synergies would be worth at least $100 million a year, even after the companies dealt with the divestitures antitrust regulators would doubtless insist upon. Despite being the junior partner, Nye believed that Vulcan’s CEO would step down in favor of him.
Nye also had a lot to lose if word got out that Martin Marietta was in play, so he insisted on contract language that prohibited both sides from divulging either that they were talking about a deal or what the specific antitrust consequences of a merger might be. With those protections in place, Nye told his board he was increasingly convinced a deal would bring huge benefits to Martin Marietta.
But, as Strine noted, “the road to true love seldom runs smooth, even for companies that make paving materials.” Vulcan’s interest in the deal petered out as its share price fell. Nye and Martin Marietta, on the other hand, became more avid as the fortunes of the companies shifted and Martin Marietta contemplated acquiring Vulcan.
Both sides had been adamant about where the headquarters of the combined company would be – and who would lead it. Strine, who heard testimony from both CEOs, wrote: “The reality is that Nye emerges in the record as being preoccupied with his own future as a public company CEO as much as, if not more than, James. Nye did not want to be demoted, even during a transition period, and evinced a willingness to forego a 20 percent premium for Martin Marietta stockholders in the exchange ratio to ensure he was slotted as CEO right away.”
Even before Vulcan’s banker informed Martin Marietta in June 2011 that the merger wasn’t going to happen, Nye and Martin Marietta had begun to contemplate a hostile offer. At trial before Strine, Nye and other Martin Marietta witnesses cloaked their decision making in attorney-client privilege, but they asserted that they didn’t launch the takeover bid on the basis of confidential information. And when Martin Marietta disclosed the history of its Vulcan negotiations in a Securities and Exchange Commission filing – including the Vulcan CEO’s rejection of a merger and alleged insistence on retaining his title – the company was only acting to comply with its obligations to shareholders, it argued to Strine. (As my colleagues at Breakingviews have reported, Strine had choice words for the public relations advisers who apparently encouraged Martin Marietta to, in his word, “spew” in the SEC filing.)
Martin Marietta insisted it wasn’t in breach of the confidentiality agreements under a hypertechnical reading of the documents, which essentially comes down to an argument that the agreements unambiguously applied only to the failed “business combination transaction” talks referenced in the contracts. Strine looked at the background to the contracts, including Martin Marietta CEO Nye’s insistence that the confidentiality strictures be worded broadly, to hold Martin Marietta to its word.
CEOs, he seems to be saying, can’t have it both ways, no matter how powerful they think they are. If you represent CEOs in Delaware litigation, that’s a hint you’d be wise to take.
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