Two recent court rulings against companies attempting to launch hostile takeovers of their counterparts highlight the need to pay close attention to confidentiality agreements, lawyers say.
“The bottom line is confidentiality agreements will be more carefully drafted and perhaps more actively and attentively negotiated,” says Neill May, a partner with Goodmans LLP in Toronto.
At issue are two cases that have had lawyers involved in mergers and acquisitions talking since judges handed down their rulings earlier this year. In Gold Reserve Inc. v. Rusoro Mining Ltd., Justice Peter Cumming granted an injunction in February against the bidder, Rusoro, over allegations it had access to Gold Reserve’s confidential information through its relationship with the target’s financial adviser, Endeavour Financial
International Corp.
Meanwhile, in Certicom Corp. v. Research In Motion Limited, Justice Alexandra Hoy sided with Certicom’s view that the existence of a confidentiality agreement between the two parties prohibited the BlackBerry maker from using information it gained through its relationship with Certicom to launch a hostile bid. That was the conclusion despite the fact that a standstill agreement barring such a takeover had already expired.
Gold Reserve, lawyers say, was most striking for its presumption that a party with access to confidential information would necessarily use it during an unfriendly bid. In that case, Endeavour was acting as financial adviser for Gold Reserve and Rusoro, both mining companies, according to the judgment.
That was the case in December, when Rusoro made its play for Gold Reserve. At the same time, Endeavour was a creditor to and shareholder in Rusoro, and one of its key former employees had links to the mining company, Hoy noted. But within minutes of Rusoro’s bid, Endeavour ended its relationship with Gold Reserve.
As the judgment points out, Endeavour over the years had access to significant information about Gold Reserve’s business, including financial, technical, geological, and operational details related to a major gold and copper project in Venezuela. In exchange, it had signed a confidentiality agreement acknowledging that it “shall not knowingly act against the interests of Gold Reserve in a material way.”
Hoy noted as well that just prior to the December bid, Endeavour made a presentation to Rusoro about the advantages of a bid for Gold Reserve that included discussion about the promise of additional exploration potential at one of its projects.
But in turn, the financial adviser argued it used only publicly available information in its dealings with Rusoro, a notion Hoy rejected. “The defendants’ argument that their officers and employees can compartmentalize their minds so as to segregate and not use confidential information given to them in the past lacks reality,” she wrote.
“Absent special measures such as institutionalized ethical walls, the reasonable presumption is that confidential information will be taken into account and used, whether intentionally or inadvertently, to the disadvantage of the provider of the confidential information.”
Noting Rusoro was fully aware of Endeavour’s relationship with Gold Reserve, Hoy added that the bidder allowed itself to unfairly benefit from its financial adviser’s position. “Rusoro cannot be in a better position than Endeavour itself,” she ruled.
For Allyson Whyte Nowak, a partner at Ogilvy Renault LLP, the case puts an added emphasis on bidding companies to take steps to avoid litigation over their access to confidential information. “You’re going to get a presumption of misuse of confidential information if a party doesn’t show they have institutionalized measures,” she says.
“That’s what’s particularly striking about this case,” she adds.
Measures to reduce the risk include ethical walls, physical and electronic protection, and what Whyte Nowak calls clean design rooms. In that last example, parties would emulate a practice used in intellectual property scenarios where a company is trying to build a similar product to a competitor’s.
In that situation, a product specification sees the original product, but the design team doesn’t. The first group then hands down a general request for what it’s looking for to the design group that carries it out in an isolated room. As a result, the company can claim it came up with its own product untainted by the original design.
A mergers and acquisition scenario could work the same way, according to Whyte Nowak. One group of employees would have access to the confidential information to carry out the business set out in the agreement while another team in the clean room could argue it had no knowledge of what the parties shared.
It’s that second group that would carry out the hostile takeover, Whyte Nowak notes. At the same time, setting up walls like computer passwords that allow only certain employees to see the confidential information can help minimize the risk of litigation over non-disclosure agreements, she adds.
In Certicom, meanwhile, the issue came in part down to what RIM could legally do under the terms of the confidentiality agreements it had signed with its counterpart, a supplier of security products for its businesses. It had signed two such documents in 2007 and 2008, the earlier of which contained the standstill provision forbidding RIM from launching an unfriendly takeover.
By the time the company went forward with a hostile bid last December, that part of the agreement had expired, but Cumming nevertheless ruled that language in the non-disclosure documents prevented its actions.
That’s because while the 2007 agreement allowed RIM to use the information disclosed by Certicom for purposes including “some form of business combination between the parties,” Cumming decided that the word “between” excluded the notion of hostile bid.
