Vintage Rodeo Parent, LLC v. Rent-A-Center, Inc.

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
VINTAGE RODEO PARENT, LLC, a Delaware )
limited liability company, VINTAGE RODEO )
)
ACQUISITION, INC., a Delaware corporation,
and VINTAGE CAPITAL MANAGEMENT, )
LLC, a Delaware limited liability company,
)
)
Plaintiffs, )
)
and )
)
B. RILEY FINANCIAL, INC., a Delaware )
corporation, )
)
Intervenor-Plaintiff, )
)
v. ) C.A. No. 2018-0927-SG
)
RENT-A-CENTER, INC., a Delaware )
corporation, )
)
Defendant. )
)
RENT-A-CENTER, INC., a Delaware )
corporation, )
)
Counterclaim-Plaintiff, )
)
v. )
)
VINTAGE RODEO PARENT, LLC, a Delaware )
limited liability company, )
)
and )
)
B. RILEY FINANCIAL, INC., a Delaware )
corporation, )
)
Counterclaim-Defendants. )
MEMORANDUM OPINION
Date Submitted: March 11, 2019
Date Decided: March 14, 2019
William B. Chandler III, Bradley D. Sorrels, Shannon E. German, and Andrew D.
Berni, of WILSON SONSINI GOODRICH & ROSATI, P.C., Wilmington,
Delaware; William M. Lafferty, Thomas W. Briggs, Jr., and Richard Li, of MORRIS,
NICHOLS, ARSHT & TUNNELL LLP, Wilmington, Delaware; OF COUNSEL:
David J. Berger and Katherine Henderson, of WILSON SONSINI GOODRICH &
ROSATI, P.C., Palo Alto, California; Tariq Mundiya, Jeffrey Korn, Sameer Advani,
and Shaimaa Hussein, of WILLKIE FARR & GALLAGHER LLP, New York, New
York, Attorneys for Plaintiffs Vintage Rodeo Parent, LLC, Vintage Rodeo
Acquisition, Inc., and Vintage Capital Management, LLC.
David E. Ross and S. Michael Sirkin, of ROSS ARONSTAM & MORITZ LLP,
Wilmington, Delaware; OF COUNSEL: Bruce Van Dalsem, William C. Price, and
Scott B. Kidman, of QUINN EMANUEL URQUHART & SULLIVAN, LLP, Los
Angeles, California; Andrew J. Rossman, Jane M. Byrne, Corey Worcester, Ellyde
R. Thompson, Guyon H. Knight, Elisabeth B. Miller, and Hope D. Skibitsky, of
QUINN EMANUEL URQUHART & SULLIVAN, LLP, New York, New York,
Attorneys for Intervenor-Plaintiff B. Riley Financial, Inc.
Michael A. Pittenger, T. Brad Davey, Matthew F. Davis, Jaqueline A. Rogers, and
Caneel Radinson-Blasucci, of POTTER ANDERSON & CORROON LLP,
Wilmington, Delaware; OF COUNSEL: John W. Spiegel, George M. Garvey, Robert
L. Dell Angelo, and John M. Gildersleeve, of MUNGER, TOLLES & OLSON LLP,
Los Angeles, California, Attorneys for Defendant Rent-A-Center, Inc.
GLASSCOCK, Vice Chancellor
Plaintiff Vintage Capital Management, LLC (“Vintage Capital) indirectly
owns stores offering consumer goods to the public under the trade name “Buddy’s.”
Buddy’s is a “rent-to-own” retailer. This business model offers consumers an
alternative to paying for goods with cash or credit, and taking immediate title. Under
the rent-to-own model, as I understand it, the consumer “rents” the item, the seller
retains title, the consumer makes payments denominated “rental payments,” which
contain an amount of principal payment, and if the consumer is able to complete the
contractual payments, title is then transferred to the consumer. Vintage Capital,
through two affiliates (collectively with Vintage Capital, “Vintage” or the “Vintage
Entitities”), entered a merger agreement to acquire Defendant Rent-A-Center, Inc.
(“Rent-A-Center”), a bigger player in the rent-to-own market. Because of the
overlap of these competing retail operations, the parties knew that Federal Trade
Commission (“FTC”) permission would be required for the merger, and that the
review process could be lengthy. Therefore, in a vigorously negotiated provision,
the merger agreement provided an “End Date,” six months from signing, after which
either party could terminate the merger agreement. If, however, the FTC review
process was still ongoing, each party negotiated for itself the unilateral right to
extend the End Date for three months (and a second time for an additional three
months), by giving the other side notice of the election to extend before the original
End Date. By doing so, the extending party was binding both its counterparty and
itself to compliance with the merger terms during the extension period. If neither
party chose to extend the End Date, the merger was not terminated once that date
had passed—both parties were still bound by the merger agreement, but either could
terminate at will, simply by giving notice.
Thus, as the End Date approached, each party had a set of decisions to
contemplate. It could give notice of election to extend, in which case both it and its
counterparty would be bound to use commercially reasonable efforts to close during
the extension period before the new End Date. If it chose not to extend, the party
would nonetheless continue to be so bound if the counterparty gave notice of election
to extend.
If neither party gave the required notice, the parties were free to proceed to
closing, but with the knowledge that either party had the right to terminate at will
before closing.
These decisions were complicated by another bargained-for set of provisions,
involving breakup fees. If Vintage chose not to extend the End Date, it (and its
banker, B. Riley Financial, Inc. (“B. Riley”), an intervenor here) was (at least per
Rent-A-Center) liable for a reverse breakup fee if either party terminated thereafter.
Adjectives are often misplaced in legal opinions; nonetheless, I am comfortable
2
describing the size of the reverse breakup fee, in light of the entity to be acquired, as
enormous. 1
At a meeting of Rent-A-Center’s Board of Directors (the “Board”) shortly
before the End Date, the Board was given a presentation by corporate counsel.
According to counsel, the Board was faced with the decision matrix described above:
whether it should unilaterally extend the End Date, and if not—and if Vintage chose
not to extend—should it immediately cancel the merger, or proceed towards closing?
The Rent-A-Center Board determined that it was, by that point, no longer in the
corporate interest to proceed under the terms of the merger agreement. It decided,
therefore, not to elect extend the End Date, and, should Vintage not elect to extend,
to terminate the merger. The Rent-A-Center Board was told by counsel that it was
likely that Vintage would extend, given, I assume, market conditions and the reverse
breakup fee. In that case, Rent-A-Center would be bound to continue to use
commercially reasonable efforts to obtain FTC approval and consummate the
1
The reverse termination fee here is $126.5 million, or 15.75% of the equity value ($803 million)
of the prospective transaction. See JX 691 (Expert Report of Professor Guhan Subramanian) ¶ 19.
According to the report of the Plaintiffs’ expert, Professor Subramanian, 15.75% is two to three
times higher than average in comparable deals. See JX 691 ¶¶ 43–69. By contrast, the Defendant’s
expert, Professor Rock, notes, among other things, that while the reverse termination fee here is
above average, reverse termination fees are necessarily deal-specific and that there are examples
of reverse termination fees within the same range as the one at issue here. See JX 696 (Expert
Report of Edward B. Rock) ¶¶ 80, 81. I note, however, that this Court has generally found
termination fees of around 3% to be reasonable, subject to deal-specific factors. See, e.g.,
McMillan v. Intercargo Corp., 768 A.2d 492 (Del. Ch. 2000); In re Pennaco Energy, Inc., 787
A.2d 691 (Del. Ch. 2001); In re Toys “R” US, Inc. S’holder Litig., 877 A.2d 975 (Del. Ch. 2005);
La. Municipal Police Emps.’ Ret. Sys. v. Crawford, 918 A.2d 1172 (Del. Ch. 2007); In re Dollar
Thrifty S’holder Litig., 14 A.3d 573 (Del. Ch. 2010).
3
merger. If Vintage made the surprising decision not to give notice of an election to
extend, Rent-A-Center was ready to exercise its resulting right to terminate,
immediately. As it happened, Vintage failed to give notice of an election to extend,
and a few hours later, Rent-A-Center gave the notice required to terminate the
merger agreement.
Vintage Capital was blindsided. In this litigation, it seeks relief including a
declaration that Rent-A-Center’s notice of termination was ineffective, and an order
that the parties must proceed to obtain FTC approval and merge. If that is to occur,
it is apparent that it must happen quickly; therefore, Vintage pursued this action on
an expedited basis. This matter was tried for two days, post-trial argument followed
quickly on March 11, 2019, and this partial (and rough-and-ready) decision is the
result.
Vintage Capital makes a number of arguments, but principally two, which I
find somewhat in tension. First, Vintage asserts that it and Rent-A-Center took
numerous actions during the six months following execution of the merger
agreement that were intended to achieve regulatory approval, and that these actions
and the accompanying joint documents executed by Rent-A-Center and the Vintage
Entities made clear that Rent-A-Center expected the merger to close after the End
Date. Therefore, per Plaintiffs, Vintage had (through the joint documents)
adequately given notice of its election to extend, or the extension notice provision
4
had lost its relevance (and enforceability) in light of both parties’ intent to proceed
past the End Date, or Rent-A-Center had, through its actions, waived the notice of
election to extend. The problem, in my view, with these assertions, is that the
parties’ activities are consistent with their obligations to use commercially
reasonable efforts to obtain FTC approval and close; the ability of the counterparty
to extend the End Date unilaterally meant that the parties were required to plan for
such activities beyond the original End Date. Therefore, these documents and
actions are not inconsistent with an intention to terminate, if such an opportunity
became available. As such, they are insufficient to bind the parties under the theories
set out above; they are consistent with the merger agreement, which contemplated,
but did not require, extension of the End Date.
The other theory the Plaintiffs advance is that Rent-A-Center’s behavior was,
in effect, fraudulent. Once the Rent-A-Center Board determined, less than two
weeks before the original End Date, that it was in the company’s interest not to
merge with Vintage, Rent-A-Center concealed its intent by continuing to act as
though it were willing to consummate the merger. The Rent-A-Center Board, in this
view, was hoping that Vintage would choose not to—or would forget to—give
notice of extension. If Rent-A-Center had conveyed its real intent to Vintage, or at
least acted like a reluctant merger partner, Vintage would have been more scrupulous
in exercising its right to extend, presumably by giving the notice required by the
5
merger agreement. While Vintage couches this as a breach of Rent-A-Center’s duty
to use commercially reasonable efforts to close, this strikes me as the equivalent of
a “duty to warn” Vintage of the approaching End Date, which Vintage itself does
not contend exists under law or under the merger agreement. More fundamentally,
Rent-A-Center had no reason to believe that Vintage had forgotten or misunderstood
its options under the merger agreement, and it believed that Vintage Capital would
extend; therefore, Rent-A-Center would continue to be required to expend
commercially reasonable efforts toward closing going forward. I find its behavior
to be consistent with that understanding.
