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654PENN STATE LAW REVIEW[Vol. 117:3stuff you give my client. It’s not just the pieceof paper that has a budget, for example; it’salso the analysis my client makes from thatbudget. If your client decides to litigate, it’sgoing to be very difficult for my client to takethe position that my client has not “usedconfidential information” in deciding to gohostile.GAR BASON:(Counsel for Target)Joel, it’s not that complicated to put together a“clean team.” Your client could have both aclean team and—I won’t call it a “dirtyteam”—another team; and the other team is theone that can look at my client’s confidentialdata. That data would be walled off, so thatmembers of the clean team would not haveaccess to it, and only the clean team memberswould be permitted to get involved in thedecision as to whether your client will gohostile on my client. If you want to talk withus about whether folks who are not on theclean team can report on some high-level basisto clean team members about their findings, wemay be able to accommodate that. But I justdon’t think it’s appropriate for your client touse my client’s confidential data to launch ahostile bid for my client.RICK CLIMAN:(Moderator)Joel, we see clean teams used frequently in duediligence investigations. What’s wrong withGar’s proposal? Why not identify the teamthat would make the decisions regarding anyhostile approach your client might want tomake, and have that team walled off from theteam that receives and reviews the targetcompany’s confidential information?JOEL GREENBERG:(Counsel for Buyer)Clean teams work just fine for certain kinds ofinformation, and if we were talking aboutwalling off technical specifications of productsor detailed customer-by-customer analyses ofcosts and revenues, that would probably be

2013]NEGOTIATING ACQUISITIONS OF PUBLIC COMPANIES655acceptable. But what we can’t do is wall offmy client’s board of directors and seniormanagement from being able to have in mind,for example, the synergy estimates developedin the context of my client’s due diligenceinvestigation.When my client’s boardmembers make their decision to go hostile onthe target company, they’re going to know thata year and a half ago we concluded we couldsave a billion dollars a year by combining thesetwo businesses. You can’t erase that. It’s quiterelevant to deal pricing, and that kind of highlevel strategic information is very hard to walloff because inevitably the decision makers whoneed to consider it, at least in a deal thissubstantial to my client, are top-level peoplewho can’t be replicated on two separate teams.RICK CLIMAN:(Moderator)Joel, can you walk us through your suggestedpermitted use language? You did a lot morehere than just eliminate the word “negotiated.”You actually added words like “facilitating,” asin “facilitating a possible transaction.” Isuspect that might tie into things like proxycontests and other hostile tactics that aren’tnecessarily “transactions” per se.JOEL GREENBERG:(Counsel for Buyer)That’s right, Rick. It’s always important whendrafting contractual language to take intoaccount the experience of others, in this casewhat happened with Martin Marietta in theVulcan litigation earlier this year. And some ofthe arguments that were made there—somesuccessful, some ultimately not decided—included such things as the word “between”implying that it is an entity-to-entitytransaction and not a transaction involving adirect approach to stockholders.13 Similarly,words like “negotiating” and “implementing”may not cover a preparatory action we need to13.See Vulcan Materials Co., 56 A.3d at 1106.

656PENN STATE LAW REVIEW[Vol. 117:3take, such as a proxy contest to replace thetarget company’s board members so that wecan get the new board to pull the targetcompany’s poison pill. That proxy contestfacilitates an ultimate deal, but it may verywell not be a “transaction” that’s part of theultimate deal. So, what we have tried to dohere, as Gar did in his language, is be candidand forthright about what we’re seeking toachieve. We want to be able to do things topursue and facilitate a transaction even if thesethings are preparatory in nature and don’tthemselves constitute a “transaction.”Along the same lines, we don’t want to have anotion that the transaction has to be betweentwo entities. A hostile tender offer isn’t atransaction “between” the buyer and the targetcompany. That’s why we said involving thetarget company or any of its stockholders. Andthen, again to avoid any doubt—because quitehonestly it’s not my objective in negotiatingthese things to drive business to my litigationdepartment—we said quite specifically that wecan proceed on an unsolicited or uninvitedbasis.RICK CLIMAN:(Moderator)Joel, the Vulcan case isn’t the first case to pointout some of these key wording distinctions inthe verbiage of confidentiality agreements.Wasn’t there a previous Canadian case thataddressed these issues?JOEL GREENBERG:(Counsel for Buyer)Yes, there was a Canadian case that addressedthese issues. The court in that case basicallytook the use restriction and turned it into aninjunction against a hostile takeover.14 TheVulcan decision has received a lot moreattention than the Canadian case for a couple ofreasons. First, because Delaware is such a key14.See Friendly Tender Offers, supra note 6, at 642 n.45.

