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Friday, December 21, 2007

Cerberus/URI opinion -- Quick Assessment of the Winners and Losers

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.

Chandler concludes:

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:

Winners

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 . . . .]

Losers

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. 

Moral

Sloppy drafting can get you into trouble.  Being vague about things even more so. 

http://lawprofessors.typepad.com/mergers/2007/12/cerberusuri-opi.html

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Listed below are links to weblogs that reference Cerberus/URI opinion -- Quick Assessment of the Winners and Losers:

» Cerberus-URI: what to do about sloppy drafting from Ideoblog
Chancellor Chandler refused to grant specific performance to URI under the specific performance provision of the agreement, section 9.10. Steven Davidoff continues his thorough coverage of the case with this report, which he’ll no doubt flesh out soon.... [Read More]

Tracked on Dec 21, 2007 5:22:32 PM

» Cerberus-URI: what to do about sloppy drafting from Ideoblog
Chancellor Chandler refused to grant specific performance to URI under the specific performance provision of the agreement, section 9.10. Steven Davidoff continues his thorough coverage of the case with this report, which he’ll no doubt flesh out soon.... [Read More]

Tracked on Dec 21, 2007 5:25:14 PM

» The Cerberus Case and Lessons in Law, Society, and Language from Concurring Opinions
Over in the M&A world (that's mergers and acquisitions for all you non-corporate types), there's a recent decision from the Delaware Chancery Court, written by Chancellor William Chandler, that is getting a fair bit of play in the blogosphere, includin... [Read More]

Tracked on Dec 22, 2007 6:59:31 AM

» Specific Performance Claim Rejected from Delaware Corporate and Commercial Litigation Blog
In United Rentals, Inc. v. RAM Holdings, Inc. (Cerberus ), (Del. Ch., Dec. 21, 2007), read opinion here, the Chancery Court rejected a claim for specific performance in a 68-page opinion that is destined to be a seminal decision on... [Read More]

Tracked on Dec 26, 2007 7:03:24 AM

» Ribstein v Lipshaw on United Rentals from Law Business
Delaware Chancellor Chandler recently issued an important decision on interpreting MA contracts in United Rentals, Inc v. Ram Holdings, Inc. I commend to your attention a thoughtful analysis by Steven Davidoff, which prompted some thoughtful co... [Read More]

Tracked on Dec 27, 2007 1:33:27 PM

Comments

I find page 42 of the opinion most interesting and most opened to appeal.
I wish URI should appeal this... but it is very unlikely.

The judge here is trying to punish the bad actors and we now know that is URI.
I think he may have over-reached a bit here.

Surprisingly, the judge found 2 reasonable interpretations.
This is where URI lost... and I'll bet URI was putting their entire case on a single interpretation.
The opinion acknowledged, in a footnote on page 38, that a contract term cannot be rendered meaningless.
However, on page 42, the opinion invoked "Penn Mutual Life Insurance Co. v. Oglesby and Supermex Trading Co., Ltd. v. Strategic Solutions Group, Inc." to do just that.
A contract term can be subservient or be trumped by another term elsewhere by imposing "certain conditions". But I doubt those cases held that the "subject to" term can be completely nullified as stated in this opinion. "Subject to" implies imposing conditions, not completely render the other term meaningless. If URI can win on this point, they can win on appeal.

Posted by: Joe Pun | Dec 21, 2007 4:44:32 PM

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