“As noted, when the 2007 [non-disclosure agreement] was negotiated, the parties contemplated a friendly bid for Certicom,” he wrote. “This is the context in which the word must be interpreted.”
For its part, RIM argued a ruling against it would amount to extending the expired standstill provisions, something it said would be inconsistent with the rationale for having such agreements in the first place. But in Cumming’s view, the confidentiality and standstill language nevertheless served different purposes, especially given that the latter provision allows for much stronger protection against an unfriendly takeover.
“In this case, I have concluded that the standstill and the non-disclosure provisions are properly interpreted as separate clauses, providing different protections for different terms . . . After the standstill provision falls away, Certicom is left with longer-term protection that, among other things, entails the need for proof of disclosure and proof of use of confidential information . . . After the standstill provision had expired, it was open to RIM to mount a hostile bid, provided that it had not received, and used, any confidential information in assessing the bid.”
Adding to RIM’s woes was its admittance that it had in fact used the disclosed information in order to decide whether to attempt a takeover. As a result, Cumming ruled it had an
unfair advantage in its bid versus other potential buyers for Certicom. “If not enjoined, RIM will be playing by a different set of rules,” he wrote.
The lesson, then, is that the courts - at least in these two cases - appear to be interpreting confidentiality agreements more stringently in order to level the playing field for securities markets, according to Whyte Nowak. “I think it goes to the integrity of commercial negotiations,” she says.
Meanwhile, for Goodmans’ May, the cases will likely make non-disclosure clauses a more contentious issue between companies, especially given that in the past, buyers tended to believe that it was the standstill provisions they had to pay most attention to when deciding whether they could launch a hostile bid.
“The early conclusion is you’ve got to be careful in drafting your confidentiality agreements,” he says, noting that one option might be for a buyer to insist that the standstill clause will be paramount to the non-disclosure ones.
But as May points out, whether the other party would concede to such a request would depend on the leverage between the two companies. Potential targets, of course, will be eager to leave the wording as it normally has been so that they can turn to that language in order to fend off a hostile bid, he adds.
In the end, May says potential buyers can minimize their risk by documenting their activities so that they can later prove they didn’t use any confidential information in assessing their takeover plans. But overall, lawyers say the two cases point to the need for companies to consider future scenarios when signing agreements in situations that may be friendly now but might not be so later on.
“You need to think big picture down the road,” Whyte Nowak says.
“The bottom line is confidentiality agreements will be more carefully drafted and perhaps more actively and attentively negotiated,” says Neill May, a partner with Goodmans LLP in Toronto.At issue are two cases that have had lawyers involved in mergers and acquisitions talking since judges handed down their rulings earlier this year. In Gold Reserve Inc. v. Rusoro Mining Ltd., Justice Peter Cumming granted an injunction in February against the bidder, Rusoro, over allegations it had access to Gold Reserve’s confidential information through its relationship with the target’s financial adviser, Endeavour Financial
International Corp.
Meanwhile, in Certicom Corp. v. Research In Motion Limited, Justice Alexandra Hoy sided with Certicom’s view that the existence of a confidentiality agreement between the two parties prohibited the BlackBerry maker from using information it gained through its relationship with Certicom to launch a hostile bid. That was the conclusion despite the fact that a standstill agreement barring such a takeover had already expired.
Gold Reserve, lawyers say, was most striking for its presumption that a party with access to confidential information would necessarily use it during an unfriendly bid. In that case, Endeavour was acting as financial adviser for Gold Reserve and Rusoro, both mining companies, according to the judgment.
That was the case in December, when Rusoro made its play for Gold Reserve. At the same time, Endeavour was a creditor to and shareholder in Rusoro, and one of its key former employees had links to the mining company, Hoy noted. But within minutes of Rusoro’s bid, Endeavour ended its relationship with Gold Reserve.
As the judgment points out, Endeavour over the years had access to significant information about Gold Reserve’s business, including financial, technical, geological, and operational details related to a major gold and copper project in Venezuela. In exchange, it had signed a confidentiality agreement acknowledging that it “shall not knowingly act against the interests of Gold Reserve in a material way.”
Hoy noted as well that just prior to the December bid, Endeavour made a presentation to Rusoro about the advantages of a bid for Gold Reserve that included discussion about the promise of additional exploration potential at one of its projects.
But in turn, the financial adviser argued it used only publicly available information in its dealings with Rusoro, a notion Hoy rejected. “The defendants’ argument that their officers and employees can compartmentalize their minds so as to segregate and not use confidential information given to them in the past lacks reality,” she wrote.