It is, I find, telling what the Plaintiffs did not present at trial. The Plaintiffs
did not attempt to explain why they did not deliver notice of their election to extend,
as called for in the merger agreement. They presented no evidence, for example,
indicating that Vintage’s principals considered the approaching End Date and the
contractual option to elect extension, but concluded it would not be necessary to give
written election notice out of the belief that Vintage had already bound Rent-A-
Center for an additional three months, or that Rent-A-Center had waived notice of
election to extend. To the contrary, Vintage’s arguments are after-the-fact
rationalizations as to why failure to give written notice of election to extend is
excused. I am left to the startling conclusion that, having vigorously negotiated a
provision under which Vintage was entitled to extend the End Date simply by
6
sending Rent-A-Center notice of election to do so by a date certain, Vintage and B.
Riley personnel, in the context of this $1 billion-plus merger, simply forgot to give
such notice. As one B. Riley principal messaged another, immediately upon learning
of the failure of notice, “We are [prejudiced in the extreme].” 2 This attempt by the
Plaintiffs to demonstrate that Rent-A-Center nonetheless was not free to terminate
followed.
At bottom, the Plaintiffs’ argument is that they were working in good faith
toward a 2019 closing, which was expected to occur only after the first End Date,
and that Rent-A-Center made it abundantly clear that it was working toward the
same goal. Both parties had committed much time and effort in that regard, as
required by the merger agreement. Under these circumstances, per the Plaintiffs, it
is unfair to allow Rent-A-Center to exercise the letter of its bargained-for rights and
walk away from the contract, because of a mistaken failure by Vintage to exercise a
right that Rent-A-Center must have known Vintage wanted to exercise. I find,
however, that the End Date, and the methods to extend it, were matters of importance
to the parties, and were heavily negotiated. The parties are bound to their contractual
bargain. And a finding that contractually-required expenditures of time and effort
2
JX 39, at 155 (expletives modified in accordance with context). In fact, the message employed
an Anglo-Saxon expression that, while generally unfit for publication, when used metaphorically
has many meanings. I am convinced from context, however, that the meaning the message
attempted to express was “prejudiced in the extreme.” I note that Vintage’s principal had a
different reaction; in a text to his partner, he wrote: “No idea what [Rent-A-Center’s] thinking.
They know its [sic] extended.” JX 870.
7
made, before the End Date, equated to sufficient notice of election to extend, would
fundamentally rewrite the bargain of the parties. I explain my reasoning below.
Also pending before me is B. Riley’s argument that the reverse breakup fee is
untethered to actual damages, and is, therefore, unenforceable. Because of the need
to issue my decision quickly in this expedited matter, I have not resolved that issue
here. At the end of this Memorandum Opinion, I lay out the issues regarding the
reverse breakup fee, and seek additional briefing on whether the implied covenant
of good faith and fair dealing should apply to liability for a reverse break fee in these
circumstances, where the buyer remains willing and able to proceed toward closing.
I. BACKGROUND
Trial took place over two days, during which eight witnesses gave live
testimony. The parties submitted over seven hundred exhibits and lodged eighteen
depositions, as well as competing expert reports. The following facts were stipulated
by the parties 3 or proven by a preponderance of the evidence at trial.
A. The Parties
1. The Vintage Entities
Plaintiff Vintage Capital is a Delaware limited liability company with its
principal place of business in Orlando, Florida.4 Vintage Capital’s managing partner
3
The parties stipulated certain facts in their Joint Pre-Trial Stipulation and Order (“Pre-Trial
Order”). I commend the parties for the excellent craftsmanship at trial and in briefing, made all
the more remarkable given these expedited proceedings.
4
Pre-Trial Order ¶ II.A.1.
8
is Brian Kahn (“Kahn”). 5 Vintage Capital is the controlling stockholder of Buddy’s
Newco, LLC d/b/a Buddy’s Home Furnishings (“Buddy’s”). 6 Buddy’s, in turn, is a
privately held operator and franchisor of rent-to-own stores, and has close to three
hundred locations across the United States and Guam. 7
Plaintiff Vintage Rodeo Parent, LLC (“Vintage Parent”)8 is a Delaware
limited liability company. 9 Vintage Parent is an affiliate of Vintage Capital.10
Plaintiff Vintage Rodeo Acquisition, Inc. (“Vintage Merger Sub”) is a Delaware
corporation, and the wholly-owned subsidiary of Vintage Parent. 11 Vintage Parent
and Vintage Merger Sub were formed for the purpose of acquiring Defendant Rent-
A-Center through a merger of Vintage Merger Sub and Rent-A-Center (the
“Merger”).12 Vintage Capital, Vintage Parent, and Vintage Merger Sub are, again,
collectively referred to as “Vintage” or the “Vintage Entities.”
2. B. Riley Financial, Inc.
Intervenor-Plaintiff B. Riley Financial, Inc. 13 is a publicly traded Delaware
corporation with its principal place of business in Woodland Hills, California.14 B.
5
Kahn Dep. 13:6–13:8.
6
Pre-Trial Order ¶ II.A.1.
7
Id.8
Vintage Parent is also a Counterclaim-Defendant.
9
Pre-Trial Order ¶ II.A.2.
10
Id.11
Id. ¶ II.A.3.
12
Id. ¶¶ II.A.2, II.A.3; see also JX 272.
13
B. Riley is also a Counterclaim-Defendant.
14
Pre-Trial Order ¶ II.A.4.
9
Riley’s Chairman and CEO is Bryant Riley (“Mr. Riley”). 15 B. Riley is a financial
services company. 16 B. Riley and Vintage Capital have previously worked together
on a number of investments.17 Here, B. Riley arranged debt and equity financing for
the Merger.
3. Rent-A-Center, Inc.
Defendant Rent-A-Center18 is a publicly traded Delaware corporation with its
principal place of business in Plano, Texas. 19 Rent-A-Center operates
approximately 2,400 rent-to-own stores in the United States, Mexico, Canada, and
Puerto Rico, and is the franchisor of approximately 250 rent-to-own stores.20 In
addition to stores, Rent-A-Center operates approximately 1,250 kiosks in the stores
of third-party retailers, where the third-party retailers’ customers can obtain rent-to-
own financing through Rent-A-Center’s Acceptance Now operating segment
(“Acceptance Now”). 21
15
Trial Tr. 301:20–302:9 (B. R. Riley).
16
Id. at 303:1–304:17 (B. R. Riley).
17
Id. at 27:23–28:7 (Kahn); id. at 306:4–307:7 (B. R. Riley).
18
Rent-A-Center is also a Counterclaim-Plaintiff.
19
Pre-Trial Order ¶ II.A.5.
20
Id.21
Id.; JX 66, at 53.
10
B. The Rent-A-Center Sales Process and Negotiation of the Merger
Agreement with Vintage
1. Rent-A-Center Pursues a Sale
In 2017, a Rent-A-Center stockholder, Engaged Capital, ran a successful
proxy contest to elect nominees to Rent-A-Center’s Board. 22 Engaged Capital’s
slate included Mitch Fadel (“Fadel”), a longtime Rent-A-Center employee who had
left the company in 2015.23 As a result, Fadel was elected to Rent-A-Center’s Board
of Directors in June 2017. 24 Around the same time, Vintage Capital sent Rent-A-
Center an unsolicited bid to acquire all of Rent-A-Center’s common stock for $15
per share, but Rent-A-Center’s Board decided not to pursue the bid. 25
At the end of October 2017, Rent-A-Center’s Board designated certain
directors, including Fadel, to serve on a steering committee to advise the Board on
strategic alternatives, including the possibility of a sale. 26 The Board hired J.P.
Morgan to help with the process. 27 On November 7, 2017, Vintage Capital sent
another unsolicited proposal to Rent-A-Center, which was declined, given the early
stage of the strategic review process.28 In December 2017, J.P. Morgan, on behalf
of the steering committee, identified and contacted thirty potential acquirors,
22
JX 316, at 36; Trial Tr. 499:20–500:4 (Fadel).
23
Trial Tr. 494:9–495:2, 499:20–500:4 (Fadel).
24
JX 316, at 36; Trial Tr. 499:20–500:16 (Fadel).
25
Pre-Trial Order ¶ II.A.6.
26
Id. ¶ II.A.7; JX 316, at 37; Trial Tr. 508:1–10 (Fadel).
27
Pre-Trial Order ¶ II.A.9; JX 316, at 36–39; Trial Tr. 501:8–19 (Fadel).
28
Pre-Trial Order ¶ II.A.8; JX 316, at 37.
11
including Vintage Capital. 29 At the end of 2017, Rent-A-Center’s CEO retired, and
Fadel became CEO on January 2, 2018.30
Of the thirty parties contacted by J.P. Morgan, eleven signed non-disclosure
agreements (“NDAs”) with Rent-A-Center, including Vintage Capital.31
Discussions with potential acquirors continued into 2018.32 Only three potential
acquirors were considered serious bidders; by May 2018, two of the serious bidders
had effectively dropped out, leaving Vintage Capital as the sole potential acquiror.33
On June 10, 2018, Rent-A-Center publicly announced it was terminating its strategic
review process, and on the same day, Vintage Capital made an acquisition offer of
$14 per share.34 After further discussion, on June 17, 2018, Vintage Capital raised
its offer to $15 per share in cash, a forty-seven percent premium over Rent-A-
Center’s closing price on October 30, 2017.35 Vintage Capital’s offer represented
“total consideration of approximately $1.365 billion, including net debt.” 36 After
receiving J.P. Morgan’s opinion, the Rent-A-Center Board voted unanimously to
approve the transaction with Vintage Capital, and the parties executed the
29
Pre-Trial Order ¶ II.A.9.
30
JX 316, at 38; Trial Tr. 502:8–17 (Fadel).
31
Pre-Trial Order ¶ II.A.9.
32
Id. ¶ II.A.10.
