Monday, December 24, 2007
So, I've been thinking a bit more about the URI/Cerberus opinion over the weekend and have the following thoughts/questions:
- Chancellor Chandler again reiterates that he denied URI's motion to grant summary judgment but that "the question was exceedingly close." However, he never states in the opinion which side it was exceedingly close for; instead he details the arguments put forth by both sides for a complete and unambiguous contract and finds both to be reasonable interpretations. I find this terribly interesting and suspect that Chandler did not make a statement either way on this to support his opinion on appeal. But I would love to know which way he was leaning (likely URI?). [Update: Actually fn 104 says it all -- Chandler would have ruled for URI -- it states:
- If defendants had filed a cross-motion for summary judgment and, therefore, borne the burden to demonstrate that their interpretation was, in fact, the only reasonable interpretation as a matter of law, this Court would not have hesitated to deny defendants’ motion. Here, however, in opposing plaintiff’s motion, defendants need only to meet the lesser burden of demonstrating that their interpretation was a reasonable interpretation and that, therefore, plaintiff’s interpretation of the Merger Agreement is not the sole reasonable interpretation. I find that defendants have satisfied this burden, concluding that their proffered interpretation is not unreasonable as a matter of law and that, therefore, the agreement is ambiguous. This was, however, as I indicated in my letter opinion denying plaintiff’s motion, an exceedingly close question.]
- We still don't know the contents of the conversations URI claimed attorney/client privilege for and I wonder why no member of the URI special committee testified. We likely will never know. This is unfortunate, because I think they are important for determining what really happened (i.e., was URI and its counsel Simpson aware of this ambiguity and decided not to raise it or were they equally caught).
- I wonder what Apollo is thinking? Apollo owns URI preferred and common stock (by my calculations on a fully converted basis equal to 15,333,000 shares of common stock). Leon Black and Michael Gross were both on the URI board but because their economic interests differed from the common holders, they recused themselves from the deliberations and didn't vote on the transaction. They've just lost a couple of hundred million in a change of control premium. I wonder whether they have been doing anything in the background? Remember there has previously been litigation between the two in Cerberus Intern., Ltd. v. Apollo Management, L.P., 794 A.2d 1141 (Del.Supr. Mar 13, 2002) and there are the old Drexel ties there (plus they have their own big deals to push through -- e.g., Hexion/Huntsman). I would have loved for the transaction to go through if only because we would get to see a new background to the transaction section disclosing if any of these contacts actually existed.
- Both Prof. Larry Ribstein and Prof. Jeff Lipshaw have weighed in on the message of Chandler's opinion for contract drafters who employ sloppy or ambiguous drafting techniques (Larry's first post is here; Jeff's is here; and Larry's reply to Jeff's post is here). I think we actually all agree on the message but apply it in different circumstances. So, there are at least three different circumstances where ambiguous contact drafting can arise 1) both parties are aware the language is ambiguous but leave the term open either because they cannot compromise on it or otherwise prefer an ambiguous interpretation; 2) one party is aware the language is ambiguous but the other does not and assigns a clear meaning to it; and 3) neither party is aware the language is ambiguous and both assign separate meanings to it. Jeff makes the valid point that commercially reasonable parties can take route 1 -- after all, a MAC clause is typically drafted in vague qualitative terms rather than quantitative ones because such vagueness and the specter of litigation can work to both sides advantage. And I think all of us would agree that 3 is a problem -- in circumstance 3, I am particularly thinking of late night sloppy and short-hand drafting which can cause problems that neither party pick-up due to haste or lack of sleep, etc. (BTW -- I am sure Prof. Coates is itching to respond on this and we will benefit from hearing his thoughts as soon as this dispute is over). But I think Chandler's opinion is not actually ruling on either of these issues. Rather, Chandler, by relying on the forthright negotiator principle, is setting a default rule in situation 2 which encourages parties to be direct in their negotiating. That is -- where a negotiator know the other side assigns a certain meaning to an ambiguous contract term and he or she know or should have known of that meaning they are required to be forthright and inform the other side. I believe this is an economic rule because it will discourage unintended consequences and needless litigation -- as opposed to situation 1 where litigation is actually contemplated as a potential resolution and cost. Hopefully, Larry and Jeff agree.
