The Delaware Chancery Court ruled in a March 11, 2019 opinion that a party to a merger agreement had the right to terminate after a “drop-dead date”, even though the other party’s failure to exercise its right to extend the term was inadvertent.
Plaintiff Vintage Capital Management, LLC (“Vintage”) and Defendant Rent-A-Center, Inc. (“RAC”) had entered into a merger agreement to join Vintage’s investment in the rent-to-own industry – Buddy’s - with RAC. Due to Vintage’s existing investment in Buddy’s, the merger required approval from the Federal Trade Commission (“FTC”) for antitrust review. Knowing that the FTC process would take a long time, Vintage and RAC agreed in the merger agreement to a six-month “End Date”, namely, a date on which either party could terminate the agreement. However, since the FTC process was not fully in their control, they agreed that each party could unilaterally extend the “End Date” for a three-month period, twice, by written notice, if the FTC review process was still ongoing.
When the End Date came and passed, and neither party chose to extend, RAC sent notice of termination to Vintage – RAC’s board had determined that it was “no longer in the corporate interest to proceed under the terms of the merger agreement”. Vintage was “blindsided” and did not expect RAC to terminate the agreement. Vintage then sued, arguing that the parties had effectively extended by virtue of their continuing to work diligently towards FTC approval and close. Vintage also claimed that RAC had engaged in a fraud by acting as if they (RAC) were willing to consummate the merger, but concealing its actual intent of terminating immediately after passing of the end date.
The Court rejected both of these arguments, pointing out that Vintage failed to explain why it never sent the notice to extend:
‘Vintage’s arguments are after-the-fact rationalizations as to why failure to give written notice of election to extend is excused. I am left to the startling conclusion that, having vigorously negotiated a provision under which Vintage was entitled to extend the End Date simply by sending Rent-A-Center notice of election to do so by a date certain, Vintage and B. Riley personnel, in the context of this $1 billion-plus merger, simply forgot to give such notice. As one B. Riley principal messaged another, immediately upon learning of the failure of notice, “We are [prejudiced in the extreme].”’
The Court rejected Vintage’s plea for equity and refused to “fundamentally rewrite the bargain of the parties”:
‘Under these circumstances, per the Plaintiffs, it is unfair to allow Rent-A-Center to exercise the letter of its bargained-for rights and walk away from the contract, because of a mistaken failure by Vintage to exercise a right that Rent-A-Center must have known Vintage wanted to exercise. I find, however, that the End Date, and the methods to extend it, were matters of importance to the parties, and were heavily negotiated. The parties are bound to their contractual bargain.’
The Court was more sympathetic to Vintage’s plight when considering whether a reverse breakup fee was appropriate in this scenario. The judge noted that he was “dubious” whether the parties meant for a breakup fee to apply to a situation where one party forgot to send an extension notice. Citing an implied covenant of good faith (which the Court deemed inapplicable to Vintage’s primary request to reinstate the merger agreement), because the parties almost certainly did not contemplate this fact pattern, the Court agreed to allow further argument on whether the fee should be paid.
Reed Smith Takeaway
The decision in this case makes it clear that the Delaware Chancery Court will look to respect the text of a bargained-for agreement between two sophisticated parties, even if one of the parties makes an unforced error. The Court will not simply grant a do-over because of a mistake.