33
Id. ¶¶ II.A.9, II.A.10; JX 316, at 38–44.
34
Pre-Trial Order ¶ II.A.10.
35
Id. October 30, 2017 was the trading day before Rent-A-Center announced it was looking at
strategic alternatives. Id.36
JX 263.
12
Agreement and Plan of Merger (the “Merger Agreement”)37 on June 17, 2018.38
Rent-A-Center and Vintage Capital issued a joint press release the next day
announcing the Merger; the press release stated that the Merger was “expected to
close by the end of 2018.”39
2. Vintage Capital Engages B. Riley to Finance the Transaction
On March 24, 2018, J.P. Morgan circulated a proposed merger agreement to
the (at that point) three prospective acquirors.40 During the negotiation period that
followed, Vintage Capital engaged B. Riley to arrange “backstop” debt and equity
financing for the prospective transaction.41 As a result, B. Riley, and its subsidiary
Great American Capital Partners, agreed to provide a large portion of the total debt
and equity to finance the Merger. 42 Of the debt financing, $275 million was in the
form of a “liquidation loan” from Great American Capital Partners, and was secured
by Acceptance Now’s assets. 43 In addition to providing debt and equity financing,
37
The Plaintiffs cite to JX 272 for the Merger Agreement, and the Defendant cites to JX 227. JX
227 was the executed version on July 17, 2018; the following day, the parties corrected several
formatting issues, and the Merger Agreement in JX 272 was the version filed with the SEC. See
JX 272. The two versions are, in pertinent part, identical. I cite to JX 272 for convenience. I also
note that, for purposes of clarity, I cite to the sections of the Merger Agreement rather than page
numbers.
38
Pre-Trial Order ¶ II.A.11; JX 227; JX 238; JX 266; JX 316, at 41, 48.
39
JX 263.
40
JX 316, at 40.
41
Id. at 44. Mr. Riley explained at trial that “backstop” in this context meant that “if [B. Riley]
could not syndicate [the debt] by the time the transaction closed, [B. Riley] would fund it off of
[its] balance sheet.” Trial Tr. 308:24–309:4 (B. R. Riley).
42
JX 233; JX 315, at 65; JX 826, at 1; JX 828, at 1.
43
Trial Tr. 27:15–22 (Kahn); see also JX 233, at 2.
13
B. Riley agreed to guarantee, among other things, a $126.5 million parent
termination fee contained in the Merger Agreement, discussed at length below. 44
C. The Merger Agreement
Rent-A-Center and Vintage Capital exchanged multiple drafts of the Merger
Agreement between March 24, 2018, when Rent-A-Center first circulated a
proposed merger agreement, and June 17, 2018, when the parties executed the
Merger Agreement.45 Given that Buddy’s was one of Rent-A-Center’s largest
competitors,46 the parties expected that the Merger would require antitrust clearance
from the FTC; accordingly, the Merger Agreement specifically references the Hart-
Scott-Rodino (“HSR”) Act and the process of obtaining regulatory approval from
the FTC.47
1. Commercially Reasonable Efforts
The parties, in various provisions of the Merger Agreement, contracted to use
“commercially reasonable efforts” to take certain actions and to achieve certain
goals, both general and specific. In Section 6.03, the parties agreed to use
commercially reasonable efforts to take all action necessary under the Merger
44
Pre-Trial Order ¶ II.A.13; JX 229. B. Riley executed the “Limited Guarantee” concurrent with
the execution of the Merger Agreement. Pre-Trial Order ¶ II.A.13.
45
See JX 44; JX 48; JX 59; JX 71; JX 78; JX 81; JX 86; JX 106; JX 110; JX 148; JX 159; JX 167;
JX 172; JX 187; JX 199; JX 211; JX 225; JX 244; JX 245; JX 246; JX 250; JX 252; JX 255; JX
271.
46
Pre-Trial Order ¶ II.A.1.
47
See, e.g., JX 272 §§ 6.18, 7.01(b).
14
Agreement to “consummate and make effective as promptly as practicable . . . the
transactions contemplated by [the Merger Agreement].” 48 In Section 6.11(f), Rent-
A-Center agreed to use commercially reasonable efforts to satisfy the conditions of
the financing for the transaction, including specific actions, such as attending certain
meetings and providing financial information.49
With regard specifically to obtaining antitrust approval for the Merger, in
Section 6.18(a) the parties agreed to use commercially reasonable efforts both to
make all filings and to take all steps to obtain government approval of the Merger.50
The Merger Agreement specified certain of the steps, such as making a filing
pursuant to the HSR Act within twenty days of the Merger Agreement. 51
Vintage Parent and Vintage Merger Sub further agreed in Section 6.18(b) to
use “commercially reasonably efforts to . . . promptly undertake . . . any and all
action necessary or advisable to avoid, prevent, eliminate or remove the actual or
threatened commencement of any action by . . . any Government Entity . . . that
would . . . prevent the consummation of the Merger or the other transactions
contemplated.” 52 Section 6.18(b) is referred to as a “hell or high water” provision,53
48
Id. § 6.04.
49
Id. § 6.11(f).
50
Id. § 6.18(a).
51
Id.
52
Id. § 6.18(b).
53
See Trial Tr. 132:5–15 (Ferris) (A “hell or high water” provision is “[b]asically that the buyer
had to remove every impediment to clearance, and every antitrust impediment to clearance.”).
15
and it specifically included the possibility of Vintage Capital’s divesture of
Buddy’s. 54
2. Closing Date, Effective Time, and End Date
The “Closing Date” of the Merger Agreement is defined as the date on which
the “Closing” occurs, and is further defined to occur on a date to be specified by
Rent-A-Center and Vintage Parent following the “satisfaction or . . . waiver by the
party . . . entitled to the benefits thereof of the conditions set forth in Article VII
. . . .” 55 Article VII of the Merger Agreement sets out conditions precedent, such as
Rent-A-Center stockholder approval of the Merger, 56 government consent for the
merger, 57 material performance of the obligations of the parties,58 and the lack of a
Rent-A-Center material adverse effect, 59 among others.
On the Closing Date, the parties to the Merger Agreement are obligated to file
a certificate of merger with the Delaware Secretary of State. 60 The Merger becomes
54
JX 272 § 6.18(b) (“[Vintage Parent] and [Vintage Merger Sub] shall . . . use their respective
commercially reasonable efforts . . . including (i) proffering and consenting and/or agreeing to an
Order or other agreement providing for the sale . . . of particular assets . . . of Vintage Parent (or
any of its Affiliates, including Buddy’s Newco, LLC) . . . .”).
55
Id. § 1.03. The date specified, however, could be no later than the third business day following
the satisfaction or waiver of the conditions in Article VII of the Merger Agreement. Id.
56
Id. § 7.01(a).
57
Id. § 7.01(b).
58
Id. §§ 7.02(b), 7.03(b).
59
Id. § 7.03(c).
60
Id. § 1.02.
16
effective when the certificate is filed, or at a later time if specified in the certificate.61
The time the merger becomes effective is defined as the “Effective Time.” 62
The “End Date” of the Merger Agreement is defined as “11:59 p.m., Eastern
Time, on December 17, 2018.”63 According to Section 8.01(b)(i) of the Merger
Agreement “either [Vintage Parent] or [Rent-A-Center] may elect (by delivering
written notice to the other party at or prior to 11:59 p.m., Eastern time, on December
17, 2018) to extend the End Date to March 17, 2019,” provided that the Effective
Time has not occurred by the End Date and “the conditions set forth in Section
7.01(b) or Section 7.01(c) shall not have been satisfied . . . .”64 Section 7.01(b)
contains the condition that “[a]ny applicable waiting period under the HSR Act shall
have expired or been earlier terminated and all other required consents under any
Antitrust Laws shall have been obtained.”65 Section 7.01(c) contains the condition
that no “Legal Restraint”66 “is in effect and makes the Merger illegal or otherwise
prevents the consummation of the Merger . . . .” 67 The End Date could be extended
61
Id.
62
Id.
63
Id. § 8.01(b)(i).
64
Id.
65
Id. § 7.01(b).
66
See id. § 7.01(c) (“No Government Entity of competent jurisdiction shall have enacted, issued,
or promulgated any Law or granted any Order (whether temporary, preliminary or permanent)
(collectively, the “Legal Restraints”) . . . .” ).
67
Id.
17
a further and final time, under the same conditions, at the election of either Vintage
Parent or Rent-A-Center, from March 17, 2019 to June 17, 2019. 68
3. Termination of the Merger Agreement
The Merger Agreement provides circumstances in Section 8.01 by which the
Merger Agreement can be terminated prior to the Effective Time. 69 The
circumstances include: by mutual written consent; 70 by Rent-A-Center or Vintage
Parent upon written notice that the other party has breached a representation or failed
to perform any covenant, such that Rent-A-Center stockholder approval or
government consent to the Merger would not be obtained as of the Closing Date;71
by Rent-A-Center or Vintage Rodeo if a Legal Restraint exists or Rent-A-Center
stockholder approval is not obtained;72 by Rent-A-Center if it receives a Superior
Proposal 73 prior to Rent-A-Center stockholder approval;74 by Vintage Parent upon
written notice that Rent-A-Center’s Board makes or fails to make certain
recommendations; 75 and by Rent-A-Center if the conditions precedent in Article VII
68
Id. § 8.01(b)(i). The election to extend again had to be by written notice and delivered “to the
other party at or prior to 11:59 p.m., Eastern time, on March 17, 2019.” Id.
69
Id. § 8.01.
70
Id. § 8.01(a)
71
Id. § 8.01(c), (e).
72
Id. § 8.01(b)(ii), (iii).
73
“Superior Proposal” was a further defined term. See id., at 77.
74
Id. § 8.01(d).
75
Id. § 8.01(f).
18
are satisfied or waived and Vintage Parent and Vintage Merger Sub fail to
consummate the merger.76
The remaining circumstance in Section 8.01 under which the Merger
Agreement can be terminated—and the primary focus of this action—is Section
8.01(b)(i), which reads:
Section 8.01 Termination. This Agreement may be terminated prior to
the Effective Time by action of [Rent-A-Center] or [Vintage Parent],
as the case may be: . . .
