On November 19, 2015, in Depomed, Inc. v. Horizon Pharma plc, the Superior Court of California, County of Santa Clara granted Depomed’s request for a preliminary injunction to enjoin Horizon’s hostile exchange offer to acquire Depomed. The injunction was issued based on Horizon’s misuse of Depomed’s confidential information under a pre-existing confidentiality agreement.  Less than one hour after the ruling was issued, Horizon withdrew its bid to acquire Depomed.  The outcome highlights the importance of careful drafting of confidentiality agreements, and the need for companies to regularly monitor compliance with their obligations under pre-existing agreements.

Background:  In 2013, Horizon and Depomed each sought to purchase the U.S. rights to a pain drug called NUCYNTA^® from Janssen Pharmaceuticals.  Both companies signed nondisclosure agreements with Janssen and, subject to the terms of those agreements, were given access to highly confidential information about NUCYNTA for the purpose of investigating a potential acquisition of NUCYNTA from Janssen.  At the conclusion of the bidding process, Depomed was the winning bidder and Horizon a losing bidder.  In connection with the NUCYNTA acquisition, Janssen assigned to Depomed all of Janssen’s rights under the pre-existing confidentiality agreement between Janssen and Horizon.  Less than two months after Depomed completed its acquisition of NUCYNTA, Horizon launched an unsolicited proposal to acquire Depomed in a stock-for-stock transaction.  The Depomed Board of Directors rejected the offer, and over the next few months, Horizon continued its pursuit of Depomed through public proposals and ultimately launching an exchange offer and proxy contest to remove and replace the Board of Directors of Depomed at a special shareholder meeting.

Judicial Action:  Depomed filed a complaint against Horizon seeking a preliminary injunction to enjoin Horizon’s unsolicited bid to acquire Depomed, which Depomed alleged was predicated on Horizon’s improper and unlawful use of confidential information in violation of the non-disclosure agreement that Horizon executed in connection with its due diligence efforts regarding NUCYNTA.  Among other things, Horizon argued that Depomed was not a third-party beneficiary of the Horizon-Janssen non-disclosure agreement and that Depomed did not have the right to enforce any breach of the confidentiality agreement by Horizon.

Judicial Resolution:  In granting the preliminary injunction, the court found that Depomed had demonstrated that it is likely to prevail on its claim that Horizon breached the confidentiality agreement and that although there may be some harm to Horizon from a delay in the special meeting to consider the replacement of Depomed’s directors, the balance of harms weighed in favor of a preliminary injunction because a takeover would leave Depomed with no remedy.

Takeaway:  This decision serves as an important reminder for M&A participants that non-disclosure agreements matter.  Even when a bidder has not previously entered into a traditional standstill provision with a target company, the bidder may still be restricted from taking certain actions.  M&A participants must continue to pay careful attention to “use of information” restrictions in non-disclosure agreements.  Restrictions on the use of confidential information may apply beyond the initial target company, including to future companies that acquire assets that are the subject of information obtained pursuant to a confidentiality agreement.  In this case, Horizon acquired confidential information about NUCYNTA in connection with Horizon’s potential acquisition of that product.  When Depomed acquired NUCYNTA, Horizon’s use of information regarding the product ultimately led to an injunction preventing Horizon from pursuing an acquisition of Depomed.

Companies should continuously monitor their obligations under pre-existing confidentiality obligations with third parties, particularly when considering potential hostile bids. The use of “clean teams,” different outside advisors, and restrictions on the use of previously acquired confidential information may help mitigate the risk of potential breaches and failed M&A opportunities.

Gibson Dunn represented Depomed in its defense against the Horizon bid.

The preceding post is based on a memorandum from Gibson Dunn, which was published on November 20, 2015 and is available here.