From Kevin Miller of Alston & Bird: With the recent spate of busted buyouts, the legal and financial community – as well as the press – have devoted significant time to dissecting the provisions of the relevant merger agreements and other transaction documents. Unfortunately, a critical issue has been overlooked.
While the Delaware courts may respect provisions in contracts in which the parties agree that irreparable harm would result from a breach of their agreement when considering motions for injunctive relief, such deference is not generally appropriate when granting extraordinary permanent relief such as specific performance.
In a recent case involving the sale of real property, Vice Chancellor Noble wrote:
“Specific performance is an equitable remedy designed to protect a party’s expectations under a contract by compelling the other party to perform its agreed upon obligation. Specific performance is an extraordinary remedy, appropriate where assessing money damages would be impracticable or would fail to do complete justice. . . . The party seeking specific performance must show that there is no adequate remedy at law. A party is never absolutely entitled to specific performance; the remedy is a matter of grace and not of right, and its appropriateness rests in the sound discretion of the court” (footnotes omitted, emphasis added).
URI’s brief fails to justify specific performance for two reasons, both relating to the alleged harms it claims: (i) the defendants’ failure to pay the agreed cash merger consideration and (ii) the decline in the value of URI shares as a result of the defendants’ allegedly manipulative disclosures.
First, to the extent the alleged harms solely relate to the fact that URI’s shareholders will not receive the agreed cash merger consideration or that the value of the URI shares they hold has declined, money damages would appear to be a practicable and therefor more appropriate remedy. URI voluntarily agreed to a cap on money damages – and should not now be permitted to claim that money damages are inadequate as a remedy because of that agreed limitation.
Second, and more importantly, the alleged harms are not harms to URI. They are only harms to URI’s shareholders who are not third party beneficiaries under the merger agreement and are consequently not entitled to protection or relief against such harms (see Consolidated Edison v. Northeast Utilities, 426 F.3d 524 (2d Cir. 2005) applying New York law and holding that shareholders cannot sue for lost merger premium; see also Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031 (Del. 2004) applying Delaware law in analogous circumstances).
It seems reasonably clear that we don’t want to have to worry about claims by other non-third party beneficiaries – e.g., executive officers, customers, suppliers, municipalities, etc. – that their expected or specifically contemplated benefits from a proposed merger constitute protectable interests justifying specific enforcement of a merger agreement (see “The ConEd Decision – One Year Later: Significant Implications for Public Company Mergers Appear Largely Ignored”).
Nowhere in URI’s brief do they set forth the standards for granting specific performance of a contract under Delaware law. Instead, they rely solely on the agreement of the parties in the merger agreement: “Section 9.10 is enforceable under Delaware law, establishes irreparable harm, and warrants specific performance and an injunction.”
But as noted by Vice Chancellor Noble, that is not enough to justify such extraordinary permanent relief – there is never a legal entitlement to such relief, it is a matter of grace and discretion for the court. Furthermore, nowhere in the URI brief do they identify any damages to URI. The only identified damages are damages to URI shareholders, who are not parties to the merger agreement: “RAM’s decision to back out of the Agreement is nothing more than a naked ploy to extract a lower price to the irreparable harm of URI’s stockholders” and “If ever there was a case for a court of equity to intervene and order specific performance and an injunction, for which the contract here expressly provides, in order to prevent irreparable harm to stockholders, this is the case.”
[Note: URI might not have these issues if it had agreed to be acquired by a competitor – see the Genesco amended complaint in which it alleges irreparable harm resulting from Finish Line’s misuse of competitively sensitive information obtained in the course of integration planning.]
URI’s most interesting argument is its reference to the IBP/Tyson case in which the Delaware Chancery Court, applying New York law, granted specific performance to a target in a cash and stock deal. URI pointedly cites IBP for the proposition that there is no compelling reason why sellers “should have less of a right to demand specific performance than buyers” but fails to put the quote in context:
“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.”
Thus, the court in IBP was clearly focused on the irreparable harm to IBP shareholders resulting from their inability to share in the difficult to quantify synergistic benefits of a stock election merger. URI is a cash deal and its shareholders are not being deprived of the ability to share in any synergistic benefits by RAM’s alleged breach.
Furthermore, the court in IBP missed the point that IBP shareholders were not third party beneficiaries of the Tyson Merger Agreement and consequently didn’t have protectable rights under that agreement – the point made by the Second Circuit in ConEd/NU – an error best explained by the IBP court when it noted that: “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.”
A final interesting question is whether RAM is precluded from making these points in its reply brief because of its agreement in Section 9.10 of the merger agreement that specific performance is an appropriate remedy – thus preventing the URI court, like the court in IBP/Tyson, from being properly briefed on this critical issue. Given the parties’ disagreement as to whether Section 9.10 is controlling, I think not.