(b) by either [Rent-A-Center] or [Vintage Rodeo]:
(i) upon written notice to the other party, whether before or after receipt
of the Company Stockholder Approval, if the Merger shall not have
been consummated by [the End Date] . . . . 77
The right to terminate the Merger Agreement under Section 8.01(b)(i), however, is
not available “to any party whose breach of any provision of [the Merger Agreement]
causes the failure of the Closing to be consummated by the End Date.”78
4. Termination Fees
The Merger Agreement provides for a termination fee under certain
circumstances. Rent-A-Center agreed to a pay a termination fee of $25,300,000 to
Vintage Parent for certain terminations described in Section 8.01, such as if Rent-A-
Center terminated the Merger Agreement to pursue a different proposal, or if
Vintage Rodeo terminated the Merger Agreement because Rent-A-Center’s Board
76
Id. § 8.01(g).
77
Id. § 8.01(b)(i).
78
Id.
19
made or failed to make certain recommendations.79 Vintage Parent agreed to pay a
termination fee of $126,500,000 to Rent-A-Center for certain terminations described
in Section 8.01 (the “Parent Termination Fee”). 80 Relevant here, Vintage Parent
agreed to pay the Parent Termination Fee if “[the Merger Agreement] is terminated
pursuant to Section 8.01(b)(i) and the conditions set forth in Section 7.01(b) shall
not have been satisfied . . . .” 81 Section 7.01(b), again, is the condition that the HSR
Act waiting period has expired (or had been terminated) and all other antitrust
approval has been obtained.82
5. Notice and Waiver Provisions
The Merger Agreement contained provisions on Waiver and Notice.
According to Section 8.05, before the Effective Time, the parties could extend the
time of performance of any obligation, waive inaccuracies in representations and
warranties, waive compliance with covenants and agreements, and waive the
satisfaction of conditions.83 “Any agreement on the part of a party to any such
extension or waiver shall be valid only if set forth in an instrument in writing signed
on behalf of such party.” 84
79
Id. § 8.03(b).
80
Id. § 8.03(c).
81
Id. § 8.03(c)(i).
82
Id. § 7.01(b).
83
Id. § 8.05.
84
Id.
20
Section 9.02 of the Merger Agreement provides the method, timing, and
required addressees of notices and other communications. 85 According to Section
9.02, notices have to be in writing and are considered “duly given” on “the date of
delivery if delivered personally” or on “the date sent if sent by facsimile or electronic
mail,” among other methods. 86 Section 9.02 requires that notices be delivered to
specified addressees set forth in Section 9.02.87 If the notice is being sent to Rent-
A-Center, the addressees are Rent-A-Center, to the attention of its General Counsel,
and separately to certain of its attorneys; if the notice is being sent to Vintage Capital,
the addressees are Vintage Capital, to the attention of Kahn, and separately to certain
of its attorneys. 88
D. Post-Signing Antitrust, Financing, and Integration Efforts
The parties signed the Merger Agreement on June 17, 2018. On July 16, 2018,
Rent-A-Center filed its Preliminary Proxy Statement with the SEC; 89 on August 15,
2018, Rent-A-Center filed its Definitive Proxy Statement on Schedule 14A
regarding the proposed Merger. 90 On September 18, 2018, Rent-A-Center
stockholders voted on and approved the Merger. 91 Before and after stockholder
85
Id. § 9.02.
86
Id.
87
Id.
88
Id.
89
JX 283.
90
Pre-Trial Order ¶ II.C.17; JX 315.
91
Pre-Trial Order ¶ II.C.20. Prior to the stockholder vote, Vintage sent Rent-A-Center a notice of
breach, in which Vintage claimed that Rent-A-Center breached Section 6.01(d) of the Merger
21
approval, Rent-A-Center and Vintage Capital worked together on: obtaining
antitrust approval, pre-closing integration efforts and planning, and Vintage
Capital’s financing for the merger. While the June 18, 2018 press release first
announcing the Merger contained an expectation that the Merger would “close by
the end of 2018,” 92 subsequent press releases and the parties’ work on antitrust
approval, integration, and financing all reflected a prospective closing date in 2019.93
1. Antitrust Approval Efforts
The Merger Agreement required a filing in accordance with the HSR Act for
antitrust approval from the FTC within twenty days of the date of the Merger
Agreement. 94 The parties to the FTC filing were Rent-A-Center and Buddy’s, as
Buddy’s was Rent-A-Center’s competitor. 95 Rent-A-Center filed its FTC
submission within the twenty days, but Buddy’s failed to do so because of an
administrative error.96 Given the missed deadline, Vintage Parent requested a
waiver, in compliance with Section 9.02’s notice requirements, to which Rent-A-
Agreement by not scheduling a stockholder vote “as promptly as practicable after the SEC clears
the Proxy Statement.” JX 308 (internal quotations omitted); see also JX 272 § 6.01(d). Vintage
later withdrew its notice of breach. JX 312. Both the notice of breach and the withdrawal notice
complied with Section 9.02 recipient requirements. See JX 308; JX 312.
92
JX 263.
93
Rent-A-Center’s own press releases contained the expectation that closing would occur in 2019.
See, e.g., JX 355; JX 477.
94
JX 272 § 6.18(a).
95
Trial Tr. 129:5–19, 169:12–20 (Ferris).
96
Id. at 134:6–19 (Ferris).
22
Center agreed.97 Buddy’s and Rent-A-Center then submitted their filing to the
FTC. 98
As described by the Plaintiffs and the Defendant,99 under the HSR Act,
prospective merger partners must submit a filing to the FTC, after which they cannot
close their merger until a thirty-day “waiting period” has elapsed (or the FTC earlier
terminates the waiting period).100 In other words, the FTC only has the length of the
waiting period to make its decision. 101 Before the end of the waiting period, the FTC
may request additional information, known as a “second request.”102 If merging
parties receive a second request, they cannot close the merger until thirty days after
they have complied with the request (again unless the FTC earlier terminates the
waiting period), essentially extending the waiting period. 103
In August 2018, the FTC signaled to the filing parties that it would issue a
second request.104 Vintage Capital and Rent-A-Center decided to pull their FTC
filings and then refile, in an effort to avoid a second request by resetting the thirty-
97
JX 294; Trial Tr. 296:15–24 (Korst).
98
JX 295; see also Trial Tr. 134:6–135:0 (Ferris).
99
The Plaintiffs and the Defendant agree on what they believe the HSR Act and the FTC antitrust
approval process require. See, e.g., Joint Proposed Finding of Fact of Pls. & Intervenor-Pl.; Def.
& Countercl.-Pl.’s Proposed Finding of Fact. I make no independent findings as to the underlying
antitrust statutes or government process, and simply rely on the parties’ representations.
100
Trial Tr. 136:13–20 (Ferris).
101
Id. at 136:18–20.
102
Id. at 136:13–23.
103
Pre-Trial Order ¶ II.C.18.
104
JX 323; Trial Tr. 135:15–136:12, 136:24–137:6 (Ferris).
23
day waiting period, which would give the FTC more time to review their filings.105
As a result, Buddy’s and Rent-A-Center refiled under the HSR Act on August 14,
2018. 106 Nonetheless, on September 13, 2018, in response to their refilings with the
FTC, Buddy’s and Rent-A-Center received a second request.107 Rent-A-Center and
Vintage Capital issued a joint press release on September 13, 2018, which
announced that the FTC had sent them a second request and included the expectation
that the Merger would “close during the first quarter of 2019.” 108
Buddy’s and Rent-A-Center subsequently entered into a joint timing
agreement (the “Joint Timing Agreement”) with the FTC on October 29, 2018.109
According to the Joint Timing Agreement, Buddy’s and Rent-A-Center agreed not
to close the Merger for a forty-five day waiting period, which would, in turn, be
triggered by their substantial compliance and certification of compliance with the
second request they had received. 110 Buddy’s and Rent-A-Center “anticipate[d]
substantially complying . . . by November 15,” but agreed not to certify their
compliance on that date.111 Certification would trigger deadlines for FTC action,
and the parties wanted to avoid rushing the FTC into unfavorable action. Instead,
105
JX 311; JX 312; Trial Tr. 138:20–139:20 (Ferris); Ressler Dep. 103:17–104:6.
106
JX 312; JX 313.
107
Pre-Trial Order ¶ II.C.18; see also JX 352; JX 358.
108
Pre-Trial Order ¶ II.D.19; JX 355, at 3.
109
Pre-Trial Order ¶ II.D.21.
110
JX 458, at 3.
111
Id.
24
Buddy’s and Rent-A-Center agreed to a timing structure that involved the FTC
making preliminary findings and engaging in a series of meet-and-confers with
Buddy’s and Rent-A-Center, prior to certification of compliance; that certification
would trigger the agreed-upon waiting period.112 Rent-A-Center’s antitrust counsel
noted to Rent-A-Center’s Board that certification was expected on December 10,
2018, which would “for all practical purposes” push a conclusion to the antitrust
approval process to the “end of January” 2019. 113 The Rent-A-Center Board
approved Rent-A-Center entering into the Joint Timing Agreement.114 On
November 5, 2018, Rent-A-Center issued a press release regarding its third quarter
2018 financial results, which contained the same expectation that the Merger would
“close during the first quarter of 2019.” 115
On November 29, 2018, counsel for Buddy’s and Rent-A-Center participated
in a call with the FTC, following which counsel updated their respective clients and
began working on a “white paper” to explain why full divesture of Buddy’s would
not be necessary. 116 Buddy’s and Rent-A-Center jointly submitted the white paper
to the FTC on December 14, 2018.117 Counsel for Buddy’s and Rent-A-Center had
112
Id. The forty-five day waiting period to which Buddy’s and Rent-A-Center agreed could be
cut short if the FTC terminated the waiting period or closed its investigation. Id.
113
JX 433, at 1.
114
Id.; JX 437, at 1; JX 439, at 1; JX 440, at 1; Trial Tr. 251:23–252:5 (Lentell).
115
Pre-Trial Order ¶ II.D.22; JX 477.
116
JX 526; JX 532; Trial Tr. 174:8–176:22 (Ferris); Agin Dep. 125:7–18.
117
JX 600; Trial Tr. 176:23–178:2 (Ferris).
25
an additional call with the FTC on December 17, 2018; based on that call, counsel
were hopeful that a full divesture of Buddy’s would not be necessary, but understood
that the FTC needed additional time to further study the issue. As a result, a planned
in-person meeting with the FTC on December 19, 2019 was canceled.118 At this
time, Buddy’s and Rent-A-Center still had not certified compliance with the second
request.119
2. Financing
Vintage Capital and Rent-A-Center worked together to create financial
models of the post-closing entity, to be used pre-closing by Vintage Capital and B.
