Friday, November 16, 2007
It is now day three of the United Rentals/Cerberus saga. Still no lawsuit by United Rentals. I'm a bit surprised -- I would have thought that they had the complaint ready to go and would have filed yesterday to keep momentum.
Yesterday's big development in the dispute was Cerberus's filing of a 13D amendment. The filing included a copy of Cerberus's limited guarantee. The guarantee had not previously been made public, Cerberus clearly included this agreement in its filing in order to publicly reinforce its argument that Cerberus is only liable for the $100 million termination fee and not a dollar more. The guarantee specifically limits Cerberus's liability to $100 million and contains a no recourse clause. This clause provides in part:
The Company hereby covenants and agrees that it shall not institute, and shall cause its controlled affiliates not to institute, any proceeding or bring any other claim arising under, or in connection with, the Merger Agreement or the transactions contemplated thereby, against the Guarantor [Cerberus] or any Guarantor/Parent Affiliates except for claims against the Guarantor under this Limited Guarantee.
NB. the definition of Guarantor/Parent Affiliates above specifically excludes the Merger Sub.
I have no doubt that Cerberus is going to argue that this limited guarantee, when read with the merger agreement, reinforces its interpretation of the agreement that specific performance is NOT available. Again, unfortunately, there is vagueness here. The integration clause of the limited guarantee states:
Entire Agreement. This Limited Guarantee constitutes the entire agreement with respect to the subject matter hereof and supersedes any and all prior discussions, negotiations, proposals, undertakings, understandings and agreements, whether written or oral, among Parent, Merger Sub and the Guarantor or any of their affiliates on the one hand, and the Company or any of its affiliates on the other hand, except for the Merger Agreement.
So, this means that when interpreting the limited guarantee a judge will also look to the merger agreement for context and guidance. I put forth my analysis of the merger agreement yesterday (read it here). Nonetheless, it would appear that this limited guarantee creates more uncertainty, though to the extent it is given any reading it reinforces Cerberus's position, with one possible exception.
This exception is Merger Sub -- the acquisition vehicle created by Cerberus to complete the transaction. Essentially, this guarantee says nothing about what merger sub can and cannot do. So, a possible United Rentals argument is that merger sub can be ordered by the court to specifically enforce the financing letters against Cerberus and the Banks. To the extent that the merger agreement permits specific performance (a big if) this would side-step the guarantee issue.
Ultimately, though, the vagueness means that a Delaware judge will need to look at the parol evidence -- that is the evidence outside the contract -- to find what the parties intended here. What this will reveal we don't know right now -- so I must emphasize strongly that, while I tend to favor United Rental's position, it is impossible to make any definitive conclusions on who has the better legal argument at this point.
Note: The Limited Guarantee has a New York choice of law clause and has an exclusive jurisdiction clause siting any dispute over tis terms in New York County. The merger agreement has a Delaware choice of law and selects Delaware as the exclusive forum for any dispute. This mismatch is sloppy lawyering -- it is akin to what happened in Genesco/Finish Line. And while I have not seen the financing letters for the United Rentals deal, my hunch is that the bank financing letters have similar N.Y. choice of forum and law provisions. This very much complicates the case for United Rentals and Cerberus as any lawsuit in Delaware will inevitably end up with Cerberus attempting to implead the banks or United Rentals suing the banks outright (if they can under the letters). If the financing letters have a different jurisdictional and law choice it makes things that much more complicated. M&A lawyers should be acutely aware of this issue for future deals.
Final Note: Weekend reading for everyone is the United Rentals proxy (access it here). Let's really find out what they did and did not disclose about the terms of this agreement and the deal generally.