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Monday, November 26, 2007

Further Thoughts on URI/Cerberus

I thought I would add a few more thoughts on the the URI/Cerberus dispute in light of the N.Y. complaint filed on Wednesday.

N.Y. Complaint

Having reread Cerberus's complaint, I still think it is a non-event (see my initial thoughts here).  Cerberus is seeking:

a judicial declaration that, under the terms of the Limited Guarantee and the Equity Commitment Letter, Cerberus Partners and CCM cannot be compelled to do so, and that Cerberus Partners can be compelled only to pay damages in an amount not to exceed $100 million.

The plaintiffs in this lawsuit are not RAM Holdings, Inc. and RAM Acquisition Corp. -- the entities which Cerberus has created to complete the URI acquisition and who are the parties to the merger agreement.   Rather, the plaintiffs here are the ultimate Cerberus funding entities.  Generally speaking, if URI is right and the merger agreement requires specific performance, the RAM entities would then enforce the equity commitment letter to compel Cerberus to finance this portion of the deal.  But if Cerberus's suit here is successful, then the equity financing is unavailable even if URI wins in Delaware and Cerberus is thus liable for only the $100 million it guaranteed. 

Cerberus's argument simply doesn't work.  If the merger agreement indeed contemplates specific performance, then the RAM entities should be able to enforce the equity commitment letter.  Cerberus attempts to side-step this by referencing a clause in the equity commitment letter which states that Cerberus shall "not, under any circumstances, be liable under the Equity Commitment Letter for any costs or damages to any person, including RAM Holdings and URI".  Yet, specific performance can be argued here not to be a damages remedy -- and if the merger agreement does contemplate specific performance, I find it hard to beleive that the parties contemplated that the right would then be rendered meaningless by subjecting the equity commitment letter to the guarantee.       

Further Thoughts on the Merger Agreement

On this point, Section 9.10 of the merger agreement, the specific performance clause, contains a clause which reinforces URI's argument that specific performance is unavailable only if it chooses to terminate the merger agreement. The last sentence of Section 9.10 provides:

The provisions of this Section 9.10 shall be subject in all respects to Section 8.2(e) hereof, which Section shall govern the rights and obligations of the parties hereto (and of the Guarantor, the Parent Related Parties, and the Company Related Parties) under the circumstances provided therein."

Interestingly, when quoting Section 9.10 in its New York complaint, Cerberus specifically excluded the underlined language. I was initially a bit skeptical of URI's argument that the merger agreement should be read so that specific performance is unavailable only if they choose to terminate this agreement.  But if this clause of Section 9.10 is read with Section 8.2(e) there is a good argument that, with one exception, section 8.2(e) is solely applicable to the situation where URI has terminated the agreement.  The one exception is what I spoke about last week -- The lead-in to the last sentence of Section 8.2(e) "[i]n no event, whether or not this Agreement has been terminated pursuant to any provision hereof," to the $100 million dollar limitation and inclusion of "equitable" relief in that sentence.  This really muddles everything.  Still, the first clause of the last sentence of Section 8.2(e) includes the words “whether or not this Agreement has been terminated” whereas those words are not included in the second clause of the last sentence of Section 8.2(e), which references equitable remedies. It could be argued that the words “whether or not this Agreement has been terminated” were needed so that the first clause of the last sentence would apply even if the agreement were not terminated.

This jibes with my initial point that if the limitation on equitable remedies in Section 8.2(e) were intended to be an outright ban on specific performance then the specific performance right in Section 9.10 would be meaningless.  So again, I think that the agreement is unclear at best, but after reflecting on it over the weekend, I think the better reading of the agreement is that URI can either (i) terminate the merger agreement and collect $100M or (ii) exercise its specific performance rights to compel Cerberus to draw down the financing and then close the deal. The termination fee provision only excludes the use of specific performance where URI has terminated the deal. In other words, URI cannot collect $100M and then seek additional damages or further equitable relief. This makes sense  -- Cerberus should not be required to pay the termination fee and then be subject to additional legal remedies. But if URI does not terminate the deal, then specific performance is fair game. 

The only hitch is that darn lead-in to the last sentence of Section 8.2(e).  And that is what throws everything a bit off and why this is bound for a trial on the parol evidence (or more likely settlement).

Trial Date

The other day I also stated the following: 

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 BUS has done in Genesco/Finish Line -- simply extend the drop-dead date to avoid grounds for a preliminary injunction ruling."

Here, note that Section 6.10(a) of the Merger Agreement does not change my view.  It states:

Parent shall not, and shall not permit Merger Sub to, agree to or permit any amendment, supplement or other modification of, or waive any of its rights under, any Financing Commitment or any definitive agreements related to the Financing, in each case, without the Company’s prior written consent (which consent shall not be unreasonably withheld or delayed), except any such amendment, supplement or other modification to the Debt Financing Commitments that would not reasonably be expected to prevent, materially impede or materially delay the consummation of the Debt Financing or the transactions contemplated by this Agreement. . ."

It could be argued that the banks postponing the drop-dead date for the financing is an amendment or waiver requiring URI's approval.  URI could then argue that such an agreement would damage it therefore justifying the irreparable harm for a preliminary judgment.  I'm skeptical -- if URI is going to be harmed by the delay, it can make a motion now for a preliminary injunction -- it may do so, but will only proceed if it thinks the facts as they are (prior to discovery) will justify it.  The drop-dead date on the financing doesn't play into this.  And it is hard to believe that URI can get a preliminary injunction for an issue made by its own refusal to grant a waiver or modification. 

http://lawprofessors.typepad.com/mergers/2007/11/further-thought.html

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