Last week – just after a Delaware court denied specific performance in the Cerberus–United Rentals decision – an opposite conclusion was found in Genesco v. Finish Line, 07-2137, Chancery Court for the State of Tennessee (Nashville). We have posted a copy of this opinion in our “M&A Litigation” portal.
Here is some analysis of these contrasting cases from Davis Polk & Wardwell:
“In contrasting rulings over the holidays, the Delaware Chancery Court upheld the right of certain affiliates of Cerberus Partners, L.P. to walk away from their $4 billion buyout of United Rentals, Inc. (“URI”) by paying a $100 million reverse termination fee, while the Tennessee Chancery Court ordered Finish Line Inc. to complete its $1.5 billion acquisition of rival retailer Genesco Inc.
The URI dispute arose in November when the Cerberus affiliates notified URI that they were unwilling to proceed with the acquisition on the terms stated in the July 22nd merger agreement, but would be prepared to enter into discussions about revised terms or to pay the reverse termination fee. URI sued in Delaware, seeking to enforce a provision in the agreement that entitled URI to compel the Cerberus affiliates to specifically perform by drawing down on their financing agreements and consummating the merger. The Cerberus affiliates argued in response that a separate provision in the merger agreement plainly provided that URI’s sole and exclusive remedy is the reverse termination fee and that “in no event shall [URI] seek equitable relief.”
Examining these two conflicting provisions on URI’s motion for summary judgment, Chancellor William Chandler found that the agreement was susceptible to two reasonable interpretations and that summary judgment was therefore not appropriate. He went on to find that the extrinsic evidence of the parties’ negotiation process did not support URI’s argument that its interpretation of the agreement represented the common understanding of the parties. Instead, he found that the Cerberus affiliates had made clear that they understood the agreement to eliminate any right to specific performance and that URI either knew or should have known of their understanding. Under the “forthright negotiator principle,” Chancellor Chandler held, “if URI disagreed with that understanding, it had an affirmative duty to clarify its position in the face of an ambiguous contract with glaringly conflicting provisions.”
By contrast, the Finish Line-Genesco merger agreement had no reverse termination fee and clearly stipulated that either party was entitled to an injunction to prevent breach of the agreement. Genesco invoked this provision when it filed suit in Tennessee state court in September 2007, seeking to compel Finish Line and UBS, the investment bank providing financing for the transaction, to complete the merger. Finish Line and UBS countered that Genesco had suffered a Material Adverse Effect (“MAE”) as defined in the merger agreement, such that Finish Line’s performance was excused.
Following a seven-day trial, Chancellor Ellen Hobbs found that Genesco had suffered an MAE but that it was due to general economic conditions and Genesco’s decline in performance was not disproportionate to its peers in the industry. The decline therefore fell within one of several carve-outs to the definition of MAE in the merger agreement, and did not excuse performance on the part of Finish Line.
Chancellor Hobbs also rejected Finish Line’s defense that Genesco had fraudulently induced Finish Line to enter into the deal by not providing material information concerning Genesco’s sharply declining May performance data to Finish Line prior to the signing of the merger agreement. On this issue, Chancellor Hobbs found that Genesco’s May results had not been calculated at the time UBS requested them on behalf of Finish Line and that neither the law nor the parties’ agreements required Genesco or its advisor, Goldman Sachs, to voluntarily provide the information once it became available. Under the parties’ due diligence procedures, the onus was on Finish Line and its advisor to renew their request, which they failed to do.
The Tennessee court expressly declined to analyze the solvency of the merged Finish Line-Genesco entity. UBS has filed a separate lawsuit in federal district court in New York, seeking to void its financing commitment letter on the grounds that Finish Line will not be able to deliver the solvency certificate required to close the financing.”