When is an Agreement Really an AgreementPDF

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					 When is an Agreement Really an Agreement?
 By Leslie K. Mansfield and Neil K. Haimm

 The style of drafting an M&A agreement can create unforeseen problems.

                                     eal       the transaction, entered into a merger        anything to the contrary in this
                                     lawyers   agreement with United Rentals, Inc.           Agreement…including [the specific
                                     and       (URI), an equipment rental company, to        performance clause]…[URI’s] right
                            others who         merge RAM Acquisition (a subsidiary           to receive the Parent Termination
                            participate in     of RAM Holdings) with and into URI.           Fee…shall…be the sole and exclusive
                            negotiating        Due to problems in the credit market,         remedy…of [URI] and its subsidiaries
                            agreements         RAM later attempted to pull out of the        against [RAM]…for any and all loss
                            must be careful    merger agreement. As a result, URI filed       or damage suffered …. In no event,
                            to capture the     suit in the Delaware Chancery Court           whether or not this Agreement has been
         Leslie K. Mansfield understanding      seeking to compel RAM to complete             terminated pursuant to any provision
                            of the parties     the transaction. URI argued that it had       hereof, shall [RAM]…be subject to
                            during the         a right of specific performance and            any liability in excess of the Parent
                            bargaining         asked the court to require RAM to             Termination Fee for any or all losses
                            process, and       consummate the merger. RAM’s defense          or damages relating to or arising out
                            to draft an        was that URI’s only remedy was to             of this Agreement or any transactions
                            agreement          receive a $100 million termination fee        contemplated by this Agreement…and in
                            that effectively   as provided in the merger agreement,          no event shall [URI] seek equitable relief
                            conveys the        and the court could not force RAM to          or seek to recover any money damages in
                            parties’ shared    consummate the transaction.                   excess of such amount from [RAM]….”
              Neil K. Haimm intent. As
                            a drafting         A case of two clauses                         Chancellor Chandler attempted to
 technique, lawyers often create                                                             read the conflicting provisions in
 shortcuts or carve outs from certain          The two provisions of the merger              harmony to no avail, and further
 provisions. For example, a particular         agreement at issue in URI v. RAM              determined that neither party could
 provision may be “subject to”                 were the specific performance clause           demonstrate that its interpretation of
 another provision, or a provision             and the termination fee clause. The           the conflicting provisions was the only
 may be preceded by a clause stating           specific performance clause provided           reasonable interpretation. In an effort
 “notwithstanding anything to                  that “irreparable damage would occur          to decipher the “shared intention”
 the contrary in this agreement.”              in the event that any of the provisions       of the parties, the court resorted to
 This practice can be valuable if              of this Agreement were not performed          applying the “forthright negotiator
 employed with precision, but if used          in accordance with their specific              principle” to consider the extrinsic
 carelessly, may result in ambiguous or        terms or were otherwise breached.             evidence presented with respect to the
 contradictory provisions with negative        Accordingly,…[URI] shall be entitled          negotiation process. Under the forthright
 results to each party.                        to seek an injunction or injunctions          negotiator principle, “in cases where
                                               to…enforce compliance with those              the extrinsic evidence does not lead to
 This style of drafting proved                 covenants of [RAM] that require [RAM]         a single, commonly held understanding
 troublesome for the parties negotiating       to…consummate the transactions                of the contract’s meaning, a court may
 the approximately $7 billion merger           contemplated by this Agreement …. The         consider the subjective understanding
 agreement at issue in United Rentals,         provisions of this [specific performance       of one party that has been objectively
 Inc. v. RAM Holdings, Inc. and                clause] shall be subject in all respects to   manifested and is known or should be
 RAM Acquisition Corp. In short, the           [the termination fee clause]….”               known to the other party.”
 defendants (collectively, RAM), which
 were shell entities formed by Cerberus        In relevant part, the termination             In order to prevail, URI needed
 Capital for the purpose of effecting          fee clause stated: “Notwithstanding           to demonstrate to the court that

22                                        BOARDROOM BRIEFING: MERGERS & ACQUISITIONS 2008
throughout the course of negotiations       examination of various stages of the         circuitous provisions that can lead
RAM (1) knew that specific performance       bargaining process, including prior          to misunderstandings and different
was the only available remedy under the     drafts and edits made by the parties         interpretations of the meaning of
merger agreement, or (2) should have        as a means of communicating their            the agreement. If not meticulously
known that specific performance was          interpretation of the deal. In making        drafted, adding shortcut clauses that
the only available remedy under the         its decision, the court considered           are intended to contradict or supersede
merger agreement. The court ultimately      that RAM’s president had indicated           other provisions within the agreement
found that URI failed to meet its burden    to members of URI’s team that RAM            (such as making a provision “subject
and RAM did not know, and should not        viewed the transaction as merely             to” another provision) can be careless.
have known, that specific performance        purchasing an option in URI and,             Using drafting shortcuts to obscure
was the only remedy under the               although they disagreed with his             a mutual interpretation of the terms
agreement, and the merger agreement         interpretation, he was not corrected or      of the bargain can lead to confusion,
was deemed to not grant the right to        informed of the specific performance          disagreements and, in some cases, even
specific performance.                        clause. Also, during a negotiation           adverse results in litigation.
                                            meeting, RAM’s president indicated that
Deeply flawed negotiation                    RAM would not continue negotiations          The second message from the court
                                            unless the sole penalty for failing to       is that conscientious deal participants
The evidence presented indicated to         close the transaction was to pay a           must ensure that both parties share a
the court that the parties’ process         termination fee, and the testimony at the    mutual understanding of the precise
was a “deeply flawed negotiation in          trial indicated that URI’s representatives   effects of the agreement. In fact, in the
which both sides failed to clearly and      agreed to this point. The court also         court’s conclusion, Chancellor Chandler
consistently communicate their client’s     pointed out that RAM’s mark-ups of           declared that, given the circumstances
positions.” In fact, even if URI believed   the merger agreement were substantial        surrounding the negotiation process,
the merger agreement contained a right      enough to indicate to URI that RAM did       URI had an “affirmative duty to clarify
to specific performance, URI’s attorney      not share the same understanding of          its position in the face of an ambiguous
“categorically failed” to effectively       the available remedies. URI had several      contract with glaring conflicting
convey that belief to RAM. For RAM’s        chances to express its interpretation of     provisions.” In the course of dealing
part, the court found that RAM’s attorney   the specific performance rights to RAM        with the counterparty in a negotiation,
did indeed make known its interpretation    but did not do so.                           those involved in the negotiation
that the merger agreement did not                                                        process must be aware of any indication
contain a right to specific performance.     Lessons learned                              that both parties do not share the same
                                                                                         interpretation of the contract.
The court found that RAM                    The lessons learned by observers of
communicated its understanding that         the URI v. RAM case are both the             Leslie Mansfield is an associate and Neil
the termination fee was the sole and        need for drafting clear agreement            Haimm is a partner in the Corporate Securities
exclusive remedy to URI “in such a          terms, and the importance of engaging        Group of the law firm Drinker Biddle & Reath
way that URI either knew or should          in straightforward negotiations. In          LLP ( The authors can be
have known of their understanding.”         the first instance, drafters should           contacted at and Neil.
This finding was based on an in-depth        avoid ambiguities and confusing,   

BOARDROOM BRIEFING: MERGERS & ACQUISITIONS 2008                                                                                            23

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