“Absent special measures such as institutionalized ethical walls, the reasonable presumption is that confidential information will be taken into account and used, whether intentionally or inadvertently, to the disadvantage of the provider of the confidential information.”
Noting Rusoro was fully aware of Endeavour’s relationship with Gold Reserve, Hoy added that the bidder allowed itself to unfairly benefit from its financial adviser’s position. “Rusoro cannot be in a better position than Endeavour itself,” she ruled.
For Allyson Whyte Nowak, a partner at Ogilvy Renault LLP, the case puts an added emphasis on bidding companies to take steps to avoid litigation over their access to confidential information. “You’re going to get a presumption of misuse of confidential information if a party doesn’t show they have institutionalized measures,” she says.
“That’s what’s particularly striking about this case,” she adds.
Measures to reduce the risk include ethical walls, physical and electronic protection, and what Whyte Nowak calls clean design rooms. In that last example, parties would emulate a practice used in intellectual property scenarios where a company is trying to build a similar product to a competitor’s.
In that situation, a product specification sees the original product, but the design team doesn’t. The first group then hands down a general request for what it’s looking for to the design group that carries it out in an isolated room. As a result, the company can claim it came up with its own product untainted by the original design.
A mergers and acquisition scenario could work the same way, according to Whyte Nowak. One group of employees would have access to the confidential information to carry out the business set out in the agreement while another team in the clean room could argue it had no knowledge of what the parties shared.
It’s that second group that would carry out the hostile takeover, Whyte Nowak notes. At the same time, setting up walls like computer passwords that allow only certain employees to see the confidential information can help minimize the risk of litigation over non-disclosure agreements, she adds.
In Certicom, meanwhile, the issue came in part down to what RIM could legally do under the terms of the confidentiality agreements it had signed with its counterpart, a supplier of security products for its businesses. It had signed two such documents in 2007 and 2008, the earlier of which contained the standstill provision forbidding RIM from launching an unfriendly takeover.
By the time the company went forward with a hostile bid last December, that part of the agreement had expired, but Cumming nevertheless ruled that language in the non-disclosure documents prevented its actions.
That’s because while the 2007 agreement allowed RIM to use the information disclosed by Certicom for purposes including “some form of business combination between the parties,” Cumming decided that the word “between” excluded the notion of hostile bid.
“As noted, when the 2007 [non-disclosure agreement] was negotiated, the parties contemplated a friendly bid for Certicom,” he wrote. “This is the context in which the word must be interpreted.”
For its part, RIM argued a ruling against it would amount to extending the expired standstill provisions, something it said would be inconsistent with the rationale for having such agreements in the first place. But in Cumming’s view, the confidentiality and standstill language nevertheless served different purposes, especially given that the latter provision allows for much stronger protection against an unfriendly takeover.
“In this case, I have concluded that the standstill and the non-disclosure provisions are properly interpreted as separate clauses, providing different protections for different terms . . . After the standstill provision falls away, Certicom is left with longer-term protection that, among other things, entails the need for proof of disclosure and proof of use of confidential information . . . After the standstill provision had expired, it was open to RIM to mount a hostile bid, provided that it had not received, and used, any confidential information in assessing the bid.”
Adding to RIM’s woes was its admittance that it had in fact used the disclosed information in order to decide whether to attempt a takeover. As a result, Cumming ruled it had an
unfair advantage in its bid versus other potential buyers for Certicom. “If not enjoined, RIM will be playing by a different set of rules,” he wrote.
The lesson, then, is that the courts - at least in these two cases - appear to be interpreting confidentiality agreements more stringently in order to level the playing field for securities markets, according to Whyte Nowak. “I think it goes to the integrity of commercial negotiations,” she says.
Meanwhile, for Goodmans’ May, the cases will likely make non-disclosure clauses a more contentious issue between companies, especially given that in the past, buyers tended to believe that it was the standstill provisions they had to pay most attention to when deciding whether they could launch a hostile bid.
“The early conclusion is you’ve got to be careful in drafting your confidentiality agreements,” he says, noting that one option might be for a buyer to insist that the standstill clause will be paramount to the non-disclosure ones.
But as May points out, whether the other party would concede to such a request would depend on the leverage between the two companies. Potential targets, of course, will be eager to leave the wording as it normally has been so that they can turn to that language in order to fend off a hostile bid, he adds.
In the end, May says potential buyers can minimize their risk by documenting their activities so that they can later prove they didn’t use any confidential information in assessing their takeover plans. But overall, lawyers say the two cases point to the need for companies to consider future scenarios when signing agreements in situations that may be friendly now but might not be so later on.
“You need to think big picture down the road,” Whyte Nowak says.
