December 6, 2007

More on URI’s Request for Specific Performance

Back on Monday, I blogged some analysis from Kevin Miller of Alston & Bird about why deference is not generally appropriate when granting extraordinary permanent relief such as specific performance.

Then, in his “M&A Law Prof Blog,” Professor Steven Davidoff posted six reasons why he doesn’t necessarily agree with Kevin’s analysis (the NY Times’ DealBook has picked up on this debate).

Below is Kevin’s friendly rebuttal to the Professor:

Fundamentally I am raising two separate issues:

1. Should a voluntary cap on monetary damages make monetary damages “inadequate” for purposes of justifying specific performance; and

2. Is it appropriate to grant specific performance as a remedy to protect the interests of non-third party beneficiaries.

URI could address the first point by alleging nonmontary damages, though it hasn’t yet and it may be it can’t. I don’t think URI can necessarily address point 2 unless it alleges damages to URI. The points are separate and distinct and I believe either one could be the basis for a motion to dismiss before getting to the summary judgment issue as to whether 9.10 or the last sentence of 8.2(e) controls.

The bottom line is that I don’t think a voluntarily agreed cap on monetary damages makes monetary relief inadequate and if monetary damages are not inadequate, a court should not exercise its equitable powers to grant extraordinary permanent relief like specific performance. For example, even without an exclusive remedy provision, I don’t think a court should or would grant equitable relief to a buyer solely because an agreed cap on an indemnity provision prevented the buyer from being fully compensated for a breach of warranty or covenant.

My argument is not that the URI specific performance provision is not enforceable or meaningless (subject to the 8.2(e) issue), it’s just that it is only enforceable if URI alleges damages that are difficult to quantify in dollars and the only damages URI has alleged so far relate to RAM’s failure to pay the merger consideration – a clearly quantifiable damage.

Kevin’s rebuttal of Professor Davidoff’s specific criticisms:

With regard to 1, 2 and 3 – The key point, as you later acknowledge, is that you can’t negotiate or contract for a “right” to specific performance as it is a remedy solely within the grace and discretion of the court to be granted only as a last resort upon a showing of no other appropriate remedy.

In my world, the Court could just say (i) yes, RAM breached; (ii) the “harm” resulting from the alleged breach is difference between the value of the merger consideration and, lets say, the cover bid; (iii) such damages are calculable and equal to $X; (iv) money damages, being easily measured, are the preferred remedy; and (iv) to the extent $X exceeds a voluntary limitation on money damages you can’t now complain that a damages award will not make you whole; (v) you can collect up to that voluntary cap through the Cerberus limited guarantee, consequently monetary damages are appropriate and practicable. Injunctive relief – e.g., prohibiting a rival bidder from interfering with a shareholder vote is different from ordering specific performance in order to force payment of a specified amount of cash. The former clearly has no remedy at law while the latter does.

As previously indicated in this blog, I am concerned that RAM may be precluded from challenging URI’s right to specific performance because of 9.10. I think that’s what happened in IBP, but I think a court recognizing the issues has to address them of its own volition.

4. The fact that IBP was a cash and stock deal was critically important. Monetary damages were not easy to calculate in IBP specifically because it would have required a guesstimate as to the value of the synergies that would have benefited IBP shareholders had they elected to receive stock. Where the merger consideration is solely cash, damages should not be that difficult to calculate.

As the IBP court said: “I start with a fundamental question: is this a truly unique opportunity that cannot be adequately monetized?…In the more typical situation, an acquiror argues that it cannot be made whole unless it can specifically enforce the acquisition agreement, because the target company is unique and will yield value of an unquantifiable nature, once combined with the acquiring company. In this case, the sell-side of the transaction is able to make the same argument, because the Merger Agreement provides the IBP stockholders with a choice of cash or Tyson stock, or a combination of both. Through this choice, the IBP stockholders were offered a chance to share in the upside of what was touted by Tyson as a unique, synergistic combination. This court has not found, and Tyson has not advanced, any compelling reason why sellers in mergers and acquisitions transactions should have less of a right to demand specific performance than buyers, and none has independently come to mind.”

