In a $1.365 Billion Merger, the Target Company “Blindsided” the Proposed Buyer by Terminating the Merger Agreement and the Court Upheld the Termination; Court Requests Further Briefing Re the $126.5 Million Reverse Termination Fee
In Vintage Rodeo Parent, LLC et al. v. Rent-A-Center, Inc., C.A. No. 2018-0927-SG (Del. Ch. March 14, 2019), the Delaware Court of Chancery (the “Court”) held that the target company Rent-A-Center, Inc. (“Rent-A-Center”) validly exercised its right to terminate the $1.365 billion merger under the merger agreement (the “Merger Agreement”) among Rent-A-Center and the proposed buyer Vintage Capital Management, LLC and certain affiliates (collectively, “Vintage”), despite Vintage’s claims that the term of the Merger Agreement had already been extended or, alternatively, that Rent-A-Center had not validly terminated.
In June 2018, Rent-A-Center and Vintage entered into the Merger Agreement, which included a provision specifying an “End Date” six months after signing. Before the End Date, either party could unilaterally extend the End Date for three months by providing written notice of the election to extend before the original End Date. After the passing of the End Date, both parties would still be bound by the Merger Agreement, but either party could terminate by providing written notice. The Merger Agreement further provided that if Vintage chose not to extend the End Date, Vintage and its banker would be liable for a reverse termination fee (“RTF”) of $126.5 million, equal to 15.75% of the equity value of the transaction (several times higher than the typical RTF percentage).
After the Merger Agreement was signed, the parties began integration and legal approval procedures. Required legal approvals included an approval from the Federal Trade Commission (“FTC”), as Vintage was also the indirect owner of another “rent-to-own” retailer and competitor of Rent-A-Center, Buddy’s. The FTC approval process proved more complex than initially anticipated, and the parties began to estimate a closing date in the first quarter of 2019, despite the upcoming End Date in December 2018.
In early December 2018, the Rent-A-Center board met for its regularly scheduled meeting and addressed the issue of whether it should terminate the Merger Agreement after the End Date passed. The board assumed that Vintage would unilaterally elect to extend the End Date. If Vintage did not so elect, the board concluded that Rent-A-Center should exercise its right to terminate because the merger was no longer in the best interests of Rent-A-Center due to Rent-A-Center’s improved financial and operational performance subsequent to the signing of the Merger Agreement.
The board also concluded that, in the interim, management should continue to use commercially reasonable efforts to consummate the merger. The End Date passed without Vintage having provided the extension notice. Shortly thereafter, Rent-A-Center terminated the Merger Agreement and requested payment of the RTF. Vintage quickly brought an action seeking a declaratory judgment that the Merger Agreement had not been validly terminated. Vintage argued: (1) the purpose of the required notice of extension had been satisfied and, therefore, no additional notice was required; (2) Rent-A-Center had either itself extended the Merger Agreement or waived the notice requirement; (3) if the contemplated notice was required, that a Rent-A-Center financial model planning for a 2019 closing date fulfilled the notice requirement; (4) Rent-A-Center did not have the right to terminate the Merger Agreement because it had failed to use commercially reasonable efforts to close and had therefore breached the Merger Agreement; and (5) Rent-A-Center should be equitably estopped from exercising its termination right. Rent-A-Center countersued for payment of the RTF, and Vintage’s banker intervened seeking a declaratory judgment that the RTF was unenforceable.
With respect to the first argument, Vintage contended that the Joint Timing Agreement that the parties entered into with the FTC represented Vintage’s election to extend the End Date, because the parties agreed with the FTC that closing would not take place until after the End Date. The Court rejected this argument, stating that the Joint Timing Agreement was part of the parties’ contractual obligations to use commercially reasonable efforts to close the transaction, and that the doctrine of substantial compliance did not apply.
In its second argument, Vintage alleged that Rent-A-Center’s entry into the Joint Timing Agreement constituted either an election to extend the End Date or a waiver of the End Date extension notice requirement. The Court rejected this argument for the same reasons, stating that the Joint Timing Agreement did not evidence any intent by Rent-A-Center to extend the End Date or waive its right to such notice.
With respect to the third argument, Vintage contended that Rent-A-Center itself provided the requisite End Date extension notice by providing a financial model that anticipated a closing date of January 2019. The Court again held that these actions were merely part of Rent-A-Center’s obligations to use commercially reasonable efforts to close the transaction.
In its fourth argument, Vintage alleged that Rent-A-Center failed to use commercially reasonable efforts to consummate the merger by not indicating that to Vintage that Rent-A-Center had resolved to terminate the merger. The Court rejected this argument as well, holding that Vintage did not prove that the confidentiality of the decision was to avoid “tipping off” Vintage, and stating that commercially reasonable efforts do not require that sophisticated parties remind one another of their contractual rights.
Vintage’s final argument was that the implied covenant of good faith and fair dealing should be applied to prevent Rent-A-Center from exercising its termination right because the implied covenant contains a “no deception” requirement. The Court similarly rejected this argument, stating that Vintage cannot have reasonably relied on Rent-A-Center’s actions in deciding not to provide the notice, nor did it change positions based on any such reliance.
The Court ultimately upheld Rent-A-Center’s termination of the Merger Agreement. As to the RTF, however, the Court questioned whether the parties intended the RTF to apply in a situation where the buyer wanted to close but merely forgot to extend the Merger Agreement. Thus, the Court requested additional briefing regarding whether the RTF should be payable, in light of the implied covenant of good faith and fair dealing.