- I think the open airing of the circumstances of this transaction negotiation has something to say about the deal team structure at large M&A firms [NB. in footnote 132 of the opinion Chandler notes that Gary Horowitz was the supervising partner on this transaction but that he engaged in no negotiation with the buyer leaving that to the senior associate on the matter, Eric Swedenburg]. Many M&A deals are staffed by a senior associate and a senior partner or alternatively a junior partner and mid-level associate. And junior partners and senior associates are and should be essentially interchangeable on any deal. There a number of differences in the dynamics of each team though. Senior associates in this situation often negotiate the entire deal and are also running the transaction documents -- they often do not get assigned a mid-level to run the drafts (besides, one of the reasons they got there is because they are form gods and want to maintain their status as A team drafters until they are elevated to partners). Junior partners have more pull to get the staffing of a mid-level to run the documents and focus more on the negotiating part. The end-result is that often sleep-deprived senior associates sweating it out to make partner and under significant stress are forced to juggle and paper entire transactions. I do wonder if this dynamic played in this contract negotiation and the end-result. But I have no way of knowing and perhaps it played no part.
- Putting aside the issue for the moment of whether Chandler made the right decision, his ruling does resolve all the complications of trying to enforce a ruling that RAM Holdings must assert a claim against Cerberus to fund the equity and cause the banks to fund the rest of the financing as well as the jurisdictional issues in New York. That would have been a nightmare.
- The appeal: by holding a trial Chandler escaped de novo review of any ruling for URI or Cerberus on summary judment -- instead his factual conclusions will be reviewed, if at all, by the Delaware Supreme Court under a deferential standard. Those findings will not be set aside by the Delaware Supreme Court unless they are clearly erroneous or not the product of a logical and orderly deductive reasoning process. Legal conclusions are reviewed de novo, but given the factual findings underlying Chandler's ruling, I think the likelihood of success on appeal is low and any such appeal would be more for negotiating position.
- The transaction highlights the importance of the non-public information for these disputes. When I first started writing about this matter, I thought URI had the better reading of the contract on a harmony basis but that it was ambiguous. But the parol evidence that came out prior to trial favored Cerberus's contract interpretation. At trial, I was therefore looking for URI to put forth a counter-story based on their own parol evidence. However, no such compelling evidence came out. From reports of the trial proceedings, I thought this would lead Chandler to find no understanding among the parties. I was wrong. In the end, once Chandler found ambiguity, the parol evidence became central and Chandler's application of the "forthright negotiator" principle trumped URI's contract reading and the limited rebuttal evidence they (could?) put on. Chandler specifically found that URI's "attorney Eric Swedenburg categorically failed to communicate [URI's contract interpretation] to the defendants during the latter part of the negotiations." Game over.
- There is a still a litigation haze that will remain over this deal even if there is no appeal -- at a minimum there are now a number of pending class actions against URI related to its failure in August and September to disclose Cerberus's concern about its failure to be able to complete this deal.
- A few final thoughts -- kudos to Chancellor Chandler for a well-reasoned and quick opinion, as well as the litigation teams on both sides for a fantastic job (Connolly Bove Lodge & Hutz, Willkie Farr & Gallagher and Orans, Elsen & Lupert for URI : Richards, Layton & Finger, Milbank Tweed Hadley & McCloy and Shapiro, Forman Allen, Sava & McPherson for Cerberus). Finally, the deal lawyers go away from this scarred, but I think we all need to take a step back and remember that we do not know all of the facts here and what went through the minds of the parties as well as their private conversations -- the senior deal partners on both sides have great reputations from long careers in M&A and one deal should not change that. But there is a moral that I repeat for all transaction lawyers -- sloppy drafting can get you into trouble, being a less than forthright negotiator even more so. The first assignment for my M&A class next semester is to read this opinion.
Addendum: This morning URI announced that it had terminated the merger agreement and stated that it would not appeal.