I guess Stephen Feinberg has finally gotten tired of being United Rentals' punching bag. Yesterday he sent his attack puppy Mark Neporent to disabuse The Wall Street Journal of the "outrageous spin and misinformation" being bandied about by spurned buyout target URI over their disputed merger agreement. The article recaps the issue at hand:At the heart of the dispute is another arcane M&A term that has taken new meaning as the credit crunch turns the deal world on its head. This one is called “specific performance,” and refers to the ability of a seller to force a buyer to complete an agreed-to buyout.
Cerberus points to a line in the merger agreement that says, in part: “In no event…shall [Cerberus or affiliates] be subject to any liability in excess of the” $100 million breakup fee. People in the URI camp say that interpretation ignores the specific-performance language in the same document that a judge will also take into account and which they say will force Cerberus to go forward with the deal.
Neporent is certainly correct in saying that the merger document seems to limit Cerberus' liability for damages strictly to the breakup fee. The "line" (rather sentence) in question at the end of Section 8.2 of the agreement says the following [annotations mine]:
In no event, whether or not this Agreement has been terminated pursuant to any provision hereof, shall Parent, Merger Sub, Guarantor or the Parent Related Parties [Cerberus and its homies], either individually or in the aggregate, be subject to any liability in excess of the Parent Termination Fee [100 million spondulics] for any or all losses or damages relating to or arising out of this Agreement or the transactions contemplated by this Agreement, including breaches by Parent or Merger Sub of any representations, warranties, covenants or agreements contained in this Agreement, and in no event shall the Company seek equitable relief or seek to recover any money damages in excess of such amount from Parent, Merger Sub, Guarantor or any Parent Related Party or any of their respective Representatives [most especially Stephen A. Feinberg].
But Mr. Neporent slips into spin mode himself when he continues.
Referring to the shell company Cerberus created to buy United Rentals, Neporent adds: “RAM negotiated an agreement that allows it to pay $100 million to walk away, unconditionally and under any circumstances. RAM has lived up to the contract it negotiated.”
Uh, no, that's not how I read it. In order to pay $100 million and walk away, Cerberus has to formally terminate the agreement. But it cannot unilaterally terminate the agreement at whim. Its ability to do so is strictly limited to the occurrence of specific conditions, including, principally, a material adverse effect in URI's business. Cerberus has not claimed an MAE or any other termination condition has occurred. Of its own volition, it remains a party to the signed agreement. It simply claims that its liability under any circumstances is limited to the breakup fee, whether the agreement terminates or no.
So what is this "specific performance" schtick that URI is flogging in the Delaware Chancery Court anyway?
I will risk alienating the three corporate lawyers left in my audience who are too lazy to have cancelled their subscriptions by wading into the debate with a few well-chosen observations. Lacking the pedigree or training of an accredited legal education, I will of course turn to that font of all legal scholarship, Wikipedia. It says the following about specific performance:
In the law of remedies, an order of specific performance is an order of the court which requires a party to perform a specific act. While specific performance can be in the form of any type of forced action, it is usually used to complete a previously established transaction, thus being the most effective remedy in protecting the expectation interest of the innocent party to a contract. ...
Under the common law, specific performance was not a remedy, with the rights of a litigant being limited to the collection of damages. However, the courts of equity developed the remedy of specific performance as damages often could not adequately compensate someone for the inability to own a particular piece of real property, land being regarded as unique. Specific performance is often guaranteed through the remedy of a writ of possession, giving the plaintiff the right to take possession of the property in dispute. However, in the case of personal performance contracts, it may also be ensured through the threat of proceedings for contempt of court.
Orders of specific performance are granted when damages are not an adequate remedy, and in some specific cases such as land sale. Such orders are discretionary, as with all equitable remedies, so the availability of this remedy will depend on whether it is appropriate in the circumstances of the case.
Given that URI and its shareholders are probably facing the erasure of a couple billion dollars of market capitalization for the foreseeable future if Cerberus walks, it does appear to Your Dedicated Correspondent that URI can argue a $100 million goodbye kiss is not an "adequate remedy" for damages suffered.
