April 1, 2019

Rent-A-Center: Keep An Eye On The Reverse Termination Fee Decision

My recent blog about the Rent-A-Center case noted that the company’s claim for a $126.5 million reverse termination fee remains pending in the Chancery Court.  This Cleary Gottlieb blog addresses why we should pay close attention to the Court’s decision on that part of the case.

The blog points out that reverse termination fees don’t carry the kind of fiduciary duty baggage associated with seller termination fees, and are simply a matter of contract. They are often sought by sellers if the parties anticipate that antitrust regulators will either oppose the deal or require significant divestitures or demand other remedies unacceptable to the buyer.

Vintage is likely to counter Rent-A-Center’s emphasis on the terms of the contract with an argument that the fee is an unenforceable penalty. This excerpt says that the consequences of a decision in favor of Vintage could have a significant impact on how parties address antitrust risk going forward:

Should the court side with Vintage on this issue, it could potentially lead sellers to demand more express commitments from buyers in terms of offering specific divestitures and behavioral remedies to the agencies rather than relying on the stick of a large reverse termination fee coupled with a general obligation to use commercially reasonable efforts or reasonable best efforts to obtain clearance. In addition, sellers may be reluctant to proceed with a transaction involving heightened antitrust risk.

While the Delaware courts have never addressed the issue of whether a reverse termination fee involves a penalty, the issue of whether a breakup fee cast as a liquidated damages clause involved a penalty was addressed at length by the Delaware Supreme Court in Brazen v. Bell Atlantic, 695 A.2d 43 (Del. 1997). Although a lot of water has gone under the bridge on deal protections since that case, the Court’s analysis of the penalty issue may be relevant in this case as well.

John Jenkins