Monday, December 3, 2007
So, last Thursday the stock of Alliance Data Systems went on a wild ride; it dropped over 20% or over $15 a share but returned to its previous level in the space of about hour and a half. The reason was due to a bear rumor that Blackstone was seeking to renegotiate or otherwise repudiate its agreement to acquire ADS. ADS later issued a statement denying the rumor and ADS stock is now trading back at the level it was before the rumor. I do hope the SEC investigates and prosecutes the person(s) responsible for this rumor -- that is was spread the day before Nov. 30 -- year-end for many traders -- I believe was no coincidence. Someone was trying to make their book and did so with a vengeance.
Nonetheless, this post is about the ADS merger agreement and the Blackstone's ability to walk. Here, the question on everyone's minds is does the ADS agreement have the same type of optionality as other private equity reverse fee termination deals (e.g., Acxiom, Harman, etc.)? The answer is a qualified no. A review of Section 9.8.2 of the ADS merger agreement finds it similar in an important respect to Cerberus/URI. The ADS merger agreement contemplates specific performance of the financing by Blackstone and a $170 million cap on Blackstone' liability otherwise; there is no naked reverse terminate fee. However, unlike Cerberus/URI, the ADS merger agreement is much clearer and specifically accounts for the two situations. It appears unlikely that Blackstone could argue the same ambiguity Cerberus is; the ADS merger agreement on its face rather reads rather unambiguously to provide that the liability cap does not apply to the specific performance provisions. For those who care, Simpson represented Blackstone in this deal as opposed to Cerberus/URI where it represented URI. If only they had negotiated the same provision for URI.
The problem ADS likely has is with the equity commitment letter and Blackstone guarantee. Neither appears to have been disclosed (although the guarantee is Exhibit A to the merger agreement it was omitted from ADS's SEC filings. Thanks for the full disclosure.). However, if it follows practice the guarantee is likely governed by New York law and has a New York forum clause as opposed to the ADS merger agreement which has a Delaware law and Delaware forum clause. And it is likely that there is enough ambiguity in these two documents to provide Blackstone a colorable claim similar to the one Cerberus is making in New York -- that its guarantee and equity commitment letter read together limit the amount it is ever required to pay to the break fee and nullify the specific performance requirement. The argument is likely a stretch but is certainly one which Blackstone can use as a bargaining tool if it wants (if indeed the documents do read as I believe they do).
In the future, M&A lawyers for targets will need to pay greater attention to these ancillary documents to ensure that this problem cannot arise. To the extent feasible choice of forum clauses and choice of law clauses in the merger agreement and financing documents should match. In addition, third party beneficiary clauses should be considered as well as clear provisions in the guarantee that it does not foreclose specific performance of the financing commitment letters. I am looking forward to the announcement of the next big private equity deal to see if we all have learned from our mistakes.