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).


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,” 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.”

Throughout the post-signing period, the parties collaborated on the application process, taking numerous actions intended for obtaining FTC approval and in satisfaction of their pre-closing covenants. However, as the merger agreement’s end date approached, Rent-A-Center’s performance began to improve, leading the board to conclude that proceeding with the merger was no longer in the company’s best interests. The board expected Vintage Capital to deliver an extension notice given prevailing market conditions at the end of 2018 and the size of the reverse break-up fee, but it also decided that it itself would not extend the end date and that if Vintage Capital were to fail to extend the end date, Rent-A-Center would terminate the merger agreement. On the morning after the end date passed, seeing that Vintage Capital had not delivered an extension notice, Rent-A-Center terminated the agreement and demanded payment of the reverse break-up fee.

Vintage Capital filed suit seeking to prevent Rent-A-Center’s termination of the agreement, arguing that:

  • The purpose of the notice provision had been satisfied in light of the work done to obtain FTC approval.
  • Rent-A-Center had effectively waived the notice requirement when it entered into a Joint Timing Agreement with Buddy's and the FTC, the timing of which meant that the closing would likely not occur until 2019, after the passing of the end date.
  • Rent-A-Center had fraudulently concealed from Vintage Capital its intention to not extend the end date by continuing to work toward closing the deal. This, Vintage Capital, argued, constituted a breach of Rent-A-Center's efforts covenant, rendering Rent-A-Center unable to terminate the agreement.
  • The implied covenant of good faith and fair dealing provides for a "no deception" term that should prevent Rent-A-Center from terminating the agreement. 


Termination of the Agreement Upheld

The Chancery Court rejected all of Vintage Capital’s arguments and upheld Rent-A-Center’s termination of the merger agreement, finding that Vintage Capital had not effectively extended the end date and that Rent-A-Center should not be barred from terminating the agreement. In particular, the court ruled as follows:

  • The notice requirement was not satisfied through the efforts taken to obtain antitrust approval. Vintage Capital argued that the purpose of the notice requirement was to provide notice of the intention to continue pursuing the closing. Having worked diligently toward obtaining FTC approval, Vintage Capital argued that Rent-A-Center knew that Vintage Capital had every intention of continuing that work past the end date and therefore did not need a formal notice. The Chancery Court rejected this description of the notice provision’s purpose, characterizing the purpose instead as making the counterparty aware that the party providing notice has chosen to bind itself to the merger agreement past the end date. More fundamentally, though, the Chancery Court explained that it was inappropriate for the court to investigate the true purpose of a contractual provision that was clear, unambiguous and had not been satisfied. The court added that the efforts expended by Vintage Capital to obtain antitrust clearance and otherwise seek to close the transaction were contractually required of it. Those efforts cannot be recast as implicit satisfaction of the notice requirement as that would render the notice requirement meaningless.


  • The notice requirement was not waived by virtue of Rent-A-Center’s entry into an agreement with the FTC. Vintage Capital argued that even if its efforts toward obtaining FTC approval had not negated the purpose of the notice provision, entry into the Joint Timing Agreement should have functioned either as an effective waiver of the notice requirement by Rent-A-Center or as substantial compliance with the notice requirement on Vintage Capital’s part. The Chancery Court acknowledged past cases that have allowed for substantial compliance with the form of notice, but distinguished this case in which notice was not given at all. While the Joint Timing Agreement was a signed agreement by the parties to postpone closing the merger, it did not constitute a writing contemplated by the merger agreement to extend the end date, for two main reasons: the Joint Timing Agreement governed the relationship between the parties and the FTC, not the contractual relationship between Vintage Capital and Rent-A-Center; and it only constituted a promise not to close the merger by a certain time, but did not bind each other to the merger agreement past the end date.


