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Thursday, November 29, 2007

URI's Argument

In light of the filings in the past two weeks and the fleshing out of the issues, I thought I would take the opportunity to set forth URI's argument for specific performance. 

The Fundamental Issue

The problem for Cerberus is that their interpretation of all the documents (the Merger Agreement, The Equity Commitment Letter and the Limited Guarantee) results in a key provision within Section 9.10 of the merger agreement being rendered meaningless – either that cannot have been the intention or it was very sloppy lawyering by URI’s M&A counsel and Cerberus managed to pull one a fast one on them (i.e., by “giving” them specific performance but not making available any way for URI to force RAM Holdings to force Cerberus to fund the equity).  Ultimately, though, there is ambiguity here that will force Judge Chandler to make a decision based on parol evidence -- but in the absence of parol evidence (something I believe may be the case) it would appear that URI has the better argument as follows: 

The Merger Agreement

The fundamental argument that URI is putting forth is that Section 8.2(e) of the merger agreement (limitation on Parent (i.e., RAM Holding), Cerberus, et al's liability to $100 million) is applicable only if URI terminates the agreement.  Otherwise, Section 9.10's provisions for specific performance govern.  This argument can be broken down as follows:

  • Section  9.10 – the last words are “under the circumstances provided therein” – one could read this to say that Section 8.2(e) is not meant to govern 9.10 in all circumstances but only in the circumstances provided in Section 8.2(e), otherwise why not have just end the last sentence in Section 9.10 before the words “under the circumstances provided therein”? [NB. When quoting Section 9.10 in its New York complaint, Cerberus specifically excluded the underlined language.]
  • Section 8.2(e)(last sentence) – the last sentence is actually two sentences joined by an “and”. The first part says “In no event, whether or not this Agreement has been terminated…” but the second part starts at “and in no event shall the Company seek equitable relief or seek to recover money damages in excess of such amount…” – this second part repeats the “in no event” qualifier but does not repeat the “whether or not this Agreement has been terminated” qualifier (i.e., URI will argue why repeat lead in language but fail to repeat language which immediately follows it?).  Under this interpretation, this second part has to do exclusively with circumstances where the merger agreement has been terminated (Section 8.2(e) is after all in section 8, which is all about termination). As to the first part, this has to do with not suing Cerberus/Parent for more than $100 million in connection with “any or all losses or damages”, but URI is not suing for losses or damages but rather for enforcement of the merger.
  • Section 8.2(e) first sentence – “for any and all loss or damage suffered as a result thereof…” – it seems the antecedent of “thereof” is “termination”, which bolsters URI’s argument

The problem with this argument is that the last sentence of Section 8.2(e) was not split -- you have to jump to that conclusion to adopt this interpretation.  And if you do not split it that way then the second part's inclusion of "equitable relief" is problematical.  Still it boils down to contract interpretation and if you do adopt this reading you ultimately come back to the fact that this would render Section 9.10 meaningless something the Delaware court will not do under basic contract interpretation rules.  In recent cases, Delaware has emphasized objective basic contract interpretation (Seidensticker v. The Gasparilla Inn; West Willow-Bay Court LLC. v. Robino Bay Court Plaza LLC)-- this supports URI's legal position. 

The Equity Commitment Letter

The third paragraph of the equity commitment letter states:

There is no express or implied intention to benefit any third party including, without limitation, the Company and nothing contained in this Equity Commitment Letter is intended, nor shall anything herein be construed, to confer any rights, legal or equitable, in any Person other than Parent. Under no circumstances shall the Equity Sponsor be liable for any costs or damages including, without limitation, any special, incidental, consequential, exemplary or punitive damages, to any Person, including the Parent and the Company, in respect of this Equity Commitment Letter; and any claims with respect to the transactions contemplated by the Merger Agreement or this Equity Commitment Letter shall be made only pursuant to the Guarantee to the extent applicable.

URI will argue the first part is irrelevant because it refers to “costs or damages” and they are dealing rather with a claim of specific performance by Parent against Cerberus; the second part says “any claims with respect to the transactions…shall be made only pursuant to the Guarantee, to the extent applicable” – but nothing in the limited guarantee prevents Parent from getting specific performance against Cerberus, or indeed even at all deals with Parent’s rights of specific performance against Cerberus.  Here URI will argue that the qualifier of “to the extent applicable” kicks in.  Parent in fact has no claim at all against Cerberus under the limited guarantee – it’s not dealt with because Parent is not a party to the limited guarantee and the purpose of the limited guarantee was not designed to even address Parent’s rights as against Cerberus.  Alternatively, Cerberus will argue the exact opposite -- "damages" does indeed include specific performance in the first part, and "to the extent applicable" is meant to read that even Parent can't bring any claims under the equity commitment letter.

