SEPTEMBER 2012 SECURITIES

Insider Trading: Tread Cautiously

Page 1

OSC Policy Issues and Concerns Regarding Emerging Market Issuers

Page 5

Confidentiality Agreements: To Include a Standstill or Not ?

Page 8

Securities and other issues of On Record are available on our web site www.bdplaw.com

Securities, Editors-in-ChiefTed Brownebb@bdplaw.com403-260-0298

Securities, Managing EditorRhonda G. Wishartrwishart@bdplaw.com(403)260-0268

Contributing Writers and Researchers:Ted Brown, Ravina Mann, Sylvie Welsh and J.J. Hudolin

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Insider Trading:

Tread Cautiously By Ted Brown and Ravina Mann

Recent decisions of the securities regulatory authorities in Canada relating to insider trading allegations provide valuable lessons and warnings to participants in the Canadian capital markets on the type of activities that can result in allegations of insider trading and potential penalties and sanctions being imposed.

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Insider Trading: The BasicsInsider trading is believed to undermine confidence in capital markets and be manifestly unfair to investors, and is therefore penalized by the securities regulatory authorities in Canada.

The elements of an insider trading offence involve a person in a special relationship with the company in question who has knowledge of inside information which has not been generally disclosed, who:

• purchases or sells securities of the company in question;

• informs another person or company of the inside information before it has been generally disclosed; or

• recommends or encourages another person or company to purchase or sell securities of the company in question.

Under securities legislation in each of the provinces of Canada, harsh sanctions may be imposed for insider trading offences including: imprisonment (maximum of 5 years), fines (maximum of the greater of $5 million or 3 times the profit made or loss avoided), cease trading orders, compensation to investors, or other orders that the securities regulatory authorities or courts consider appropriate.

Breaking Down the ElementsThe test for finding a “special relationship” is simple: a person is in a special relationship with a reporting issuer if, among other things,

• the person or company is a director, officer, employee, other insider, affiliate or associate of the reporting issuer,

• the person or company has engaged or is engaging in any business or professional activity with the reporting issuer,

• the person or company is proposing to make a take-over bid for, or become a party to a reorganization, amalgamation, merger or arrangement or similar business combination with, the reporting issuer, or

• the person or company learns “of a material fact or material change with respect to the reporting issuer from any other person or company who may be in a special relationship with the reporting issuer, and such person or company knows or ought reasonably to know that the other person or company is a person or company in a special relationship with the reporting issuer.1

Although “inside information” is not a defined term under securities legislation, it generally refers to material facts or material changes about a reporting issuer, which have not been generally disclosed. For the successful prosecution of an insider trading offence, the persons putting forth the allegation (who are usually staff of the provincial securities commissions) must prove whether there were material facts, material changes, or both, which were known to the person in the special relationship with the reporting issuer when such material facts or changes were not generally disclosed. A material fact is one that “would reasonably be expected to have a significant effect on the market price or value of the securities”2 while a material change is a change in the issuer’s “business, operations or capital […] that would reasonably be expected to have significant effect on the market price or value of the securities […] or a decision to implement such a change […] made by the directors of the issuer, or by senior management of the issuer who believes that confirmation of the decision by the directors is probable.”3

The materiality test is not as black and white as one would assume, but rather a fact specific objective test of mixed law and fact, to be determined contextually from the viewpoint of a reasonable investor using the facts that were available in the relevant time period. National Instrument 51-201 Disclosure Standards4 sets out a list of factors to be considered in assessing materiality:

• nature of the information;

• volatility of the issuer’s securities;

• prevailing market conditions;

• company size;

• nature of business operations or capital;

• nature of event; and

• consequences to issuer’s business operations or capital.