2013]NEGOTIATING ACQUISITIONS OF PUBLIC COMPANIES657forum for these types of disputes and, second,because the Vulcan case was litigated verythoroughly.It’s hard to imagine anyarguments that weren’t made by the parties inthat case. The Chancery Court’s opinion is awonderful analysis, provision by provision, ofthings people do in confidentiality agreements.What we’re seeing in the market now arepeople responding to that.If the word“between” can be argued to connote“negotiated,” which was certainly an argumentthat Chancellor Strine found to be valid on thefacts of the Vulcan case,15 then, if you want tobe able to go hostile, you don’t use the word“between.” You use the word “involving.”RICK CLIMAN:(Moderator)Gar, in our hypothetical negotiation, the partieshave agreed to an explicit 15-month standstill.And as Joel pointed out, the narrow userestriction that you put forward could operateas a back-door standstill even after theexpiration of the negotiated 15-month period.That’s because, as a practical matter, it’s veryhard for Joel’s client to go hostile in month 16without using at least some of the confidentialinformation that your client provided to Joel’sclient in due diligence.In an actualnegotiation, would you agree to the expandedpermitted use language [in Exhibit 2] that Joelhas proposed to address this issue?GAR BASON:(Counsel for Target)Yes, I would. If the deal is 15 months for theterm of the standstill, my client shouldn’t belooking for semi-sneaky back-door ways ofextending it.In some senses, this is partly an emotionalissue. Saying that, I don’t mean to downplayit. But in the early phases of the negotiations,when you are having discussions CEO-to-CEO15.See Vulcan Materials Co., 56 A.3d at 1115.

658PENN STATE LAW REVIEW[Vol. 117:3about a friendly deal, to have the buyer’slawyer send over a confidentiality agreementcontaining an explicit acknowledgement thatafter 15 months the buyer might decide to dothis unilaterally and go hostile, that can reallytrigger a negative emotional reaction on thepart of the target company’s CEO. But if thetarget company’s counsel is thoughtful aboutthe issue, it’s not one he will fight hard on.JOEL GREENBERG:(Counsel for Buyer)B.One way this is resolved in the marketplace isto simply make the time periods coterminous,so that the use restriction and the standstillprovision run for the same period of time.Then, I don’t need to fuss about the permitteduse language because the use restrictionterminates when the standstill terminates.Disclosure RestrictionRICK CLIMAN:(Moderator)Now, let’s take a look at the “secondcommandment,” which appears in section 1(b)of the confidentiality agreement. It’s thedisclosure restriction.It says that theprospective buyer may not disclose any of thetarget company’s confidential information,except as permitted in section 4.I turn the page to section 4, Gar, and there I seethat in section 4(a)(iii) you’re permitting theprospective buyer to disclose your client’sconfidential information “to the extent requiredby applicable law or governmental regulationor by valid legal process.” That seems fair. Ifthe prospective buyer is legally required to dosomething, it should not be precluded by thisconfidentiality agreement from doing it. But inthe very next sentence you’ve added someverbiage that I haven’t seen in negotiatedconfidentiality agreements before Vulcan. Thissentence seems to say that, under certaincircumstances, even after the 15-month