  • Rent-A-Center did not breach its covenants by failing to warn Vintage Capital of the upcoming end date and of its own intentions. Vintage Capital attempted to rely on past Delaware decisions, particularly Williams Companies v. Energy Transfer Equity, L.P. and Hexion Specialty Chemicals, Inc. v. Huntsman Corp., in which Delaware courts have considered parties in breach of their efforts covenants when they became aware of obstacles to the closing and stayed silent instead of communicating the problems to their respective counterparties. In Vintage Capital’s view, Rent-A-Center’s intention to not extend the end date and to terminate the agreement if given the chance amounted to the same type of obstacle to closing, which Rent-A-Center should have warned Vintage Capital about. The Chancery Court here rejected that comparison, distinguishing a problem in which a condition precedent will go unfulfilled from a problem in which a party does not understand its own rights and obligations under the contract. The court held that were it to require Rent-A-Center to have notified Vintage Capital of the upcoming end date, it would be imposing a “duty to warn” on contractual parties. The court declined to write in this requirement, noting both that it was not bargained for explicitly in the merger agreement and that a “commercially reasonable efforts” standard does not require sophisticated parties to remind each other of their contractual rights.
  • The implied covenant of good faith and fair dealing did not operate to impede Rent-A-Center’s right to terminate the agreement. The court dismissed Vintage Capital’s implied-covenant argument, explaining that the implied covenant operates as a gap-filler, supplying terms that the parties would not have been expected to consider when drafting their contract. The implied covenant does not, by contrast, operate as an all-purpose supplier of equitable fairness. Here, Vintage Capital effectively sought the latter, hoping to have the implied covenant prevent an unjust result. This, however, is not the purpose or effect of the implied covenant.

Key Takeaways

The decision underscores two related points: Delaware courts will interpret contracts according to their plain language and not correct results to ease a party’s disappointment; and it is therefore essential for deal lawyers to understand their clients’ rights and duties under any M&A agreement and map out a timeline of upcoming obligations and due dates. The Vintage Rodeo case is ultimately reducible to a basic failure to perform the blocking and tackling that are essential for getting to closing.

Enforcement of the Reverse Break-Up Fee 

Having determined that the merger agreement had been validly terminated by Rent-A-Center, the court reserved judgment on the question of whether Vintage Capital (or its guarantor) now owes the reverse break-up fee to Rent-A-Capital. The court suggested that the implied covenant of good faith and fair dealing might operate to prevent payment of the fee. Under the theory laid out by the court, because the parties would never have anticipated having to negotiate and draft for the possibility that the acquirer would owe the fee even as it wished to close the merger, the implied covenant should fill that contractual gap and relieve Vintage Capital of the payment obligation. The court requested further briefing from the parties on this subject.

The implied-covenant theory, elegant as it is, would have narrow application in most deals going forward. An issue with broader application is whether the reverse break-up fee should be declared an unenforceable penalty, as Vintage Capital argued, given the fee’s size and that Rent-A-Center’s business had actually improved, let alone suffered a loss. The decision does not dive deeply into this question and does not note that the underlying merger agreement contains a typical acknowledgment by the parties that any negotiated fees payable when the agreement is terminated are not penalties but are liquidated damages in reasonable amounts.

The decision does briefly recount the testimony of competing experts on the question of the size of the fee and whether it is within range for reverse break-up fees payable for antitrust failure. The court did not decide this question yet, but noted case law in which the court has generally found break-up fees in the 3% range to be reasonable, subject to deal-specific factors. However, these decisions address break-up fees payable by the target company, which invoke issues of fiduciary duties that are not germane to a buyer agreeing to pay a reverse break-up fee. A future decision by the court on the reverse break-up fee should help clarify these issues.

In follow-up correspondence with the court, the plaintiffs advised that they would await the court’s decision on the fee so that all of the issues in the case can be appealed at the same time.

Discovery of Electronic Communications

The Vintage Rodeo case is also the latest Delaware decision to highlight the discoverability of emails and text messages by those involved in a deal and, by extension, the potentially significant and embarrassing results when those messages show up in a court decision. Here, on learning of Vintage Capital’s failure to provide notice, one principal messaged another, “We are [prejudiced] in the extreme.” This follows recent guidance by the Delaware judiciary in Section 220 books-and-records cases that made discoverable both director emails and communications stored on directors’ personal devices.