I think the Second Circuit in the ConEd case discussed below answered the IBP court’s rhetorical question – because target shareholders are not parties or third party beneficiaries of the contract. Note: Not a big point, but IBP is not a Delaware precedent, it is a Delaware court applying NY law.

5. I agree that the third party beneficiary defense is a weaker defense though I think your music teacher story fails to address the real issue.

To avoid being distracted by issues relating to the provision of personal services, let’s assume you ordered an xbox 360 from seller A for $350 as a present for your kid but for some reason – lets say they’re big fans of Ohio State – seller A refused to deliver an xbox 360 to Michigan even though Seller A had sufficient product, forcing you to cover by paying $400 to obtain the same product from seller B. And suppose further that the contract with seller A had a provisions stating that (i) the parties agreed in advance that a breach would result in irreparable harm and that equitable relief including specific performance would be appropriate and (ii) under no circumstances would seller A be liable for money damages in excess of $25 for breaches of the agreement. I honestly don’t think a court should require specific performance solely because you couldn’t collect the full $50 in money damages from Seller A. On the other hand, if everyone was sold out of xbox 360’s, specific performance might be the only appropriate remedy and the court would be required to balance the equities.

But the foregoing example as well as your music teacher example focus on the easy case – protecting the interests of a party to an agreement – not a demand for equitable relief to effectively compensate a non-third party beneficiary.

There is a huge difference between (i) a court specifically enforcing a buyer’s rights to buy a product or a service at a specific price, even where that product or service will be delivered or rendered to a third party and (ii) a court specifically enforcing a buyer’s “obligation” to pay cash consideration to a non-third party beneficiary.

The more relevant example would be, suppose you agree that I can buy your brother’s old X-Box for $10 provided your brother agrees (analogous to the requisite shareholder vote), but later I say I don’t want to buy your brother’s old xbox for $10 but will still pay $8. Can you sue me in equity and force me to pay your brother $10 for his xbox. I don’t think that’s the right answer. Certainly your brother can’t sue me (ConEd). Similarly he couldn’t sue you for agreeing to take $8 instead $10 (essentially Tooley) or even for voluntarily terminating the agreement in its entirety.

The court in IBP didn’t see the point because it wasn’t briefed. “Although Tyson’s voluminous post-trial briefs argue the merits fully, its briefs fail to argue that a remedy of specific performance is unwarranted in the event that its position on the merits [of whether there had been a MAC] is rejected. This gap in the briefing is troubling.”

6. The Second Circuit effectively held that neither the target nor its shareholders could sue for lost merger premium as the shareholders were not third party beneficiaries. In ConEd, the claim for lost profits was originally brought by NU. The federal district court held that NU’s shareholders were clearly third party beneficiaries of the merger agreement and denied ConEd’s motion to dismiss. Later, a competing shareholder class action for lost profits was brought and the federal district court ended up ruling that the shareholder class plaintiffs could more effectively represent the interests of NU shareholders at the time of the breach and granted summary judgment against NU’s claim for lost profit. Thus, on appeal, the second circuit was effectively asked whether NU or the shareholder class plaintiff’s acting on behalf of shareholders at the time of the breach were the better plaintiff/plaintiff representative. The second circuit’s answer was essentially “neither” as shareholders were not third party beneficiaries under the merger agreement.

This generated a fair amount of discussion among M&A lawyers though no one seemed to come up with a solution that many thought practicable. A few lawyers have sought to include provisions in merger agreements governed by NY law making target stockholders third party beneficiaries with rights solely enforceable by the target, including some very large deals – see Berkshire Hathaway’s acquisition of Russell Corp.; Brookfield Properties acquisition of Trizec; Phelps Dodge’s proposed acquisition of Inco; and Aviva’s proposed acquisition of AmerUs (all referenced in the ConEd article cited in my original DealLawyers’ blog). See also a more recent article by Victor Lewkow and Neil Whoriskey of Clearly Gottlieb in the October 2007 issue of The M&A Lawyer).

Based on anecdotal evidence, I think the practical effect is that most M&A lawyers are avoiding the ConEd issue by agreeing to Delaware rather than New York choice of law provisions in merger agreements – in effect, hoping for a different answer from the Delaware courts, with no guarantee of success.