2013]NEGOTIATING ACQUISITIONS OF PUBLIC COMPANIES659standstill period expires, the buyer may notmake use of the “required by law” exemptionin clause (iii)(A). And one circumstance underwhich the prospective buyer is prohibited fromusing this “required by law” exemption iswhere the prospective buyer decides to make ahostile tender offer or to accumulate targetcompany shares. Yet, as we’ve just confirmedin the context of discussing the use restriction,beginning in month 16 the prospective buyershould be free to do just about anything of ahostile or coercive nature. So please explainwhat this additional sentence is intended to doand why it’s here.GAR BASON:(Counsel for Target)Well, I admire Joel’s style because, uneducatedas I may have been, I had always thought thatprovisions like section 4(a)(iii) were intendedto address the prospective buyer’s need to beable to respond to a subpoena. But afterreading the lower court’s decision in Vulcan, Irealize that a prospective buyer could arguethat this provision goes further than that. Theprospective buyer could argue that thisprovision comes into play when theprospective buyer unilaterally makes adecision, after the expiration of the 15-monthstandstill period, to go out and buy targetcompany shares. The prospective buyer couldreason as follows: “Well, of course, under theU.S. securities laws, I must either (1) discloseall material nonpublic information I have aboutthe target company before I purchase targetcompany shares, or (2) abstain from purchasingthose shares. And because I want to purchasetarget company shares, I am ‘required bylaw’—by U.S. securities laws—to disclose allmaterial confidential information in mypossession. Section 4(a)(iii)(A) permits me todo just that.”Now it’s not at all clear to me that the

660PENN STATE LAW REVIEW[Vol. 117:3prospective buyer’s argument that thisdisclosure is “required by law” would stand up.In fact, there is authority suggesting thatdisclosure in this context is not “required bylaw.”16 But I’m not inclined to take anychances, especially in light of the Vulcanopinion, and that’s why I put this sentence inhere at the end of section 4(a). I want to makeit clear that Joel’s client can’t decide to gohostile and then use this “required by law”exemption to publish my client’s sensitiveinformation.RICK CLIMAN:(Moderator)Joel, you’ve crossed out [in Exhibit 2] thissentence at the end of section 4(a), so I assumeyou want to retain the flexibility to do justthat—to make any disclosure of confidentialinformation legally required to enable yourclient to proceed with a tender offer. In fact, inyour mark-up [in Exhibit 2], you even addedlanguage, in parentheses at the end of clause(a)(iii), to make it crystal clear that you can dothis.JOEL GREENBERG:(Counsel for Buyer)Correct. I made it clear that my client candisclose confidential information “as requiredby law,” even if the law becomes applicableonly as a result of a specific decision on thepart of my client, such as the decision to gohostile.RICK CLIMAN:(Moderator)Gar, you might use the term “bootstrapping” todescribe what Joel is seeking to do.GAR BASON:(Counsel for Target)That word does, in fact, capture the notion.What Joel is seeking to be able to do reminds16. Chancellor Strine expressly declined to reach this issue in Vulcan Materials Co.See id. at 1135 n.241. Vulcan had argued that Martin Marietta could not “manufacture itsown legal requirement” and then use that requirement to permit disclosure of informationthat was otherwise required to be kept confidential (citing, inter alia, ARTHUR LINTONCORBIN, CORBIN ON CONTRACTS § 76.11; Peckham v. Indus. Sec. Co., 113 A. 99 (Del.1921)). See Vulcan Materials Company’s Post-Trial Brief at 55-56, Martin MariettaMaterials, Inc. v. Vulcan Materials Co., 56 A.3d 1072 (2012) (No. 7102-CS).

2013]NEGOTIATING ACQUISITIONS OF PUBLIC COMPANIES661me of the child who murders his parents andpleads for sympathy from the court becausehe’s an orphan. It’s a classic bootstrap.RICK CLIMAN:(Moderator)Joel . . .JOEL GREENBERG:(Counsel for Buyer)Interestingly, this is one issue that ChancellorStrine avoided in Vulcan. The Chancellordeclined to decide whether voluntary conductthat triggered a disclosure requirement wascovered, because he got to his decision in adifferent way.17 But this issue goes back to thisbasic business premise: there’s no legal waywe can do a hostile offer without disclosing atleast some matters that are protected by theconfidentiality agreement; therefore, theconfidentiality agreement must permit thatdisclosure after the standstill period hasexpired. Take an obvious example: the priornegotiations between the parties regarding apossible friendly acquisition of the targetcompany by my client. The SEC’s regulationsrequire my client to write a “background”section in its tender offer document thatdiscloses these negotiations.RICK CLIMAN:(Moderator)Your point, Joel, is that those prior negotiationsconstitute confidential information under theconfidentiality agreement, but the SEC’s tenderoffer regulations might require disclosure ofthese negotiations if your client decides tomake a hostile tender offer in month 16.GAR BASON:(Counsel for Target)But I think that’s okay. We’ll agree to thatdisclosure. Disclosing past negotiations won’tbe troubling to my client.JOEL GREENBERG:(Counsel for Buyer)But there might be other things that fall intothat category as well. If, for example, my17.See Vulcan Materials Co., 56 A.3d at 1113.

