Friday, November 23, 2007
On Wednesday, Cerberus filed suit in New York State court to enforce the terms of its limited guarantee -- the document which Cerberus purports limits its liability under the URI merger agreement to $100 million. This development doesn't mean particularly much for the legal case but it is an interesting new front opened by Cerberus and provides an insight into their strategy. First, let's examine how this effects the legal case. In their complaint, Cerberus asserts that:
Under the Limited Guarantee and Equity Commitment Letter, United Rentals has no right to and therefore may not require Cerberus or its affiliates to fund or finance any transactions contemplated by the Merger Agreement or to bring any claim against Cerberus or its affiliates relating to or arising out of the Merger Agreement other than a claim for non-payment of the Guaranteed Obligations subject to a cap of $100 million.
In its N.Y. suit Cerberus is attempting to leverage the limited guarantee into an interpretation of the merger agreement. But, this is the cart before the horse. The guarantee only comes into play if a payment obligation is triggered under the merger agreement. And whether the merger agreement itself limits Cerberus's liability to only the $100 million or includes a remedy of specific performance is vague itself at best. I therefore suspect that any judge on this N.Y. case will find Cerberus's claims not yet ripe and wait for the Delaware court to interpret Cerberus's obligations under the merger agreement. This is because the application of the limited guarantee only comes into play if the merger agreement obligations are triggered. And for that we need a Delaware ruling. This is not to say that the limited guarantee is not evidence of intent for the contractual provisions of the merger agreement -- it is, and will likely be brought into the Delaware court for such purposes -- rather Cerberus will likely not be permitted to litigate the merger agreement provisions through this N.Y. claim.
Cerberus likely knows this, so the question really is, why bring the suit at all? A couple of thoughts: 1) Cerberus is playing hardball here -- they are putting URI on notice that they will aggressively litigate this dispute to force URI to negotiate, 2) through this filing Cerberus shows what a mess these legal documents are -- again, this will likely push URI towards a settlement, 3) Cerberus can now have a designated New York judge on its case and begin to prep him or her for any possible litigation in New York involving the banks (I haven't seen the financing commitment letters but presume they have a N.Y. choice of forum clause -- there is also a diversity issue I need to look at), and 4) Cerberus gets to show what a big dog it is. Still, while the strategy may work, I am not sure what it bodes for Cerberus's future. Going-forward, parties are going to likely demand tighter restrictions, higher premiums and be less likely to pick Cerberus as a transaction partner on deals. The rumor on The Street is that Cerberus is cutting its losses on URI because of larger failures on other transactions -- this may or may not be true -- but Cerberus may find that, ultimately, its conduct in the URI dispute becomes the longest-lasting wound.
Note on Delaware Trial Date: A Wednesday news article reported that there is likely to be an expedited Delaware court ruling, possibly by December or January, in the URI litigation. The reason given is that "URI envisions an earlier court decision in its pursuit of specific performance, as the drop dead date on financing for the deal is 22 January." Don't bet on it. The banks here (and Cerberus) have no incentive for a quick ruling in this dispute. Therefore, they will likely do what UBS has done in Genesco/Finish Line -- simply extend the drop-dead date to avoid grounds for a premliminary injunction ruling.
Final Note: The Cerberus suit in N.Y. once again highlights the importance for M&A lawyers of ensuring that all of the transaction documents have the same choice of forum clause. Ideally, M&A lawyers should also select only one law to govern all of the transaction documents. I understand in making this second statement that New York law is the choice for bank finance and Delaware increasingly the choice for merger agreements -- but perhaps the solution is to have the provisions in the financing doocuments which mirror the merger agreement provisions (e.g., MAC clauses) be governed by Delaware law and the rest by New York. I need to think about this as it might just make things even more complicated.