Friday, December 21, 2007
Access the opinion here. Chandler begins:
In classical mythology, it took a demigod to subdue Cerberus, the beastly three-headed dog that guarded the gates of the underworld.1 In his twelfth and final labor, Heracles2 journeyed to Hades to battle, tame, and capture the monstrous creature. In this case, plaintiff United Rentals, Inc. journeyed to Delaware to conquer a more modern obstacle that, rather than guards the gates to the afterlife, stands in the way of the consummation of a merger. Nevertheless, like the three heads of the mythological Cerberus, the private equity firm of the same name presents three substantial challenges to plaintiff’s case: (1) the language of the Merger Agreement, (2) evidence of the negotiations between the parties, and (3) a doctrine of contract interpretation known as the forthright negotiator principle. In this tale the three heads prove too much to overcome.
the dispute between URI and Cerberus is a good, old-fashioned contract case prompted by buyer’s remorse . . . .As with many contract disputes, hindsight affords the Court a perspective from which it is clear that this case could have been avoided: if Cerberus had simply deleted section 9.10(b), the contract would not be ambiguous, and URI would not have filed this suit. The law of contracts, however, does not require parties to choose optimally clear language; in fact, parties often riddle their agreements with a certain amount of ambiguity in order to reach a compromise. Although the language in this Merger Agreement remains ambiguous, the understanding of the parties does not. One may plausibly upbraid Cerberus for walking away from this deal, for favoring their lenders over their targets, or for suboptimal contract editing, but one cannot reasonably criticize the firm for a failure to represent its understanding of the limitations on remedies provided by this Merger Agreement. From the beginning of the process, Cerberus and its attorneys have aggressively negotiated this contract, and along the way they have communicated their intentions and understandings to URI. Despite the Herculean efforts of its litigation counsel . . . . Indeed, defendants have admitted that they have breached the Merger Agreement and seek no protection from the Agreement’s MAC clause. . . . . URI could not overcome the apparent lack of communication of its intentions and understandings to defendants. 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. Because it has failed to meet its burden of demonstrating that the common understanding of the parties permitted specific performance of the Merger Agreement, URI’s petition for specific performance is denied.
For those who were really wondering about the wider implications, Swedenburg was found to not be a forthright negotiator. Chandler states on page 48:
With respect to URI, I find that even if the Company believed the Agreement preserved a right to specific performance, its attorney Eric Swedenburg categorically failed to communicate that understanding to the defendants during the latter part of the negotiations.
I'll have more once I get through it (and the liklihood of success on appeal). But a few quick winners and losers:
Cerberus -- they come across as the smart money at a time everyone is doubting Stephen Feinberg. Still, their clients are now out $100 million plus a substantial legal bill.
Delaware -- once again, Delaware is the place to be for quick resolution of sophisticated transactional litigation. Kudos to Chandler for a quick ruling (I'll have commentary on the substance later).
Swedenburg -- he made partner at Simpson only three weeks ago in the midst of this dispute. Lucky guy.
The Rule of Contract -- Chandler's ruling reinforces age-old default rules which discourage these types of drafting practices. Good for him. [A decision the other way would also have done the same thing, but still . . . .]
URI -- left at the altar with a deal that they may or may not have agreed to.
Gary Horowitz and Simpson -- one is left wondering were Mr. Horowitz was on this deal . . . .
Lowenstein -- Ehrenberg should have drafted sections 8.2(e) and 9.10 better, but you have to give him the benefit of the doubt in light of less than forthright practices by the other side.
Sloppy drafting can get you into trouble. Being vague about things even more so.