Riley when engaging with investors, potential investors, and rating agencies.120
Rent-A-Center was obligated to provide assistance for the financial modeling under
the Merger Agreement.121 Rent-A-Center’s Vice President of Finance, Daniel
O’Rourke, was primarily responsible for the modeling and for responding to requests
from Vintage Capital. 122 O’Rourke created and updated a financial model for
“NEWCO,” the post-merger entity, and did so with input and model assumptions
from Kahn. 123 O’Rourke’s original model included a “transaction close” assumption
118
JX 601; Trial Tr. 190:22–192:18, 193:1–13 (Ferris).
119
Trial Tr. 191:20–192:7 (Ferris).
120
See, e.g., Trial Tr. 33:22–35:7 (Kahn); id. at 328:1–14 (B. R. Riley).
121
See JX 272 §§ 6.03, 6.11(f).
122
Trial Tr. 458:24–460:8 (O’Rourke).
123
See, e.g., JX 282; Trial Tr. 460:24–462:10 (O’Rourke).
26
of September 30, 2018. 124 On September 20, 2018, O’Rourke updated the financial
model, changing, among other things, the assumption for “Transaction Close” from
September 30, 2018 to January 31, 2019. 125 O’Rourke received approval from both
Kahn and Fadel to make this change to the financial model. 126
On December 7, 2018, Fadel met Mr. Riley at B. Riley’s Los Angeles
office.127 Fadel first met with Great American Capital Partners, a subsidiary of B.
Riley that was providing, in part, debt financing for the Merger. 128 Fadel then met
with Mr. Riley and discussed, among other things, how B. Riley might continue to
be involved with the post-merger entity. 129 On December 8, 2018, Fadel e-mailed a
Rent-A-Center employee, copying Mr. Riley. 130 Fadel wrote that “B. Riley will be
a major partner in our company going forward,” and B. Riley should therefore be
allowed to compete for a financial services opportunity at Rent-A-Center. 131
Given other changes in the financial model for “NEWCO,” on December 11,
2018, O’Rourke asked Kahn if he should move “close timing back.”132 Kahn gave
124
JX 282; JX 369, at 6; JX 371, at 6; Trial Tr. 465:5–14 (O’Rourke).
125
JX 369, at 6; JX 373, at 3. The model contains a typo; “January 31, 2018” is clearly a scrivener’s
error, which should instead be “January 31, 2019.” See Trial Tr. 115:17–116:5 (Kahn); O’Rourke
Dep. 145:20–146:5.
126
JX 369; JX 370; JX 371; JX 376, at 1; Trial Tr. 488:6–489:7, 489:20–490:10 (O’Rourke).
127
Trial Tr. 327:24–329:5, 329:19–24 (B. R. Riley); id. at 527:8–528:1, 595:13–16 (Fadel).
128
Id. at 482:11–20 (O’Rourke); id. at 527:8–13 (Fadel).
129
Id. at 330:22–331:16, 334:1–8 (B. R. Riley); id. at 575:2–8 (Fadel).
130
JX 553.
131
Id.
132
JX 573.
27
his approval, and O’Rourke updated the financial model with an assumption that the
“Timing” of the Merger was the “End of March 2019.”133 This financial model was
sent, after review by Kahn, Fadel, and B. Riley, to investors and a rating agency on
December 14, 2018.134
3. Integration Planning and Rent-A-Center Operations
Rent-A-Center was also obligated under the Merger Agreement to provide
support for Vintage’s 135 integration of Rent-A-Center. 136 Fadel, who was expected
to become the CEO of the merged entity, was involved in integration planning.137
Among other meetings and activities, Fadel attended an integration planning
meeting in Orlando, Florida on December 10, 2018.138 After the integration
planning meeting, Fadel met with Kahn and discussed, among other things,
Acceptance Now. 139 Kahn planned to find a merger partner to manage the
Acceptance Now business; Fadel sought Kahn’s approval at the meeting, in light of
an expected closing in 2019, for ninety days to implement a change to Acceptance
Now, in the hopes of keeping it wholly owned by Rent-A-Center.140 Vintage and
133
JX 589, at 49; JX 594, at 10; JX 595, at 6.
134
JX 589, at 1; JX 594, at 5; JX 595, at 1; JX 602; Trial Tr. 488:3–489:7 (O’Rourke).
135
Vintage in this regard includes Buddy’s. See Trial Tr. 37:23–38:13 (Kahn); id. at 514:11–14
(Fadel).
136
JX 272 §§ 6.03, 6.11(f).
137
Trial Tr. 37:23–39:13 (Kahn); id. at 514:1–515:5, 539:9–11 (Fadel).
138
Id. at 44:11–17 (Kahn); id. at 528:30–529:3 (Fadel).
139
Id. at 45:24–47:23 (Kahn); id. at 530:5–18 (Fadel).
140
Id. at 45:24–47:23, 49:2–7, 73:15–74:1 (Kahn); id. at 530:5–18, 579:21–580:7 (Fadel).
28
Rent-A-Center representatives had another integration planning meeting scheduled
for December 18, 2018.141
Rent-A-Center had agreed in the Merger Agreement to “conduct their . . .
business and operations in the ordinary course of business consistent with past
practices;” conduct outside the ordinary course could only be taken “with the prior
written consent of [Vintage Parent] (including by email) . . . .” 142 Rent-A-Center
requested such consent from Kahn on several occasions, and received it. 143 The
Rent-A-Center Board approved a transaction on December 6, 2018 that required
such consent,144 Kahn asked for documents related to the transaction,145 and Fadel
sent the documents to Kahn on December 17, 2018. 146
E. Termination of the Merger Agreement
1. Rent-A-Center’s Board Decides to Terminate the Merger
Agreement If Given the Opportunity
Rent-A-Center held regularly scheduled Board meetings on December 5 and
6, 2018. 147 During the meetings, the Board discussed Rent-A-Center’s financial and
operational performance, which had improved since the Merger Agreement was
141
Id. at 61:16–62:19 (Kahn); id. at 597:9–14 (Fadel).
142
JX 272 § 5.01.
143
Trial Tr. 30:7–32:14 (Kahn); see also, e.g., JX 296; JX 326.
144
JX 558.
145
JX 652.
146
JX 619, at 1.
147
See JX 546; JX 558.
29
signed on June 17, 2018.148 Legal counsel to the Board “reminded” the Board that
the Merger Agreement’s “initial end date” was December 17, 2018, but could be
extended by either party through written notice beforehand.149 Legal counsel to the
Board explained that in the event Vintage did not extend, the Board would need to
decide whether Rent-A-Center should extend the End Date or terminate the Merger
Agreement. 150 Legal counsel also “reminded the Board of the Provisions in the
Merger Agreement relating to payment of a termination fee.” 151 The Board then
determined that if Vintage Capital did not extend the End Date, it would be in the
best interests of Rent-A-Center’s stockholders for the Board to also not extend the
End Date, and to instead terminate the Merger Agreement.152 The Board and legal
counsel believed that Rent-A-Center would receive written notice electing to extend
the End Date from Vintage Capital before the Section 8.01(b)(i) deadline, that is,
before midnight Eastern Time on December 17, 2018. 153 In the meantime, the Board
decided that Rent-A-Center’s management “should continue with its efforts to
consummate the merger.”154 The determination by the Board to terminate the
148
JX 546, at 1; see also JX 556.
149
JX 546, at 2.
150
Id.
151
Id.
152
JX 546, at 2; JX 558, at 4; Trial Tr. 384:6–24 (Ressler); Trial Tr. 519:2–11, 519:23–521:21
(Fadel); Brown Dep. 50:21–51:3, 56:15–57:14.
153
Trial Tr. 404:24–405:8 (Ressler); id. at 519:17–22, 555:4–5, 577:10–19 (Fadel); see also
Hetrick Dep. 133:20–134:6.
154
JX 558, at 4.
30
Merger Agreement, if given the opportunity, was kept confidential. 155 For example,
Rent-A-Center’s General Counsel was not told of this decision until December 14,
2018, and O’Rourke was not told until December 17, 2018.156
As previously described, following the December 5 and 6, 2018 Rent-A-
Center Board meetings, Vintage and Rent-A-Center continued to work together
toward antitrust approval, integration planning, and arranging financing for the
Merger. Specific actions that took place after the December 5 and 6 Board meetings
included joint discussions with the FTC, Fadel’s in-person meetings with Kahn and
B. Riley, exchanging information, financial modeling, and integration planning.
During the course of these joint interactions, the Rent-A-Center Board’s discussions
and its decision to terminate the Merger Agreement, if given the opportunity, were
not shared with anyone from the Vintage Entities or B. Riley. 157
Rent-A-Center’s Board held a special meeting at 9 p.m., Eastern Time, on
December 17, 2018.158 Legal counsel to Rent-A-Center and legal counsel to its
Board159 told the Board that they had not yet received a notice to extend the End
Date in accordance with the Merger Agreement, which extension, under the Merger
155
Trial Tr. 389:6–14, 411:16–18 (Ressler); id. at 533:15–18 (Fadel).
156
Id. at 275:17–258:10 (Korst); id. at 483:13-16 (O’Rourke). The Board also did not tell Rent-
A-Center’s antitrust counsel. Id. at 584:5–7 (Fadel).
157
See, e.g., id. at 50:19–51:2, 58:2–7, 59:21–61:6, 61:4–15 (Kahn); id. at 333:5–10 (B. R. Riley);
id. at 582:6–12 (Fadel).
158
JX 617.
159
Legal counsel were required recipients of notice under Section 9.02. See JX 272 § 9.02.
31
Agreement, must be made, if at all, by 11:59 p.m. that night.160 During the special
meeting, the Board “reviewed their previous discussions regarding [Rent-A-
Center]’s strong financial performance and outlook, as well as their view that
terminating the Merger Agreement was in the best interest of the Company’s
stockholders.”161 The Board resolved to terminate the Merger Agreement and
demand the Parent Termination Fee if Rent-A-Center did not receive an extension
notice before the deadline in the Merger Agreement.162
2. Rent-A-Center Purports to Terminate the Merger Agreement
On December 18, 2018, shortly after midnight, Rent-A-Center’s General
Counsel 163 advised the Board that he had “not received any communication from
Vintage or Vintage attorneys.” 164 As a result, at 6:55 a.m., Eastern Time, on
December 18, 2018, Fadel e-mailed Kahn a “notice of termination and demand for
payment” (the “Termination Notice”).165 The Termination Notice indicated that
Rent-A-Center was “exercising its right to terminate the Merger Agreement pursuant
to Section 8.01(b)(i) thereof, effective immediately.” 166 The Termination Notice
160
JX 617, at 1.
