Chancery Declines to Require Specific Performance in a Case of Buyer’s Remorse

On December 21, 2007, Chancellor William B. Chandler issued his post-trial opinion in United Rentals, Inc. v. RAM Holdings Corp. The suit, which has been closely monitored by members of the M&A bar and the business press, sought specific performance of a merger agreement whereby Cerberus (through wholly-owned subsidiaries known as “RAM”) would have acquired United Rentals (“URI”) for $34.50 per share in cash. As described by the court, “the dispute between URI and Cerberus [was] a good, old fashioned contract case prompted by buyer’s remorse.”

Nearly four months after agreeing to acquire URI on July 22, 2007, RAM sent URI a letter advising that it was not prepared to proceed with the acquisition on the original terms, but was willing to re-negotiate the price or simply pay URI a $100 million “reverse” termination fee to walk away from the deal. The central issue in the case was whether two terms of the merger agreement– section 9.10 (entitled “Specific Performance”) and section 8.2(e) (entitled “Termination, Amendment and Waiver”)–provided URI with the right to seek specific enforcement of the deal, or whether RAM had the ability to walk away from the deal upon payment of the $100 million termination fee.

Section 9.10 expressly invested URI with a right to seek specific performance. However, section 9.10 explicitly states that it is “subject in all respects to section 8.2(e) hereof, which Section shall govern the rights and obligations of the parties . . . under the circumstances provided therein.” Section 8.2(e) describes the $100 million termination fee payable to URI as the “sole and exclusive” remedy against RAM under the merger agreement in the event of a termination; and, critically, further stated that:

In no event, whether or not this Agreement has been terminated pursuant to any provision hereof, shall [RAM or Cerberus] . . . be subjected to any liability in excess of the [termination fee] for any or all losses or damages relating to or arising out of this Agreement or the transactions contemplated by this Agreement, . . . and in no event shall [URI] seek equitable relief or seek to recover any money damages in excess of such amount from [RAM or Cerberus].

URI contended that specific performance under section 9.10 remained a viable remedy despite the language of section 8.2(e), in part because the $100 million termination fee was the “sole and exclusive” remedy only in the event of a “Termination” (as defined in the merger agreement) and not a breach of the agreement. In contrast, RAM argued that because section 9.10 is “subject in all respects to section 8.2(e)”, the terms of section 8.2 control, and effectively nullify any right to specific performance that may have been authorized by section 9.10.

The Court held that the meaning of the provisions was ambiguous, and thus denied a motion for summary judgment filed by URI (calling it a “close call”). The parties proceeded to a two-day trial where extrinsic evidence (including the negotiating history between the parties and their respective advisors) was extensively scrutinized by the Court.

After trial, the Court concluded that URI failed to demonstrate that the common understanding of the parties was that the agreement provided for specific performance. The Court found that the trial evidence revealed “a deeply flawed negotiation in which both sides failed to clearly and consistently communicate their clients’ positions.” As a result, the Court was required to employ the “forthright negotiator” principle, which provides that, “in cases where the extrinsic evidence does not lead to a single, commonly held understanding of a contract’s meaning, a court may consider the subjective understanding of one party that has been objectively manifested and is known or should be known by the other party.” Applying this principle, the Court concluded–based on a painstaking review of the negotiation history between the parties’ advisors–that URI did not adequately communicate its belief that the merger agreement provided for specific performance, but that RAM did adequately communicate its view that section 8.2(e) eliminated any right to specific performance. (The Court did comment, however, that RAM could have avoided the dispute simply by striking section 9.10.)

Ultimately, the Court concluded that RAM and its attorneys “aggressively negotiated” the merger agreement, and throughout the negotiation process, “communicated their intentions and understandings to URI.” However, “[d]espite the Herculean efforts of its litigation counsel at trial, URI could not overcome the apparent lack of communication of its intentions and understandings to RAM.” In the end, the Court found that:

Even if URI’s deal attorneys did not affirmatively and explicitly agree to the limitation on specific performance as several witnesses allege they did on multiple occasions, no testimony at trial rebutted the inference that I must reasonably draw from the evidence: by July 22, 2007, URI knew or should have known what Cerberus’s understanding of the Merger Agreement was, and if URI disagreed with that understanding, it had an affirmative duty to clarify its position in the face of an ambiguous contract with glaringly conflicting provisions.

A few preliminary observations can be made about the United Rentals decision. First off, because the decision turns on the unique negotiating history of this particular transaction, it is difficult to discern any sweeping rules or principles from the Court’s opinion. The decision is nevertheless important, and a must-read for all deal lawyers. It serves as an eye-opener about the lengths that Chancery will go to scrutinize the written and oral communications of the advisors to parties to a merger agreement. (This is certainly something for all deal lawyers to keep in mind the next time they are exchanging drafts of a merger agreement, e-mails about particular provisions, or other communications with the other side. These documents may end up as exhibits in a trial where they will be called to testify.) In addition, the Court’s decision suggests that, when faced with an ambiguous contract provision, a party may have an affirmative duty to clarify its position when it knows (or should have known) that the other party has a different understanding about the meaning of the provision.

Chancellor Chandler’s opinion is available at this link.