When a person with knowledge of an undisclosed material fact or change with respect to a reporting issuer trades in securities of the reporting issuer, informs others of the material fact or change or encourages others to trade in securities of the reporting issuer, the person has violated the purposes of securities legislation as such conduct is considered to be contrary to the public interest.5

Recent DecisionsRe Greenway - 7 Degrees of Guilt

In the recent decision, Re Greenway,6 the British Columbia Securities Commission (“BCSC”) highlighted a number of factors critical to the determination of whether a party will be held liable for insider trading, which factors were previously set out in Eron Mortgage Corporation7, and reiterated in several other cases, namely:

1. The seriousness of the respondent’s conduct and the damage done to [the province’s] capital markets;

2. The harm suffered by investors as a result of the respondent’s conduct and the extent to which the respondent was enriched;

3. Factors that mitigate or aggravate the respondent’s conduct;

4. The respondent’s past conduct;

5. The risk to investors and capital markets posed by the respondent’s continued participation in the capital markets;

6. Specific and general deterrence; and

7. Orders made by the Commission in similar circumstances in the past.

Greenway earned a living from finders’ fees and consulting fees from reporting issuers, and from acting as a director or officer of those issuers. Despite being employed in such capacities, Greenway inadvertently acted on insider information due to his ignorance of the rules. Based on an assessment of the aforementioned factors, the BCSC found that Greenway did not intend to profit by trading on inside information, and although his misconduct was serious, it was at the lower end of the spectrum, thereby warranting a lesser punishment. The BCSC penalized Greenway with a one year prohibition from trading and purchasing securities or exchange contracts of any issuer with whom he was in a special relationship and with a relatively insignificant administrative fine.

Re Kapusta: Material or Not Material

In Re Kapusta8, the Chief Executive Officer of Canext Energy Ltd. (“Canext”), Stephen Kapusta (“Kapusta”), and three other Canext employees, were found guilty of insider trading as a result of purchasing Canext shares based on undisclosed information. In early January of 2008, Kapusta obtained the results of a newly drilled well (the “Well”) which indicated that Canext had discovered a new

oil pool (the “Discovery”), at a time when Canext’s production was heavily weighted toward natural gas. Kapusta began communicating this fact to others within the small oil and gas company. Canext issued a news release at the end of February in relation to the results of its independent engineering report. This news release did not specifically highlight the Well or the Discovery, rather the results were embedded in the summary reserve information. It was not until mid-March that Canext issued a news release specifically discussing the Well and the Discovery (the “March News Release”). The following day, the trading price of Canext’s common shares rose by 41%. From the time that drilling had started on the Well in mid-December 2007 to the time of the March News Release, certain directors and officers of Canext had purchased 891,500 Canext shares on the market. The Alberta Securities Commission (the “ASC”) found Kapusta and the other employees had engaged in insider trading.

The ASC concluded there was sufficient information to be considered a material change or material fact at the time Canext had enough information to demonstrate that the Well was capable of and was producing from a new oil pool with estimated resources in place of 40 million barrels. The ASC stated that:

“[t]he test for materiality […] is the reasonably expected effect of information on the market price or value of a security. For listed securities like Canext Shares, this dictates consideration of the reasonably expected response to information on the part of investors or the capital market generally — not merely the wise response of that subset of investors well-versed in oil and gas resource classifications and reserves evaluation.”9

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The ASC outlined General Lessons to be gleaned from its decision, including that a conservative approach should be adopted in arriving at conclusions about materiality in the context of insider trading:

“No company disclosure policy can be a substitute for individual responsibility and attention to this issue. The most advisable course of action for anyone in the position just described is the cautious one: refrain from buying or selling securities of that issuer until certain that the material information has been publicly disseminated. If in any doubt, do not trade. There is nothing punitive, unfair or unduly constraining in this — it demands nothing more of those who may have heightened access to material information than that they recognize participation in the capital market as a privilege, and behave responsibly in the exercise of that privilege.”10

Re Suman: You’re As Guilty As You Look…

In the recent decision Re Suman11, the Ontario Securities Commission (“OSC”) found an employee and his spouse guilty of insider trading based on the communication of undisclosed material information by an employee to his spouse. The trades of the spouse were found to be contrary to the public interest, based on evidence that was largely circumstantial. The OSC concluded that Shane Suman (“Suman”), who was at the time an employee of a division of MDS Inc. (“MDS”), communicated an undisclosed material fact to his wife. The material fact was that MDS was proposing to acquire Molecular Devices Corporation (the “Acquisition”).

Suman learned of the Acquisition by inadvertently seeing documents relating to the deal. In looking at all the circumstantial evidence as follows, the OSC was prepared to infer that Suman and his spouse were guilty of insider trading.