662PENN STATE LAW REVIEW[Vol. 117:3client has worked out synergy numbers basedon confidential information, I don’t see howmy client can go out into the market with atender offer without disclosing those numbers.Are you going to be okay with that too?Bootstrapping may seem to be a bad thing todo, and it’s certainly the prejudicial term agood advocate would use. However, if we goback to the basic business premise that, afterthe 15-month standstill period, my client issupposed to be able to unilaterally launch ahostile tender offer, then my client needs to beable to do the things that go along with that. Ifwe wanted to develop a more refined approach,I would say that you can probably make somedistinction in the confidentiality agreementbetween types of confidential information that,if disclosed, would be really harmful and thosethat would not. If Gar is representing the CocaCola Company as the target of an acquisition, Ido not want or need the right to put the secretformula for Coke Classic in my tender offerdocuments.GAR BASON:(Counsel for Target)Right. That’s not the same thing as disclosingpast acquisition negotiations. There is often anargument made that the prospective buyerneeds to let the target company’s confidentialinformation go stale before initiating a hostilebid. Most targets would not like to see theirraw confidential information disclosed if it’sstill market sensitive.But I agree thatdisclosing past negotiations should not becontroversial. And we would think of a way toaddress the synergies point. But this is whatpushes people towards the solution that Joelarticulated before, which is simultaneoustermination of the standstill provision and otherrestrictions in the confidentiality agreement.

2013]NEGOTIATING ACQUISITIONS OF PUBLIC COMPANIES663JOEL GREENBERG:(Counsel for Buyer)Yes. And clearly, if Gar’s client had disclosedthe secret Coke Classic formula somewhere inthe course of my client’s due diligenceinvestigation, that would be excepted from thetermination of the disclosure restriction.GAR BASON:(Counsel for Target)Right.RICK CLIMAN:(Moderator)Joel, you wouldn’t have seen language like thelanguage Gar included at the end of section4(a) three years ago in an M&A-relatedconfidentiality agreement, would you? Isn’tthis something that target companies are onlynow starting to address in the wake of theVulcan decision?JOEL GREENBERG:(Counsel for Buyer)That’s right. Perhaps target companies shouldhave included this type of language in the past.But, given that the “bootstrap” issue wasargued in Vulcan and Chancellor Strinespecifically declined to decide that issue,18 theVulcan case invites the parties to do someprivate ordering here.GAR BASON:(Counsel for Target)And that “bootstrap” issue has been lurking outthere for a while.RICK CLIMAN:(Moderator)Have you in fact seen an increase in thefrequency with which parties have specificallyaddressed this particular issue since the Vulcandecision, Gar?GAR BASON:(Counsel for Target)I’d say yes, certainly.JOEL GREENBERG:(Counsel for Buyer)I’d say yes too. And I’d also say that a relatedissue the parties are addressing a lot morecarefully now since Vulcan is what it means foran action to be “required by law.” Chancellor18.See id.

664PENN STATE LAW REVIEW[Vol. 117:3Strine went through a detailed nts, on one hand, and what he called“external demands,” like subpoenas, on theother.19And the so-called notice and vetting provisionsthat you often find in confidentialityagreements—the provisions that require theprospective buyer to give advance notice to thetarget company before making certain legallycompelled disclosures of the target company’sconfidential information—also did not get asmuch attention as they should have beforeVulcan. It’s a kind of in

Law School 1977; A.B. Harvard College 1974. 3. Partner, Davis Polk & Wardwell LLP, New York, New York. J.D. Harvard Law School 1978; A.B. Harvard College 1975. . much of our discussion today will also apply to acquisitions structured as one-step mergers. For a good chunk of our session toda