Sweat the Small Stuff - Delaware Court of Chancery Faults Acquirer for Failing to Deliver Notice to Extend End Date

Key Takeaways

• A provision in a merger agreement requiring notice to extend the agreement’s end date was not satisfied by virtue of the parties’ joint efforts to obtain antitrust clearance.
• Contractual parties have no duty to warn their counterparties of upcoming due dates. Deal teams must keep track of their own clients’ obligations.
• Delaware courts interpret clear and unambiguous contractual terms strictly and will not use the implied covenant of good faith and fair dealing to provide equitable fairness.
• The Chancery Court reserved judgment on the enforcement of the reverse break-up fee payable for failure to obtain antitrust approval.

The Delaware Court of Chancery has ruled that an acquirer and target company’s joint efforts to obtain antitrust approval for a merger did not substitute for, or satisfy, the merger agreement’s requirement to send written notice in order to extend the agreement’s end date, and that the acquirer’s failure to deliver that notice allowed the target company to terminate the agreement. The error by the acquirer has exposed it to potential liability for a large reverse break-up fee, to be decided in a future ruling by the court. The decision demonstrates Delaware courts’ continuing adherence to the strict construction of contractual terms and the necessity for deal lawyers to keep track of all rights, responsibilities and due dates on the way to closing (and after closing).

Background

On June 17, 2018, affiliates of private equity firm Vintage Capital Management, LLC entered into a merger agreement to acquire Rent-A-Center, Inc., a large “rent-to-own” retailer, with an eye toward combining the Rent-A-Center business with Vintage’s own rent-to-own retailer chain Buddy’s. Expecting a lengthy review process by the FTC, the parties agreed to a suite of covenants describing the efforts required of the parties to obtain antitrust approval. These provisions included a covenant to use commercially reasonable efforts to consummate and make effective the transaction, a covenant to use commercially reasonable efforts to make all filings and take all steps to obtain government approval of the merger, and a typical “Hell or High Water” covenant requiring the parties to take any and all action necessary to remove the threat of litigation proceedings brought by any governmental entity that would prevent the deal from closing.In a termination provision that the court described as “vigorously negotiated,”2 the parties set the outside date for closing the merger to six months after the signing date. 

In the event that FTC approval were not obtained by then, the agreement gave each party, so long as not at fault for causing the delay, the option to extend the end date for three months (a second extension was also permitted at the end of the first extension period). The extension would be accomplished by providing written notice to the counterparty, which, once delivered, would bind each party to the agreement until the next end date. If the notice were not delivered, either party could then terminate the agreement from that point on. The parties also agreed that if the merger agreement were to be terminated under these circumstances, Vintage Capital would owe Rent-A-Center a US$126.5 million reverse break-up fee, or 15.75% of the deal’s US$803 million equity value — an amount that the court characterized as “enormous.”3

Read "Sweat the Small Stuff: Delaware Court of Chancery Faults Acquirer for Failing to Deliver Notice to Extend End Date"