• Suman and his spouse had ample opportunity to view documents relating to the deal;

• Suman had made an unusual investment in a huge volume of MDS options in the five days prior to the deal’s announcement;

• Suman browsed the internet for information related to possible insider trading charges against Martha Stewart;

•Suman denied to the OSC that he had purchased MDS shares altogether and had wiped all the data on his computer after OSC staff contacted him about a trading investigation and expressly warned him not to delete any data or tamper with his office computer; and

• Suman’s purchase of MDS options cost more than the couple’s other assets;

Re Keith: Not Guilty but You Should Have Known Better

In the recent hearing Re Keith12, staff of the ASC alleged that two employees of Berens Energy Ltd. (“Berens”) and their relatives were guilty of insider trading based primarily on circumstantial evidence that the relatives acquired securities of Berens immediately prior to the announcement that Berens had entered into a definitive agreement for the acquisition of Berens by Petrobakken Energy Ltd. Despite the circumstantial evidence presented by ASC staff, the ASC found that there was direct and circumstantial evidence refuting the allegations including that the employees of Berens

were likely not aware of the imminent transaction and therefore could not have informed their relatives of the fact. All allegations of the ASC staff against the employees of Berens and their relatives were dismissed.

Despite the dismissal of the allegations in Re Keith, the ASC did offer some lessons to be learned by the respondents and other participants in the capital markets. In particular, the ASC noted that the trading activity undertaken by the relatives of the Berens employees was not in their own best interests or in the best interests of their relatives. When engaging in the trades involving securities of Berens both relatives were aware that it was a sensitive time for Berens and that their relatives who were employees might be in possession of undisclosed material information relating to Berens. The ASC noted that the relatives of the Berens’ employees should have known better and that such trades may result in the employees and their relatives being exposed to unwelcome public allegations. In conclusion to their salutary lesson, the ASC stated:

“ Appearances can have consequences, so people closely associated with anyone whom they know may be in a position to acquire inside information would be well advised to tread cautiously before trading.”13

Sober ThoughtsAs stated by the BCSC in Greenway:

“ Insider trading is serious, even when small amounts are involved, and the conduct is not intentional or done in ignorance of the rules. Market participants expect that all those trading in a market with integrity have available to them the same material information about the securities traded in that market. When people in a special relationship with an issuer trade while in possession of material information about the issuer that has not been generally disclosed, the public’s perception of the fairness and integrity of capital markets is tainted.”14

These cases reiterate to those engaged in special relationships with issuers and privy to confidential insider information, that insider trading, regardless of the size of trades, will be penalized. In addition, people in special relationships with issuers and their relatives should be conscious of the appearance their trading activity may have in the public eye. Despite an innocent intent the appearance of impropriety may result in unwelcome public scrutiny and possibly even the imposition of sanctions and penalties.

footnotes

1 The Securities Act (Alberta), RSA 2000 c.S-4, s.9 2 Supra, Note 1, s.1(gg) 3 Supra, Note 1, s.1(ff) 4 National Policy 51-201 Disclosure Standards (2002), 25 OSCB 4492 5 Supra, Note 1, s.1.1 6 2012 BCSECCOM 59 para. 21 7 [2000] 7 BCSC Weekly Summary 22 8 2011 ABASC 322 9 Ibid, para 27310 Ibid, para 40611 2012 LNONOSC 17612 2012 ABASC 38213 Ibid, para 23414 Supra, Note 6, para 22

“ Appearances can have consequences, so people closely associated with anyone whom they know may be in a position to acquire inside information would be well advised to tread cautiously before trading.”

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Introduction In the wake of the allegations that Sino-Forest Corporation, a Toronto Stock Exchange listed company with its primary business and assets in China, had falsified documents to inflate assets and revenue, the Canadian Securities Administrators, and in particular the OSC, began to more carefully scrutinize issuers listed on a Canadian stock exchange whose primary business and assets are in a foreign jurisdiction. This additional scrutiny could affect such issuers and their advisors when carrying out a broad variety of activities including preparing financial statements and other continuous disclosure documents, applying to list on Canadian stock exchanges and completing financings.