161
Id.
162
Id.
163
Rent-A-Center’s General Counsel was a required recipient of notice under Section 9.02. See
JX 272 § 9.02.
164
JX 646.
165
JX 660.
166
Id.
32
also demanded payment of the $126.5 million Parent Termination Fee. 167 At 7:00
a.m., Eastern Time, Rent-A-Center issued a press release announcing the Merger
Agreement had been terminated because Rent-A-Center had not received a notice of
election to extend and the Rent-A-Center Board, “in light of the current financial
and operational performance of [Rent-A-Center],” decided not to extend either, and
instead to terminate. 168
Kahn responded to Fadel by letter on December 18, 2018. 169 Kahn disputed
that the Termination Notice was valid and insisted that Rent-A-Center continue to
comply with the Merger Agreement. 170 Rent-A-Center did not respond, nor did
Fadel respond to Kahn’s other attempts to reach him. 171
F. Procedural History
The Vintage Entities filed a Complaint against Rent-A-Center on December
21, 2018. Vintage also sought a Temporary Restraining Order (“TRO”) against
Rent-A-Center in an attempt to force compliance with the Merger Agreement. I held
a TRO hearing on December 31, 2018; from the Bench, I denied in part and granted
in part the TRO. I subsequently entered a Status Quo Order on January 7, 2019. On
January 3, 2019, I granted B. Riley’s Motion to Intervene; it filed its own Complaint
167
Id.
168
JX 627.
169
JX 657.
170
Id.
171
Trial Tr. 41:4–41:7 (Kahn).
33
against Rent-A-Center on the same day. On January 8, 2019, Rent-A-Center filed a
Counterclaim. The parties pursued discovery and trial on an expedited schedule.
Trial took place over two days on February 11 and 12, 2019. I heard Post-Trial Oral
Argument on March 11, 2019.
II. ANALYSIS
Plaintiffs Vintage Capital, Vintage Parent, and Vintage Merger Sub seek
declaratory judgment, and bring claims for breach of the implied covenant of good
faith and fair dealing and estoppel—all, in one way or another, to prevent Rent-A-
Center’s termination of the Merger Agreement. They also bring a claim for breach
of contract and specific performance to enforce the Merger Agreement. Intervenor-
Plaintiff B. Riley seeks declaratory judgment on several counts, which are largely
duplicative of the relief the Vintage Entities ask for, with the exception of a request
for a declaratory judgment that the Parent Termination Fee is an unenforceable
penalty. The Vintage Entities and B. Riley are collectively referred to below as “the
Plaintiffs.” Defendant Rent-A-Center has brought a counterclaim for breach of
contract, seeking payment of the Parent Termination Fee. I begin with the
contractual claims surrounding the termination of the Merger Agreement.
A. Rent-A-Center Had the Right to Terminate the Merger Agreement
Pursuant to Section 8.01(b)(i)
The Plaintiffs did not introduce evidence at trial, nor do they argue, that they
sent a written notice of election to extend to Rent-A-Center that explicitly used the
34
term “End Date” or otherwise referenced Section 8.01(b)(i) of the Merger
Agreement or the date March 17, 2019. Nor do they argue that they sent any
document that could be construed as a written notice of election to extend in a
manner compliant with the Merger Agreement, which required notice to Rent-A-
Center to be delivered personally or sent by fax or email to Rent-A-Center’s General
Counsel and certain of Rent-A-Center’s outside counsel. The Plaintiffs do, however,
argue that Rent-A-Center’s termination of the Merger Agreement pursuant to
Section 8.01(b)(i) was not valid. The Plaintiffs seek declaratory judgment and put
forward four contractual arguments that the End Date had been extended before
termination, or that Rent-A-Center had waived notice: first, that the purpose of the
notice requirement in Section 8.01(b)(i) of the Merger Agreement was satisfied, and
no “additional”172 notice was therefore required; second, that Rent-A-Center
extended or waived the notice requirement of Section 8.01(b)(i) in accordance with
Section 8.05; third, that if notice of election to extend was required, a financial model
prepared by Rent-A-Center itself listing a “Transaction Close” date of January 31,
2019 fulfilled the notice requirement and complied with the general provision on
notice in Section 9.02; and fourth, that Rent-A-Center did not have the right to
terminate the Merger Agreement under Section 8.01(b)(i) because it had breached
the Merger Agreement by failure to employ commercially reasonable efforts toward
172
Post-Trial Answering Brief of Pls. and Intervenor-Pl. at 7.
35
the closing. The Plaintiffs, as the parties seeking declaratory judgment, assume the
burden of proving their position. 173 The Plaintiffs also argue that if Rent-A-Center
had the right to terminate under Section 8.01(b)(i), the implied covenant of good
faith and fair dealing prevents Rent-A-Center from exercising that right. I begin
with the clear and unambiguous language of the Merger Agreement itself, before
addressing the Plaintiffs’ arguments in turn.
1. The Merger Agreement and the End Date
The provisions of the Merger Agreement at issue are clear and
unambiguous,174 and all the provisions are assumed to have meaning.175 As parties
to the Merger Agreement, Vintage and Rent-A-Center are assumed to have
knowledge of the terms of the contract that they bargained for and entered into.176
The Merger Agreement binds the parties until its termination; Section 8.01 details
various rights to terminate, but the Merger Agreement would also “terminate” after
a successful closing of the Merger. While bound, the parties agreed to use
173
In re Oxbow Carbon LLC Unitholder Litig., 2018 WL 818760, at *50 (Del. Ch. Feb. 12, 2018),
aff’d in part rev’d in part sub nom. Oxbow Carbon & Minerals Hldgs., Inc. v. Crestview-Oxbow
Acq., LLC, 2019 WL 237360 (Del. Jan. 17, 2019).
174
The parties also agree that the language is clear and unambiguous. See Post-Trial Answering
Br. of Pls. and Intervenor-Pl. at 5 (“Quite the opposite, the parties agree on the meaning of the
clear words of Section 8.01(b)(i) . . . .”).
175
See Kuhn Constr., Inc. v. Diamond State Port Corp., 990 A.2d 393, 396–97 (Del. 2010) (“We
will read a contract as a whole and we will give each provision and term effect, so as not to render
any part of the contract mere surplusage.”).
176
See, e.g., Chapter 7 Tr. Constantio Flores v. Strauss Water Ltd., 2016 WL 5243950, at *6 (Del.
Ch. Sept. 22, 2016) (“[A] party who enters into a contract governed by Delaware law will be
charged with knowledge of the contents of the instrument and will be deemed to have knowingly
agreed to the plain terms of the instrument absent some well-pled reason to infer otherwise.”).
36
commercially reasonable efforts to work toward closing, as well as for obtaining
antitrust approval, for integration planning, and for achieving financing for the
transaction.
Section 8.01(b)(i) of the Merger Agreement states that the “End Date” of the
Merger Agreement is “11:59 p.m., Eastern Time, on December 17, 2018.” 177 If the
Merger is not consummated by the End Date, either Vintage or Rent-A-Center have
the right, but not the obligation, to terminate the Merger Agreement upon written
notice. Either party, however, can elect to extend the End Date to March 17, 2019,
if FTC approval has not yet been achieved, and if the party electing to extend
delivers written notice of its election to the other party by 11:59 p.m., Eastern Time,
on December 17, 2018. Section 9.02 of the Merger Agreement governs notices and,
relevant here, specifies the names and addresses of the recipients of such notices.
Extension of the End Date is not permissible if there is a “Legal Restraint” that
“makes the Merger illegal or otherwise prevents the consummation of the Merger .
. . ,” 178 or “[a]ny applicable waiting period under the HSR Act shall have expired or
been earlier terminated and all other required consents under any Antitrust Laws
shall have been obtained.” 179 Those conditions did not obtain here, and either party
was entitled to file a notice of election to extend, upon which the obligations of the
177
JX 272 § 8.01(b)(i).
178
Id. § 7.01(c).
179
Id. § 7.01(b).
37
Merger Agreement would be binding on all parties until the new End Date. In other
words, the Merger Agreement creates a reciprocal, unilateral right to extend the End
Date.
Therefore, each party to the Merger Agreement was faced with a decision
concerning the End Date in Section 8.01(b)(i), and had to make that decision in
accordance with the following decision matrix. The party could elect to extend the
End Date, and thereby bind itself and its counterparty to the Merger Agreement until
at least March 17, 2019,180 or the party could choose not to extend the End Date, at
which point its options were contingent on its counterparty. If its counterparty chose
to extend, then the first party had no choice—it would remain bound by the Merger
Agreement. If the counterparty did not elect to extend, the party could terminate the
Merger Agreement at any time after the End Date. If both parties did not elect to
extend but also both chose not to immediately exercise their termination rights, then
both parties would continue to be bound by the Merger Agreement, but by their own
volition and with the understanding that either party could terminate at will.
Rent-A-Center was faced with this decision matrix during its December 5 and
6, 2018 Board meetings. The Board knew that Vintage had the unilateral right to
bind Rent-A-Center to the Merger Agreement until at least March 17, 2019. The
180
The parties could extend the End Date again to the further and final End Date of June 17, 2017.
Id. § 8.01(b)(i).
38
record shows that the Rent-A-Center directors did not believe that Vintage had
already effected an election to extend the End Date; their discussion would otherwise
have been moot, as the right to extend was unilateral. Rent-A-Center’s Board also
believed that it would likely receive a written notice from Vintage electing to extend
the End Date.181 However, from the Board’s perspective, it had no assurance that
Vintage would definitely make such an election, nor does the record show that Rent-
A-Center had reason to believe that Vintage did not also think it was faced with the
same decision matrix. Rent-A-Center’s Board, then, late in the process but
appropriately, considered the options available to Rent-A-Center under Section
8.01(b)(i) and made the decisions that it found to be in the Company’s best interest.
It decided not to extend the End Date. Furthermore, the Rent-A-Center Board
decided that, should Vintage not bind Rent-A-Center through an election to extend,
the Board would exercise its right to terminate immediately after the End Date and
walk away from the Merger. This litigation is the result of that decision.
