Delaware Court Of Chancery Holds Merger Termination Valid After Plaintiffs “Forgot” To Provide A Notice To Extend, But Reserves Decision On Reverse Termination Fee
On March 14, 2019, after a two-day trial, Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery rejected requests by plaintiff Vintage Capital Management, LLC and its affiliates for a declaration that defendant Rent-A-Center, Inc.’s termination of the parties’ merger was ineffective and an order that the parties must proceed with the deal. Vintage Rodeo Parent, LLC v. Rent-A-Center, Inc., C.A. No. 2018-0927-SG (Del. Ch. Mar. 14, 2019). Pursuant to the merger agreement, both parties had a right to provide a notice of extension by the contractual “End Date.” If neither party elected to extend, then either could terminate the agreement thereafter. Plaintiffs argued that both parties had been working toward closing the deal and had expressly recognized that the closing could not occur until after the End Date. On this basis plaintiffs contended that the contractual notice of extension had been effectively provided or waived. But the Court held that defendant’s termination of the merger agreement after plaintiffs apparently “forgot” to provide a notice of extension by the End Date was valid. However, the Court reserved judgment on defendant’s counterclaim for a reverse termination fee pending supplemental briefing, noting that it was “dubious whether the parties meant for a reverse breakup fee to apply in this situation.”
When the parties entered the merger agreement, they knew that the deal would require approval from the Federal Trade Commission (“FTC”) and the review process could be lengthy. Therefore, the agreement provided an End Date of six months from signing, after which either party could terminate. But if the FTC review remained ongoing, either party could extend the agreement by providing a notice of extension. Notices were to be provided in writing and delivered to specified addressees. Separately, the merger agreement required the parties to use “commercially reasonable efforts” toward the closing. Notably, the agreement also contained a provision for a $126.5 million reverse termination fee payable by plaintiffs if the agreement was terminated (including by defendant) under certain circumstances.
As the End Date approached, there was no discussion of termination. Instead, the parties continued to work together toward antitrust approval, integration planning, and arranging financing for the merger. By that time, the expectation, as expressly stated by both parties, was that approval and closing would not occur for another month or more. Because of improved performance, however, defendant’s board had determined to terminate the merger if given the opportunity. But defendant’s board expected that plaintiffs would provide notice to extend. After the End Date passed without a notice of extension, defendant provided a notice of termination and a demand for the reverse termination fee.
The Court rejected various arguments advanced by plaintiffs that the extension notice provision had been satisfied or waived. For example, plaintiffs pointed to an agreement that plaintiffs and defendant entered with the FTC not to close the merger until after a specified period, which ended after the End Date. But the Court found that this did not comply with the unambiguous requirement in the agreement to provide notice of an election to extend the End Date. Likewise, the Court found that the circulation by defendant of financial models indicating a closing date after the End Date did not constitute a written notice of an election to extend by defendant.
The Court also rejected plaintiffs’ argument that defendant’s failure to inform plaintiffs that defendant planned to terminate the merger if able constituted a breach of the obligation to use “commercially reasonable efforts” to consummate the merger. The Court explained that there was no “duty to warn” in the contract and “[c]ommercially reasonable efforts do not require that sophisticated parties remind one another of their contractual rights.” Moreover, the Court added, “[i]f an agreement to use commercially reasonable efforts to comply with obligations in a contract means that a party cannot exercise its bargained-for right to terminate that contract, that bargained-for right would be illusory.” The Court also held that defendant was not estopped from terminating the merger because plaintiffs did not rely to their detriment on defendant’s conduct; instead it appears that plaintiffs “simply forgot” the End Date and its implications.
The Court, however, deferred a decision on the reverse termination fee pending supplemental briefing. Noting that plaintiffs are ready to move to closing, the Court questioned “whether the [reverse termination fee] is applicable here, in light of the implied covenant of good faith and fair dealing.”