Ultimately, I think that if you read all the words together, they stand for URI's proposition that claims for the termination fee (and other expenses payable under the guarantee) must be made through the limited guarantee.  But again you have to stretch a bit to read the agreement this way.

The Limited Guarantee

  • Section 4(b) of the limited guarantee (No Recourse) is the key section. It deals with URI’s rights against Cerberus, not with Parent’s rights against Cerberus, nor with URI’s rights against Parent (in fact, this is expressly carved out). So assuming Judge Chandler agrees with URI's reading of the merger agreement and limited guarantee, you then look at the equity commitment letter to see if Parent has the right to specifically enforce the Cerberus commitment to inject equity. And so, we are back to the equity commitment letter's statement that “and any claims with respect to the transactions contemplated by the Merger Agreement or this equity commitment letter shall be made only pursuant to the limited guarantee to the extent applicable” – but URI will argue that Parent cannot make a claim against Cerberus under the limited guarantee because Parent is not a party to that agreement and that agreement was never intended to govern the relations between Parent and Cerberus, so it could not have been intended that the equity commitment letter requires Parent to make a claim against Cerberus pursuant only to the limited guarantee, because that is non-sensical and so cannot have been the intent.
  • Cerberus's counter-argument:  If you read the equity commitment letter this way, then in the 3rd paragraph, last part beginning “and any claims…”, this argument would seem to imply that, since Parent cannot make any claims pursuant to the limited guarantee (because it is not a party), this sentence must be addressing someone else (i.e., URI) but URI is in turn not a party to the equity commitment letter, so what’s the point of this sentence?
  • URI's counter-counter argument:  One possible explanation is provision 4(a) of the limited guarantee.  This provision talks about not going after Cerberus affiliates whether by or through a claim by or on behalf of Parent – which seems to contemplate the idea of a direct claim by Parent, but since Parent is not a party to the limited guarantee, they have to catch this problem by wrapping it up in this “and any claims…” sentence in the equity commitment letter. Furthermore, Cerberus is liable in certain circumstances for up to $100 million per the limited guarantee and yet this sentence in the equity commitment letter begins “Under no circumstances shall the Equity Sponsor be liable for any costs or damages…to any person, including the Parent and the Company, in respect of this ECL”, which, if ended there, would clearly make no sense in conjunction with the $100 million provisions in the limited guarantee and in the merger agreement, and so when we read the follow-on language of “and any claims….” it becomes clear that all this section is saying is that Cerberus is indeed liable for up to $100 million in liquidated damages if the circumstances provided for in the Guarantee are applicable (“to the extent applicable”). But those are not the circumstances that URI is arguing about.

Cerberus’ Further Interpretation of The Limited Guarantee

Earlier this week counsel for Parent sent a letter to Judge Chandler.  Here, I think URI can point out that they flat out have it wrong and are conflating two sections of the limited guarantee so as to make their argument appear stronger – they say in the 2nd to last paragraph that “the limited guarantee in turn clearly states that URI’s and its affiliates only remedy – directly or through the RAM entities – against Cerberus Partners and all of its affiliates other than the RAM Entities…is a claim under the limited guarantee for…$100 million” – that’s not what the limited guarantee says. Both sections 4(a) and 4(b) of the limited guarantee deal with URI’s (not with Parents’s) rights to go after Cerberus and various of its affiliates. However, Section 4(a) of the limited guarantee explicitly excludes Cerberus from the definition of who URI cannot go after (because it deals with limiting URI’s ability to go after limited partners, officers etc of Cerberus, but explicitly carves out the right to go after Cerberus itself) and so URI has good grounds to say what Parent's counsel says in the letter is flat out wrong. 

Further, Section 4(b) deals with URI’s (not with Parents’s) rights to go after Cerberus and its affiliates, BUT section 4(b) does not have the language “directly or through the RAM entities” (that only appears in section 4(a) and is not repeated). So, the limited guarantee says nothing about Parent being able to go after Cerberus, which is precisely URI's argument that Parent has the ability to specifically enforce the equity commitment letter against Cerberus. Cerberus appears a bit off here. 

Ultimately, I think that the arguments over the limited guarantee and the equity commitment letter will inform the Judge's ruling on the merger agreement but will not be dispositive -- Chandler will largely make his decision on the merger agreement provisions alone since the evidence from the limited guarantee and equity commitment letter are as ambiguous as the merger agreement.  And, if Judge Chandler does rule in favor of URI, I beleive that the New York action is not a winner for Cerberus.  But can certainly cause delay in the process.

http://lawprofessors.typepad.com/mergers/2007/11/uris-argument.html

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