2. The Joint Timing Agreement Was Not An Election to Extend the
End Date
Section 8.01(b)(i) of the Merger Agreement requires written notice of election
to extend the End Date. Section 9.02 details how and to whom notices must be sent.
The Plaintiffs, nonetheless, contend that under the circumstances a written notice—
181
See, e.g., Trial Tr. 404:24–405:8 (Ressler); id. at 519:17–22 (Fadel).
39
in accordance with Section 9.02—of election to extend the End Date was not
required because “the purpose of [the] contractual notice requirement” had already
been satisfied.182 The Plaintiffs’ reasoning is as follows: the purpose of Section
8.01(b)(i) was to “define the parties’ rights if the merger did not close by December
17, 2018 due to the ongoing FTC clearance process,” 183 and this purpose is satisfied
by an [implicit] election to extend the End Date and notice to the other party of that
election. 184 The Plaintiffs suggest that the true purpose of Section 8.01(b)(i) is to
provide notice that the counterparty intends to go forward towards closing, post-End
Date. The purpose evidenced by the clear and unambiguous language of Section
8.01(b)(i) is, to my mind, different: It is to give notice that the counterparty has
elected to bind itself, and the party receiving notice, to the strictures of the Merger
Agreement pending the extended End Date.
The Plaintiffs argue that the Joint Timing Agreement, in addition to other
communications between the parties, represented notice185 to Rent-A-Center that the
Plaintiffs had elected to extend the End Date, because the parties represented to the
FTC therein that closing would not take place until after the End Date. Since any
182
Written Closing Argument of Pls. and Intervenor-Pl. at 3.
183
Post-Trial Answering Br. of Pls. and Intervenor-Pl. at 6 (quoting Def. and Counterclaim-Pl.
Rent-A-Center’s Opening Post-Trial Br. at 17).
184
Id.
185
The Plaintiffs go so far as to claim that the Defendant has “actual knowledge” of the election
to extend. Written Closing Argument of Pls. and Intervenor-Pl. at 11; Post-Trial Answering Br. of
Pls. and Intervenor-Pl. at 6.
40
closing would be post-End Date, per the Plaintiffs, this must represent an election to
extend, thus satisfying the purpose of Section 8.01(b)(i).186 According to the
Plaintiffs, once the purpose was satisfied, there was no obligation to provide
“separate” or “additional” notice in literal compliance with Section 8.01(b)(i) and
Section 9.02’s specific requirements regarding recipients.187
First, I note that Rent-A-Center bargained for a right in the Merger
Agreement: the right to cancel the merger after six months unless Vintage gave
written notice of election to bind itself and Rent-A-Center to an additional three-
month term. The Plaintiffs essentially ask that I go beyond the written words of the
provision to consider its “purpose,” which, the Plaintiffs contend, if satisfied,
constitutes substantial compliance, negating the need for literal compliance.188
However,“[c]ontracts are to be interpreted as written,”189 which is why judicial
review generally stops if the terms are clear and unambiguous.190 In order to deviate
from clear and unambiguous contract terms without consequence, a party must
justify its deviation, by, for instance, showing that it has acted reasonably, in light
of the circumstances, to substantially comply in a way that preserves the benefits of
186
Post-Trial Answering Br. of Pls. and Intervenor-Pl. at 6–7.
187
Id. at 7.
188
Written Closing Argument of Pls. and Intervenor-Pl. at 11.
189
Willie Gary LLC v. James & Jackson LLC, 2006 WL 75309, at *5 (Del. Ch. Jan. 10, 2006),
aff’d, 906 A.2d 76 (Del. 2006).
190
See Gildor v. Optical Sols., Inc., 2006 WL 4782348, at *6 (Del. Ch. June 5, 2005) (“The
language of [the notice provision] is clear and unambiguous, which means that the language alone
would typically dictate the outcome.”).
41
the contract to the counterparty. 191 To the extent a reviewing court contemplates
condoning such deviation, it must be scrupulous to preserve the benefits of the
counterparty’s bargain.
In that regard, this Court has, at times, accepted substantial compliance with
notice provisions in lieu of literal compliance,192 when the circumstances so
justified. 193 The Court’s precedent on substantial compliance with notice provisions
focuses almost entirely on the manner in which notice was provided.194 The
Plaintiffs here argue that the Court should find substantial compliance not only in
the manner in which notice was given, but also in the substance. They argue that
191
For example, in Corporate Property Associates 6 v. Hallwood Group Inc., this Court found
substantial compliance with a notice provision when the executive designated to receive notice
had left the company—making literal compliance impossible—but executives at the receiving
company did receive and review the notice. 792 A.2d 993, 1000–01 (Del. Ch. 2002), rev’d on
other grounds, 817 A.2d 777 (Del. 2003).
192
As then-Vice Chancellor Strine explained, “when confronted with less than literal compliance
with a notice provision, courts have required that a party substantially comply with the notice
provision. The requirement of substantial compliance is an attempt to avoid ‘harsh results . . .
where the purpose of these [notice] requirements has been met.’ When literal compliance is not
possible, that is a sensible rule, and it is one which would not require [the defendant] to search to
the ends of the world for [the plaintiff]. Substantial performance is ‘that which, despite deviations
from contract requirements, provides the important and essential benefits of the contract.’” Gildor,
2006 WL 4782348, at *7 (internal quotations and citations omitted).
193
In PR Acquisitions, LLC v. Midland Funding LLC, the Defendant argued that the Plaintiff had
received actual notice and that the notice provision did not require strict compliance. 2018 WL
2041521, at *6 (Del. Ch. Apr. 30, 2018). This Court, after reviewing prior case law, rejected the
defendant’s arguments on notice, writing “[the defendant] offers no reason other than its own error
for its failure to comply with the notice provision it negotiated.” Id. at *7.
194
For example, in Gildor v. Optical Solutions, Inc., the notice provision did not contain an address
for a required recipient, making literal compliance impossible; this Court found that substantial
compliance would have sufficed. 2006 WL 4782348, at *6–9. Additionally, in Kelly v. Blum, the
Court found that notice sent by fax and a confirmation copy by overnight commercial delivery
substantially complied with the notice provision, which required fax and a confirmation copy on
the same day by first class mail. 2010 WL 629580, at *8 (Del. Ch. Feb. 24, 2010).
42
implicit in Vintage’s actions, such as Vintage causing Buddy’s to enter the Joint
Timing Agreement, was Vintage’s intent to close after the End Date, thus putting
Rent-A-Center on notice of Vintage’s desire to go forward to closing beyond the
End Date. In the Plaintiffs’ view, this made contractual notice a meaningless
formality. Again, however, the notice of election to extend had a different purpose:
to bind the parties after the End Date.
The Joint Timing Agreement, as testimony made clear, was an attempt by the
parties to encourage a favorable outcome from the FTC. By agreeing not to close
for a period, the parties gave the FTC, which was otherwise under a time constraint,
a chance to consider the parties’ argument that less than full divestiture of Buddy’s
was necessary. By agreeing not to close, however, the parties were not binding one
another past the End Date. If Vintage had found it in its business interest to do so,
it could have terminated the agreement after the End Date, unless Rent-A-Center
elected to extend. The reciprocal must be true. It is worth pointing out that, even if
neither party elected to extend, the parties could nonetheless have gone forward to a
closing after the End Date, consistent with the Joint Timing Agreement. Under
Section 8.01(b)(i), the Merger Agreement remained in force until notice of
termination. Contractually, the parties could have gone forward to closing after the
End Date. Each would have done so suffering the daunting uncertainty of knowing
43
that the counterparty could terminate at will, but with the advantage that the party
itself could cancel if a change in circumstances warranted.
In addition to the Joint Timing Agreement itself, the Plaintiffs point to all the
other actions and expense they devoted to moving toward a closing. They argue that
Rent-A-Center must have known the Vintage intended to extend, because no
reasonable party would have undertaken the effort Vintage did without that
intention. But Rent-A-Center itself did that very thing. Both parties had a
bargained-for right to terminate the agreement at any time after the End Date, unless
the counterparty elected to extend. All the Plaintiffs really point to is that market
conditions changed in a way that made it attractive only for Rent-A-Center to
terminate. However, nothing in the parties’ changed financial circumstances, the
Joint Timing Agreement, or the other actions of the parties is a replacement for a
notice of election to extend the End Date.
Finally, I note that much, if not all, of the effort Vintage expended toward
closing was required contractually; both parties were required to use commercially
reasonable efforts to obtain FTC permission and otherwise advance the merger. If
undertaking contractually-required action to consummate the merger is the
equivalent of an election to extend the End Date, bind the counterparty, and give
44
notice thereof, the notice of election to extend requirement of Section 8(b)(i) is
meaningless. I must avoid such an interpretation of contractual language. 195
The parties bargained for a reciprocal, unilateral right to extend the End Date
of the Merger Agreement via written notice of election to exercise that right. The
parties could have written Section 8.01(b)(i) to provide for automatic extension of
the End Date if the Merger was still under antitrust review, or the parties could have
imposed a different standard of notice, but they did not. They are bound by their
contract.
3. The Notice Requirement in Section 8.01(b)(i) Was Not Extended or
Waived by the Joint Timing Agreement
The Plaintiffs argue that they were not required to provide notice of election
to extend the End Date according to Section 8.01(b)(i) of the Merger Agreement
because the Defendant agreed, pursuant to Section 8.05, to extend the time to submit
the notice and/or waived the requirement to submit the notice at all. According to
Section 8.05, an agreement of extension or waiver is only valid if “set forth in an
instrument in writing signed on behalf of” the party agreeing to extend or waive.196
According to the Plaintiffs, the Defendant signed such an instrument in writing when
it agreed to the Joint Timing Agreement. Furthermore, the Plaintiffs argue, “an
195
See O’Brien v. Progressive N. Ins. Co., 785 A.2d 281, 287 (Del. 2001) (“Contracts are to be
interpreted in a way that does not render any provisions ‘illusory or meaningless.’”) (internal
quotations and citations omitted).
196
JX 272 § 8.05.
45
instrument in writing” is not subject to the general notice requirements in Section
9.02; that is, it need not be sent to specific individuals of the counterparty. 197
I have found above that the Joint Timing Agreement, as well as similar
agreements, actions, and communications, did not function as an election to extend
the End Date. For the same reasons, to the extent that the Joint Timing Agreement
could serve as an extension or waiver under Section 8.05 of the End Date itself, 198 it
is not such an extension or waiver.
