Delaware Courts and the "Protection" of Investors
Martin Marietta Materials v. Vulcan Materials Co., 2012 Del. Ch. LEXIS 93 (Del. Ch. May 4, 2012) is a 138 page tome ultimately holding that Martin Marietta violated a confidentiality agreement with Vulcan. As a result, the Chancery Court enjoined Martin Marietta's hostile offer for Vulcan. The interesting thing in the case concerns the court's treatment of the argument that an injunction would harm shareholders.
When the court finds a violation of the law, they must consider an appropriate remedy. In some cases, the parties argue that a particular remedy would be harmful to shareholders. That issue came up in El Paso Energy. There the Chancery Court first found that shareholders had sufficiently alleged a violation of the duty of loyalty. When addressing the injunction sought by shareholders, however, the court demurred. Doing so would harm shareholders. As the court reasoned, an injunction would potentially cause "more harm than good" to shareholders by allowing the purchaser to walk away from the offer.
The court made no mention of the broader benefits to the market that could have flowed from an injunction. While shareholders of El Paso could have been injured by the remedy (any delay could have caused the bidder to withdraw the offer and move on), the market arguably would have benefited in the aggregate from strong measures against alleged breaches of fiduciary obligations. The broader benefit, however, was not addressed.
In Martin Marietta, the same issue came up. Martin Marietta argued that even had it violated the confidentiality agreement, any injunction prohibiting its hostile acquisition attempt would be harmful to shareholders. As the court described:
In some of its arguments, Martin Marietta has tried to assert that this case has large implications for the ability of American investors to receive premium-generating offers for their shares. Martin Marietta implies that, if it is enjoined from pursuing its Exchange Offer and Proxy Contest because it violated the Confidentiality Agreements, a chill on M&A activity will result, harming stockholders and lowering share values. 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.
That contention, however, received short shrift.
But 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.
In other words, harm or not to shareholders, the court intended to enforce the contract. The court went on, however, to explain how shareholders in the aggregate benefited from the enforcement of the confidentiality agreement.
The American M&A markets are extremely vibrant and generate a high volume of premium-generating transactions, even in comparison to the U.K. system beloved by certain of my favorite academics in corporate law. One of the reasons for this vibrancy is the freedom given to corporations to use contracts to limit the very real business risks attendant to exploring M&A transactions. By respecting contract rights, our courts give parties in commerce the confidence that they can rely upon the contracts they execute to reduce risks and transaction costs. . . . If the message is sent that the confidentiality and other agreements that control the downside risks of such engagement will not be respected, then one can rationally expect such competitors not to be as prone to considering such transactions.
In other words, whatever the impact in this particular situation, investors and the market would benefit from knowing that contracts will be vigorously enforced.
Perhaps. Only the same thing can be said about enforcing fiduciary obligations. Yet in the Delaware courts, that does not seem to be the case.