Whoopsie!: Missing Merger Deadlines (and the Duty of Good Faith)
The Delaware Chancery court, per Vice Chancellor Glasscock, issued an opinion in Vintage Rodeo Parent, LLC v. Rent-A-Center, Inc., 2019 WL 1223026 (Del. Ch. Mar. 14, 2019), which discussed the implications of Vintage’s inadvertent failure to meet a merger extension deadline. At stake was a $126.5 million breakup fee. The court held that the target, Rent-A-Center, had no duty to warn Vintage of the impending deadline. While the decision, which focuses on a strict reading of contractual duties is understandable, it fits uneasily with a prominent previous decision; it also seems to be missing a full analysis of the duty of good faith.
In June 2018, Vintage agreed to purchase Rent-A-Center for $15/share. Because Vintage owned another similar furniture rental business, the deal would not be able to close until after FTC antitrust review had occurred. The uncertainty around antitrust review was memorialized in three provisions of the contract: First, if the deal was terminated because of lack of FTC approval, Vintage would have to pay Rent-A-Center a $126.5 million breakup fee. Second, the parties agreed that if the deal had not closed by the drop-dead date of December 17, then either party could walk away. However, and finally, if the drop-dead date arrived and the parties were still waiting for FTC approval, either party could decide to extend by three months by giving notice (with a second subsequent extension contemplated).
With the merger signed, Vintage Capital and Rent-A-Center diligently worked together to close the deal. They worked on financial models and integration of the two businesses and to obtain the necessary FTC approvals. But the FTC had questions, and there were delays. Together, the parties issued a joint press release stating that the merger would close after the drop dead date.
While this was happening, Rent-A-Center’s fortunes improved. In fact, they improved so much that to Rent-A-Center’s board, the Vintage merger no longer seemed like a good deal. In a December 2018 meeting, Rent-A-Center’s board decided that, if they had a choice, they would not extend the date for completion, and would instead walk away and seek to collect the $126.5 million breakup fee. But this seemed like a choice that could never happen. Logically, Vintage would decide to extend the deal; it was in Vintage’s financial interest to have the merger move forward. And so the Rent-A-Center board decided to keep the matter confidential, and in the meantime to keep working with Vintage to close the deal.
Everything was proceeding apace, but then December 17 came and went without any request for an extension by Vintage. On December 18, Rent-A-Center terminated the merger agreement and requested the $126.5 million breakup fee.
Vintage’s response was apparently unprintable, so a stop at the Delaware Chancery Court ensued. But Vice Chancellor Glasscock was wholly unsympathetic to Vintage’s claims. Essentially he held the parties to the exact letter of the contract, and said that if Vintage failed to remember to ask for an extension, that was their fault and no one else’s. As for Rent-A-Center, it had no “duty to warn” Vintage of the upcoming deadline. Staying silent paid off for Rent-A-Center.
While I can certainly understand the strict reading of the contract and the idea that each party has the responsibility to look out for its own interests, it is difficult to square this opinion with a leading case that discusses the duty of good faith in similar circumstances.
In Market Street Associates v. Frey, 941 F.2d 588 (7th Cir. 1991), Judge Richard Posner considered the implications of one party staying silent about the other side’s contractual obligations. That case involved a complicated commercial real estate deal. (The facts are unimportant for the present discussion). Suffice it to say that by staying silent about a contractual provision, Market Street was able to purchase the property in question at an extremely low price.
One way of interpreting the facts was to say that there was no bad faith on the part of Market Street Associates:
“[Market Street Associates] acted honestly, reasonably, without ulterior motive, in the face of circumstances as they actually and reasonably appeared to it. The fault was the pension trust's incredible inattention, which misled Market Street Associates into believing that the pension trust had no interest in financing the improvements regardless of the purchase option. We do not usually excuse contracting parties from failing to read and understand the contents of their contract; and in the end what this case comes down to—or so at least it can be strongly argued—is that an immensely sophisticated enterprise simply failed to read the contract.”
But Judge Posner also suggested a contrasting interpretation:
“On the other hand, such enterprises [the pension trust] make mistakes just like the rest of us, and deliberately to take advantage of your contracting partner's mistake during the performance stage (for we are not talking about taking advantage of superior knowledge at the formation stage) is a breach of good faith. To be able to correct your contract partner's mistake at zero cost to yourself, and decide not to do so, is a species of opportunistic behavior that the parties would have expressly forbidden in the contract had they foreseen it. The immensely long term of the lease amplified the possibility of errors but did not license either party to take advantage of them.”
In light of these two vastly different interpretations, Judge Posner remanded the case for further findings of fact, noting that the issue of good faith turned on a state of mind question. Was it trickery or just a belief that the other side was already aware of the contract provision? The opinion was attuned to both possibilities.
Returning to the merger dispute in Rent-A-Center, the Delaware Chancery Court seems to have considered only one side of the story, the one in which promises are enforced exactly as written. The court seems not to have considered (or cared much) for the alternate scenario, in which Rent-A-Center’s silence could be seen as opportunistic behavior. The duty of good faith seems to have been missing in the analysis.
Or, as Bloomberg journalist Matt Levine put it in his blog post, “Don’t Forget to Do Your Merger” (https://www.bloomberg.com/opinion/articles/2019-03-15/don-t-forget-to-do-your-merger):
You are not supposed to forget to close a billion-dollar deal, but there you are, working so hard to do the actual hard complicated nuanced substantive things required to get the deal closed, I can see how sending a one-sentence formal notice might slip your mind. The expectation, once you have signed a merger agreement, is that you’re all in it together, that you’re all working hard toward the same goal and that you all want to achieve it. You’re one team, in a deep and meaningful and presumably permanent relationship; you’re not supposed to be harboring secret doubts or plotting your escape. But sometimes the other side is!
This seems completely accurate; it is true that Vintage was certainly the least cost avoider in this situation. But does this decision allow for too much gamesmanship, too great an opportunity for opportunism? Typically strategy takes place in negotiations, not when the parties have already agreed to bind themselves to a contract.
Be that as it may, the opinion is just one more reminder about the importance of being diligent. Having a checklist and making a timeline of a deal aren’t especially exciting tasks. But they do ensure that neither side is making a basic mistake, and they protect each party from the secret or disguised intentions of the other side.