The Delaware Chancery Court’s recent ADS v. Blackstone Capital Partners decision is a clear statement of support for the effectiveness, where the contracts are drafted unambiguously, of the established private equity deal structure of using a separate acquisition subsidiary, a reverse termination fee and a limited private equity fund guarantee of the fee, specifically to protect the broader private equity group from overexposure to any one deal. While some of the Delaware courts’ recent decisions have had practitioners grappling with subtle issues of how properly to integrate the “lessons learned” into everyday practice – from how properly to draft a specific performance provision to what constitutes “forthright negotiations” to what constitutes an appropriate exercise of a board’s Revlon duties (see e.g., the United Rentals and Ryan v. Lyondell decisions) – the message of the ADS decision in support of the private equity deal structure is loud and clear.
In May 2007, ADS agreed to be acquired by Aladdin Solutions, a Blackstone-controlled entity formed expressly for the purpose of making the ADS acquisition. Other than via a separate, limited guarantee of Aladdin’s obligations to pay a “business interruption fee” of $170 million if Aladdin breaches the merger agreement, no other Blackstone entities signed or were otherwise a party to the merger agreement or any other related agreement. In addition, Aladdin’s obligations under the agreement were drafted, except in only very limited circumstances, to refer only to Aladdin and its merger subsidiary, and not to Blackstone or any other Blackstone entities. Subsequent to signing, the federal Office of the Comptroller of the Currency refused to grant the necessary approval for the transfer of an ADS bank subsidiary in the transaction unless Blackstone and other affiliates agreed to provide financial support for the subsidiary, which Blackstone refused to do. After the expiration of the drop dead date in the merger agreement without OCC approval (which was a required precondition to the closing of the merger), ADS terminated the agreement and sued Blackstone and Aladdin for the $170 million fee, alleging a breach by Aladdin of, among other things, its obligation to use “reasonable best efforts” to obtain OCC approval and to keep Blackstone from thwarting the closing of the merger.
In finding for Blackstone, the Chancery Court made it clear that because of the “carefully cabined” promises that Aladdin made about Blackstone, Blackstone had no contractual obligation to agree to any arrangements with the OCC. Further, the Court refused to look at extrinsic evidence to support ADS’ argument that all negotiators knew that Blackstone might have some liability in this regard. The Court reiterated that because of the “clear bargain” struck by the parties, it would not later alter the agreement that “sophisticated parties entered into willingly because a party now regrets the deal.”
In a strong statement of support for the way that private equity firms structure their businesses and acquisitions and for the enforceability of such structures where the contractual language is clear, the Court states that:
A huge amount of wealth generation results from the use of distinct entities by corporate parents to conduct business. This allows parents to engage in risky endeavors precisely because the parents can cabin the amount of risk they are undertaking by using distinct entities to carry out certain activities. Delaware law respects corporate formalities, absent a basis for veilpiercing, recognizing that the wealth-generating potential of corporate and other limited liability entities would be stymied if it did not otherwise.
The Court thus dismissed ADS’ complaint in its entirety, closing the chapter on yet another failed buyout, this time with the private equity buyer walking away from the deal without having to pay a reverse termination fee or negotiating a settlement.