On July 5, 2011, the Ontario Securities Commission (the “OSC”), in an attempt to address its concerns about emerging market issuers, announced the commencement of a regulatory review of such issuers (the “Review”). In conducting the Review, the OSC staff (the “Staff”) focused on issuers whose mind and management are largely outside of Canada and whose principal active operations are outside of Canada, in regions such as Asia, Africa, South

America and Eastern Europe. The Staff analyzed 24 emerging market issuers (the “EM Issuers”), which were all listed on Canadian exchanges. The OSC’s concerns and findings resulting from the Review are set out below.

General Concerns The Review primarily assessed the quality and adequacy of the EM Issuers’ disclosure and corporate governance practices, as well as the adequacy of the gatekeeper roles played by auditors, underwriters and exchanges. The Review advanced the OSC’s goal of providing investors with a wide variety of investment opportunities while balancing those opportunities with appropriate levels of investor protection. In order to conduct the Review, the Staff contacted the EM Issuers and their advisors as well as organizations such as the Canadian Public Accountability Board, Canadian exchanges and other provincial securities regulators.

The Review aided the Staff in identifying areas in the regulation of emerging market issuers that they believe require improvement. In March 2012 the OSC published OSC Staff Notice 51-719 (the “Notice”) which discusses the findings of the

Review and the key policy issues that the OSC believes should be further addressed in relation to the following four areas:

1. the level of governance and disclosure by emerging market issuers;

2. the adequacy of the audit function pertaining to emerging market issuers;

3. the adequacy of the due diligence process conducted by underwriters emerging market issuers’ securities offerings; and

4. the nature of the exchange listing approval process.

The Staff was primarily concerned with the level of rigor and independent-mindedness applied by boards, auditors and underwriters in performing their roles. The Staff stated that the Review identified a “form over substance” approach implemented by those parties, and suggested that those parties should be more thorough when dealing with emerging market issuers in the future. The Staff expects that emerging market issuers and their auditors, underwriters and other advisors, as well as the exchanges, will address the concerns stated in the Notice and take the necessary steps to improve their practices accordingly.

OSC Policy Issues and Concerns Regarding Emerging Market Issuers By j.J. Hudolin

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The Review primarily assessed the quality and adequacy of the EM Issuers’ disclosure and corporate governance practices, as well as the adequacy of the gatekeeper roles played by auditors, underwriters and exchanges.

The EM Issuers’ Governance and DisclosureThe Staff believes that the level of engagement by boards and their committees, in respect to overseeing management and assuming responsibility for the stewardship of the EM Issuers with public investors, was deficient in some cases. Examples of such deficiencies include very little contact between directors and senior management running the business in the emerging market jurisdiction, lack of awareness regarding the EM Issuer’s cultural and business practices in those jurisdictions and, to the extent there was awareness, a lack of adjustment in board oversight to reflect those practices.

In the Notice, the Staff questions the appropriateness and transparency of certain EM Issuers’ corporate structures, some of which involved the presence of multiple legal entities supporting a single operating business. Complex business structures can be difficult to describe to investors and can impact the ability of directors to properly oversee management or understand an issuer’s operations. The Staff was primarily concerned with the necessity of complex corporate structures with respect to the EM Issuers’ underlying business models and the quality of controls in place to manage the risks associated with such structures.

The oversight role of EM Issuers’ boards and audit committees, with respect to related party transactions, was another concern expressed by the Staff. The Notice states that certain EM Issuers could have used a more appropriate degree of independent-mindedness when dealing with related party transactions. Particularly, the Staff notes concerns with the extent and frequency of related party transactions, the quality of management and board processes in place to identify and approve related party transactions and the completeness and clarity of related party disclosures.

The Notice provides that directors of emerging market issuers should sufficiently understand the political and cultural risks impacting the issuers and assess those risks from the viewpoint of the emerging market and North American jurisdictions. The Staff expected to see internal controls adjusted to reflect the unique risks associated with emerging market operations, but

this was not always observed amongst the EM Issuers. Risks associated with political factors, legal and regulatory frameworks, movement and conversion of foreign currency and legal title to assets were noted as risks that may not be appropriately addressed by certain EM Issuers. The Staff also notes that the EM Issuers’ risk disclosures were not specific or relevant enough to be sufficiently helpful and informative to investors.