There are some circumstances where specific performance is usually not granted. Wikipedia lists them as:
- specific performance would cause severe hardship to the defendant
- the contract was unconscionable
- the claimant has misbehaved (no clean hands)
- specific performance is impossible
- performance consists of a personal service
- the contract is too vague
Because Mr. Neporent boasts to the Journal that Cerberus has $10 billion of ready liquidity, it does not appear credible that buying URI for $7 billion would be a severe hardship. Neither is it apparent to a disinterested observer that any of the other conditions apply in this case. Chalk another one up for URI.
On the other hand, it is not obvious to me as a layman that what Cerberus has to deliver under the contract—seven billion dollars, more or less—is really that unique and irreplaceable. (I could see Cerberus bringing a claim of specific performance against URI if the tables were turned, since URI itself is arguably a unique collection of assets which Cerberus could not obtain elsewhere.) Why can't Cerberus argue that URI is not permanently harmed because it can simply go back out and find someone else to buy the company if it really wants to sell? Sure, the selling price may be lower, but dems da breaks, no? Notwithstanding the fact that the credit markets still seem to be suffering from a collective case of the vapors, there remain quite a few strategic and financial buyers out there with plenty of the folding, and the last time I looked the dollar was still a fungible, if depreciating, currency. Add a tally to the Cerberus column.
And yet, Cerberus has presumably triggered this dispute by getting cold feet about the price it agreed to pay for URI. It has not claimed that a material adverse effect has occurred, and a cursory reading of the conditions under which either party can terminate the merger agreement (Section 8.1) seems to indicate that Cerberus indeed has no cause to terminate the deal unilaterally. (If it did, it could pay the reverse breakup fee and walk away. URI would have no remedy but to pound sand and plant unflattering rumors about Feinberg in Vanity Fair.) Therefore, the merger agreement is still in force, and presumably Cerberus is still subject to all of its obligations thereunder, including the non-trivial one of delivering a suitcase full of 7 billion simoleons to the closing ceremony. It cannot terminate, and the company will not terminate. What does signing a contract mean if you can just sit back passively and refuse to deliver your side of the bargain? Forget about specific performance; what about simple performance?
Since URI seems to have limited its ability to collect liquidated damages from Cerberus to the $100 million breakup fee, I guess its only option is to get the Chancery Court to enforce the merger as agreed. Hence, I presume, its approach based on specific performance. Since the facts do not appear to be in dispute, and the language of the contract does not seem to be unclear, the outcome will presumably come down to a question of law. Will the court compel Cerberus to perform under a contract which it has not chosen to (and apparently cannot) repudiate, or will it tell URI that—tough cookies—it waived its ability to collect more than $100 million from Cerberus under any circumstances other than the closing of the merger? Stay tuned for the answer.
(Oh, and you're welcome for the cut-rate legal education. Send your checks for $1,000 each made out to the TED Legal Defense Fund, care of Stephen Feinberg, 299 Park Avenue, New York, NY 10171. We also accept euros, pounds sterling, and Canadian loonies, but only at last year's exchange rates. Pip-pip.)
UPDATE: A colleague of mine with even less legal education (and therefore substantially greater clarity of thought) than me points out that one can indeed read the critical language in Section 8.2 above as limiting Cerberus' liability to the breakup fee even if it intentionally breaches or repudiates any or all provisions of the merger agreement, including the obligation to close. If so—which I presume is the interpretation Cerberus itself intended and sought by negotiating it into the document—that would be a new one to me. Sort of like a "Nyah, Nyah, Just Kidding" clause, or a "Contract? This Ain't No Stinking Contract" provision. If it stands in court, and URI actually agreed to give Cerberus a $100 million Get Out of Jail Free card for a $7 billion acquisition, I think it should be enshrined in the annals of contract law as the United Rentals, Inc. Dumbshit of the Century Clause. I would fully expect that none of us will ever see it a second time.
Any time any of you clever legal eagles out there would like to weigh in on the subject and illuminate me, feel free to drop me a line. I'm scratching my head so hard my hair is beginning to fall out.
FINAL UPDATE: For those of you looking for more informed speculation on this little brouhaha, and with time to spare over the long weekend, you could do far worse than to start here at the M&A Law Prof Blog. My interpretation: things don't look so good for URI.
© 2007 The Epicurean Dealmaker. All rights reserved.