The Staff suggests that emerging market issuers establish organizational guidelines in order to clarify the responsibilities of boards and their committees in understanding the issuers’ business, operating environment and risks, and to clarify the expectations of management in conducting reasonable due diligence. In addition, the Notice provides recommendations that emerging market issuers increase disclosure to investors by clarifying complex corporate structures and their purpose, and explaining unique risk factors that are pertinent to emerging market issuers. The Staff also recommends that emerging market issuers consider a minimum language competency for Canadian-resident board members.

The Audit FunctionThe Staff expressed a concern that the level of professional scepticism exhibited by auditors, during the Review, was generally lacking. The Staff indicates that the EM Issuers’ auditors could have done a better job verifying and challenging the information received from management. The Staff also identified issues pertaining to the sufficiency of work done by auditors to substantiate their conclusions and mitigate risks; broad-based auditor conclusions, unsupported by underlying analysis, were observed during the Review.

The Staff also observed auditors with an insufficient understanding of the legal environment in the emerging market jurisdiction, including procedures to obtain licenses and permits. In addition, a lack of communication between foreign component auditors and group auditors was identified. The Staff believes that communication is essential for the group auditors to understand what the foreign component auditors learned while reviewing operations in the

emerging market jurisdictions. The Staff expects to see more group auditor executives visiting foreign operations and interacting with issuers’ management. Lack of communication between these parties was also a result of language barriers, which impacted auditors’ ability to communicate with management and examine foreign documentation. Another significant concern noted during the Review was the inability to remove certain working papers from emerging market jurisdictions. As a result, group auditors could be prevented from including key papers in their files and North American regulators could be prevented from reviewing key files.

The Staff recommends that these audit concerns be addressed by increasing discussion and the dissemination of information between securities regulators, the emerging market issuers and the audit oversight bodies. It is suggested that these parties work together to determine certain standards that should be developed (in accordance with applicable laws and regulations), in order to ascertain the sufficiency of the audit review process and provide necessary disclosure to investors. The Staff suggests that emerging market issuers develop policies to address what should be done when regulators are unable to access foreign working papers.

The Underwriters’ Due Diligence ProcessAs there are no standard requirements for the conduct of due diligence by underwriters, Staff observed that underwriters for the EM Issuers adopted a wide array of policies, procedures and practices. Staff noted situations where certain risks were not documented and, where they were, there was little evidence of follow up in the due diligence materials. For example, Staff believed that certain responses to underwriters’ questions and other “red flags” should have raised scepticism, yet they were not pursued any further. In addition, the Staff witnessed situations where site visits were unsuccessfully attempted and not rescheduled or followed up on during the remainder of the due diligence process.

The Review also identified deficiencies arising from a lack of documentation pertaining to meetings, site visits and bring-down calls.

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As a result, the Staff notes that it was not always evident that the underwriters’ internal processes for the approval of offerings were followed. In terms of the documentation of due diligence calls, the Notice indicates that, at times, the names of participants and written transcripts were not provided. The Staff also states its concern with insufficient documentation and discussion of the risks associated with the EM Issuers’ operations. Where underwriters’ due diligence policies addressed certain risks, those risks were not always taken into account when conducting the due diligence process.

The Staff recommends that a consistent and transparent set of requirements be established for the conduct of due diligence by underwriters, which should include a process that addresses, among other things, the issuer’s operational structure, internal controls, risk management and business environment, as well as translation and foreign language issues and related party transactions.

The Exchange Listing Approval ProcessThe Staff suggests that a re-examination of exchanges’ policies regarding emerging market issuers may be warranted in light of its increased understanding of emerging market issuer risks. The Notice indicates that there appears to be no requirement for an emerging market issuer, with primary listing in Canada, to maintain a meaningful “Canadian presence.” The Staff has also noted its concern with the exchanges’ broad discretion in applying their listing requirements and the lack of public disclosure pertaining to the waiver of listing requirements for certain issuers. Lastly, the Staff expresses concerns with the exchanges’ reliance on outside experts to conduct due diligence regarding prospective listings. There does not appear to be publicly available information regarding experts’ roles in new listings or their due diligence reports.

The Staff recommends that exchanges reassess their policies regarding the above matters and provide greater transparency with respect to the waiver of listing requirements.

IntroductionIn the recent U.S. case of Martin Marietta Materials, Inc. v. Vulcan Materials Company1 (“Martin Marietta/Vulcan”) the Delaware Court of Chancery issued a four month injunction preventing Martin Marietta Materials, Inc. (“Martin Marietta”) from proceeding with a $5.3 billion hostile takeover bid to acquire its rival in the sand and aggregate industry, Vulcan Materials Company (“Vulcan”). The Court found that in making the hostile bid Martin Marrietta had violated the terms of certain confidentiality agreements between Martin Marietta and Vulcan. The decision was later affirmed by the Delaware Supreme Court2. The decision is of particular interest to participants involved in Canadian merger and acquisition activity as the Delaware Court of Chancery relied on the 2009 decision of the Ontario Superior Court in, Certicom Corp. v. Research in Motion Ltd.3 (“Certicom/RIM”), in which the Court permanently barred Research in Motion Ltd. (“RIM”) from making a hostile take-over bid of Certicom Corp. The decisions of the Delaware Courts and the Ontario Court are particularly significant due to the fact that the confidentiality agreements in question had no explicit standstill provisions in effect at the time of the impugned activity.

FactsDelaware –Martin Marietta/Vulcan

In 2010, Martin Marietta and Vulcan began discussing the possibility of a business combination with Vulcan. The parties entered into two confidentiality agreements as each party desired to protect against misuse of information shared with a competitor during negotiations. During the negotiation of these confidentiality agreements, Martin Marietta was concerned both with broadening the information subject to restrictions and increasing restrictions on the use of confidential information. Specifically, the confidentiality agreements prohibited the parties from using or disclosing the other’s material for any purpose other than evaluating a “Transaction”. Moreover, a Transaction was defined as a “possible business transaction between [Martin Marietta] and [Vulcan].” The confidentiality agreements did not contain an explicit standstill provision.

Shortly after the parties entered into the confidentiality agreements, negotiations between the parties halted as the market conditions made the merger less desirable for Vulcan. When Vulcan cooled to the idea of a merger, Martin Marietta launched a hostile takeover bid to acquire Vulcan and proxy contest to elect new members to the Board of Directors of Vulcan.

Ontario – Certicom/RIM

The facts in the Certicom/RIM decision are very similar to the facts in the Delaware case. Certicom and RIM had a commercial relationship and had entered into a series of non-disclosure agreements over a several year period. In 2007, the parties began discussions about the possibility of a business combination and entered a non-disclosure agreement which contained a specific standstill provision. All of the confidentiality agreements entered into between Certicom and RIM contained customary provisions restricting the use of the confidential information for the purposes as set out in such confidentiality agreement, including in one instance the purpose of “assessing the desirability or viability of establishing or furthering a business or contractual relationship between the Parties which may include…some form of business combination between the Parties...” In 2008, after the expiry of the standstill provision but while the other provisions relating to the use of confidential information remained in effect, RIM launched a hostile take-over bid.

Delaware and Ontario Decisions

The Courts in both the Martin Marietta/Vulcan and the Certicom/RIM decisions found that the provisions in the confidentiality agreements relating to use of the confidential information between the parties prohibited the parties from using confidential information for any transaction other than a friendly, negotiated transaction. Therefore, the use of confidential information provisions in the confidentiality agreements operated as a standstill even though no explicit standstill was in effect at the time.

In coming to the decision in the Martin Marietta/Vulcan case, the Court considered whether the hostile takeover bid constituted a “possible business transaction between [Martin Marietta] and [Vulcan]” within the

8 SECURITIES

Confidentiality Agreements: To Include a Standstill or Not?By Ted Brown and Sylvie J.M.Welsh

meaning of the confidentiality agreements. Vulcan took the position that the hostile takeover bid was not a business transaction between the two companies as Vulcan’s board had not approved the bid. Furthermore, Vulcan argued that the confidentiality agreements permitted the use of confidential information only for a consensual transaction. In contrast, Martin Marietta took the position that the hostile takeover bid was a business transaction between the two companies as it would result in a combination of the companies. After reviewing the language in the confidentiality agreements, the Court concluded that the language was ambiguous and both positions were plausible readings. Thus the Court turned to extrinsic evidence including in-court testimony, interim drafts of the confidentiality agreements, history of the discussions/negotiations between the parties and conduct of the parties to determine their intent. Ironically, Martin Marietta, the hostile bidder, was the party which initially most feared a hostile approach and during the negotiations of the confidentiality agreements, made changes that ultimately weakened their position in the litigation. Specifically, Martin Marietta changed the definition of “Transaction” from “a business combination involving” to “a business combination between” the parties. Ultimately the Court agreed that Vulcan’s interpretation captured the parties’ intent and issued an injunction against Martin Marietta barring them from proceeding with the hostile bid and the proxy contest for a period of four months.

In the Certicom/RIM decision, the Court agreed with Certicom’s position that despite the fact that the standstill provision had expired, RIM was still offside the provisions of the non-disclosure agreements because RIM had used the confidential information it obtained from Certicom to decide whether to launch the hostile bid. The word “between” in the use of confidential information provision was a key consideration for the Court. The Court considered the dictionary definition of the word “between” and determined that the manner in which the word was used in the use of confidential information provisions in the non-disclosure agreements prevented RIM from proceeding with a take-over bid. This would be the case unless Certicom consented to, or endorsed, the

transaction and in that manner participated with RIM in RIM’s bid. The Court issued a permanent injunction against RIM barring them from ever making a hostile bid for Certicom.

Lessons Learned from Certicom/RIM and Martin Marietta/VulcanWhen negotiating and entering into a confidentiality agreement the parties need to carefully consider some of the following lessons learned from the Martin Marietta/Vulcan and the Certicom/RIM decisions:

• Potential bidders need to carefully consider whether there is any possibility that they may want to make a hostile bid of a target. If so, they may want to avoid entering into a confidentiality agreement with the target or ensure that any confidentiality agreement does not contain either an explicit or implicit standstill provision.

• When entering into confidentiality agreements, parties must also consider that if the terms in the agreement are vague or ambiguous, a court may consider extrinsic evidence to determine the intent of the parties. As is evident from Martin Marietta/Vulcan, this is important even when a confidentiality agreement does not have a standstill provision.

• Both the target and the bidder should carefully consider whether the intent of the confidentiality agreement is to restrain a bidder from making a hostile bid and if so to ensure the agreement clearly reflects that intent.

• Parties should also consider the duration of the confidentiality obligations imposed by the agreement. Despite the fact that a standstill provision may have an expiry date, if the use of confidential information provision has no such expiry date or expires later than the standstill provision, a bidder may be prevented from making a hostile bid even after the expiry of the standstill provision.

• The decisions suggest that a company that creates a firewall or uses a “clean team” could possibly launch a hostile takeover bid after obtaining confidential information. By creating a firewall or clean team, the hostile takeover bid would have been organized and prepared by persons or advisors not originally involved in the friendly negotiations and who would not have access to the confidential information. However in practice this might be hard to implement because senior executives are likely to be involved in both the friendly negotiations and hostile transaction.

ConclusionConfidentiality agreements are an important tool in merger and acquisition discussions for both the potential acquiror and the target. They enable the potential acquiror to obtain the necessary confidential information about the target to assist the acquiror in determining whether to proceed with a potential business combination. Confidentiality agreements enable the target to share confidential information with a potential acquiror in order to increase the chances that the acquiror will make a bid. The sharing of such confidential information can potentially increase the price the acquiror is willing to pay while still providing some protection that the confidential information will not be used for purposes the target has not approved. However, the decisions in Martin Marietta/Vulcan and Certicom/RIM demonstrate that confidentiality agreements should not be entered into lightly as such confidentiality agreements may impose obligations and restrictions on the parties far beyond what is originally contemplated.

Footnotes

1 Martin Marietta Materials, Inc. v. Vulcan Materials Company, Civil Action No. 7102-CS (Del. Ch. May 4, 2012)

2 Martin Marietta Materials, Inc. v. Vulcan Materials Company, No. 254, 2012 (Del. Sup. Ct. July 10, 2012)

3 Certicom Corp. v. Research in Motion Ltd. (2009) 94 O.R. 3d 511

9

Confidentiality Agreements: To Include a Standstill or Not?By Ted Brown and Sylvie J.M.Welsh

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