As an initial matter, the Joint Timing Agreement governs the relationship
between the FTC, on one side, and Vintage199 and Rent-A-Center, on the other side.
The Joint Timing Agreement says nothing of the Merger Agreement or the
relationship between Vintage and Rent-A-Center, although it certainly has
implications for the Merger. The Merger Agreement requires a writing to work an
extension or waiver, and that requirement implies an explicit, not implicit, release of
such rights.200 Furthermore, even implicit references to obligations or agreements
197
Id.
198
I use “could” because it is not clear that Section 8.05 can be used to extend or waive the End
Date. Section 8.05(a) allows for the extension of the “the time for the performance of any of the
obligations or other acts of the other parties” and Section 8.05(c) allows for the waiver of
“compliance with any covenants and agreements contained” in the Merger Agreement. Id. §
8.05(a), (c) (emphasis added). The right to extend the End Date in Section 8.01(b)(i), does not
obviously qualify as an obligation, an act, a covenant, or an agreement in the Merger Agreement.
I assume, however, for purposes of this analysis that waiver or extension are available here.
199
It is, in fact, Buddy’s, and not Vintage, that is a party to the Joint Timing Agreement.
200
See, e.g., Simon-Mills II, LLC v. Kan Am USA XVI Ltd. P’ship, 2017 WL 1191061, at *34 (Del.
Ch. Mar. 30, 2017) (“The standard for demonstrating waiver is ‘quite exacting;’ because waiver is
redolent of forfeiture, ‘the facts relied upon to demonstrate waiver must be unequivocal.’”)
(quoting Amirsaleh v. Bd. of Trade of City of N.Y., Inc., 27 A.3d 522, 529 (Del. 2011)).
46
related to Section 8.01(b)(i) are lacking in the Joint Timing Agreement. As
explained in detail above, a promise to the FTC not to close before the End Date is
not an implicit election to extend the End Date.
I accept, as do the parties, that the Joint Timing Agreement functions to push
the anticipated time of closing into 2019. The Joint Timing Agreement, however,
is not the equivalent of a promise that a post-End Date closing shall occur and that
the parties agree to be bound by the Merger Agreement until that time. An actual
extension or waiver of the right to notice of election to extend the End Date would
extend the time in which both parties are definitively bound by the Merger
Agreement. I find that Rent-A-Center never expressed in writing such an intent, and
that it did not waive its right to terminate the Merger Agreement post-End Date.
4. The Notice Requirement in Section 8.01(b)(i) Was Not Otherwise
Satisfied
The Plaintiffs argue that if written notice in literal compliance with Section
8.01(b)(i) was required to elect to extend the End Date, this requirement was
satisfied—not by Vintage, but by Rent-A-Center itself. On September 24, 2018,
O’Rourke of Rent-A Center sent a financial model of “NEWCO” to Kahn. The
financial model had an assumption for “Transaction Close” of January 31, 2019 that
was an update from an earlier version, which listed a close date of September 31,
2018. Fadel approved the change in the closing date assumption of the financial
model, and knew that the financial model would be sent to Kahn. The Plaintiffs
47
contend that when O’Rourke sent the financial model to Kahn, Rent-A-Center
effectively gave a written notice of election to extend the End Date, because the
closing date assumption was past the End Date. The Plaintiffs further argue this
“written notice” complied with Section 9.02, because Kahn was one of the
designated recipients in Section 9.02—although so were certain of Vintage’s
attorneys. In other words, Vintage argues that Rent-A-Center bound both Vintage
and itself by creating the financial model, and sending it to Vintage. For the same
reason I have rejected the Plaintiffs’ arguments regarding the Joint Timing
Agreement, this argument fails.201 Rent-A-Center’s statement that it expected
closing to occur in 2019 is not contractual notice extending the End Date. I do not
find that Rent-A-Center sent Vintage written notice of its own election to extend
through O’Rourke’s financial model.
5. Rent-A-Center Did Not Lose Its Contractual Right to Terminate
Under Section 8.01(b)(i)
According to the Merger Agreement, a party does not have the right to
terminate under Section 8.01(b)(i) if that party has breached the Merger Agreement
and its breach “cause[d] the failure of the Closing to be consummated by the End
Date.”202 The Plaintiffs argue that the Defendant failed to use commercially
201
The financial model, including the assumption on time of closing, was also required by the
Merger Agreement because Rent-A-Center had agreed to use commercially reasonable efforts to
help Vintage achieve financing for the Merger. See generally JX 272 § 6.11.
202
Id. § 8.01(b)(i).
48
reasonable efforts to consummate the Merger, and thus cannot exercise the right to
terminate pursuant to Section 8.01(b)(i). The Plaintiffs base their allegation of
breach on the fact that the Defendant did not tell them that the Rent-A-Center Board
had resolved to terminate the Merger if it did not receive a written notice electing to
extend the Merger Agreement. The Plaintiffs not only allege a failure to disclose in
this regard, but also claim that the Defendant took affirmative action to conceal,
which they contend conflicts with Rent-A-Center’s obligation to use commercially
reasonable efforts.
The Plaintiffs argue that Rent-A-Center’s efforts and actions in support of the
merger—at least, after the Board’s termination decision at the December 5 and 6,
2018 Board meetings—were deceptive, because its “business as usual” conduct hid
the fact that Rent-A-Center did not believe that the End Date had been previously
extended. The Plaintiffs suggest that if they had known that Rent-A-Center did not
consider the End Date extended, then they would have re-read the Merger
Agreement, recognized the upcoming termination of the period in which to elect to
extend, and sent the required written notice. In support of their argument, the
Plaintiffs compare their situation to those in Williams Companies. v. Energy
Transfer Equity, L.P. 203 and Hexion Specialty Chemicals., Inc. v. Huntsman Corp.204
203
159 A.3d 264 (Del. 2017).
204
965 A.2d 715 (Del. Ch. 2008).
49
In both Williams and Hexion, a party to a merger agreement was obligated to use its
reasonable best efforts 205 to achieve a condition precedent to the contemplated
merger; when the party became aware of a problem that threatened the condition
precedent, however, the party stayed silent and did not share its concern with its
counterparty. 206 In Hexion, the “reasonable best efforts” clause “impose[d]
obligations to take all reasonable steps to solve problems and consummate the
transaction.”207 In Williams, our Supreme Court wrote that the “reasonable best
efforts” and “commercially reasonable efforts” clauses “placed an affirmative
obligation on the parties to take all reasonable steps to obtain the [condition
precedent] and otherwise complete the transaction.”208 The Plaintiffs point to the
inescapable fact that, as the minutes ticked down to the passing of the End Date,
Rent-A-Center’s principals watched Vintage closely. Rent-A-Center personnel
205
In Williams, the party was obligated to use both “reasonable best efforts” and “commercially
reasonable efforts.” 159 A.3d at 273.
206
In Williams, where the contemplated merger was conditioned on the issuance of a tax opinion
by the defendant’s counsel; the Supreme Court found that there was evidence that the defendant
did not use reasonable best efforts where the defendant “did not direct [its counsel] to engage
earlier or more fully with [the plaintiff’s] counsel, failed itself to negotiate the issue directly with
[the plaintiff], failed to coordinate a response among the various players, went public with the
information that [its counsel] had declined to issue the [tax opinion], and generally did not act like
an enthusiastic partner in pursuit of consummation of the [Merger Agreement].” 159 A.3d at 273(quoting Williams Cos. v. Energy Transfer Equity, L.P., 2016 WL 3576682, at *17 (Del. Ch. June
24, 2016)). In Hexion, where the contemplated merger was conditioned on financing, the buyer
did not use reasonable best efforts when it developed concerns about the solvency of the combined
entity, but instead declined to share those concerns. 965 A.2d at 755–756; see also Williams, 159
A.3d at 272 (discussing Hexion).
207
Williams, 159 A.3d at 272 (discussing Hexion).
208
Id. at 273.
50
acted entirely in the corporate interest, anticipating the stroke of midnight, when
Rent-A-Center’s termination right would ripen and could be exercised. A friendly
heads-up, argues Vintage, would have allowed it to bind Rent-A-Center to the
Merger Agreement, going forward.
Here, according to the Plaintiffs, the Defendant breached its obligation to use
commercially reasonable efforts by not informing Vintage that Rent-A-Center
considered the operative End Date to be the initial End Date defined by the Merger
Agreement—that is, December 17, 2018. The result, per the Plaintiffs, was that
Vintage was not put on notice of its need to comply with the notice requirement in
Section 8.01(b)(i). Williams and Hexion are, I find, distinguishable from the case
before me. The defendants in those cases were aware of a “problem,” impending
failure to obtain a condition precedent, and chose not to make the effort to alert, and
to work with, their counterparties. The “problem” posed by the Plaintiffs here is not
the sabotage of achieving a condition precedent to the Merger, but Vintage’s lack of
understanding of its explicit rights under the Merger Agreement. Under Delaware
Law, parties are assumed to have knowledge of their own contractual rights.209 For
Williams and Hexion to be analogous here would require me to find that Rent-A-
Center was aware that Vintage misunderstood its contractual rights, but Rent-A-
209
See, e.g., Chapter 7 Tr. Constantio Flores v. Strauss Water Ltd., 2016 WL 5243950, at *6 (Del.
Ch. Sept. 22, 2016).
51
Center nonetheless chose not to raise the confusion with its counterparty. 210 I need
not decide whether, in such a case, failure to raise the issue would violate Rent-A-
Center’s duty to use commercially reasonable efforts, because the record fails to
demonstrate that the Defendant had such knowledge.
The record is bereft of any evidence that the Rent-A-Center Board had
knowledge Vintage was mistaken as to its contractual right to extend the End Date
by giving notice.211 In fact, testimony at trial indicates that the Board was told, and
believed, that Rent-A-Center was likely to give notice before the end date. 212 The
Plaintiffs argue that the Defendant’s behavior was nonetheless fraudulent or
deceptive, and that this is therefore evidence that Rent-A-Center knew Vintage was
210
I note that I am faced here with the exercise of a contractual right, and not compliance with
contractual commitments. To the extent that precedent provides guidance here, I find helpful the
analysis of “reasonable best efforts” (presumably also applicable to “commercially reasonable
efforts”) described in Akorn, Inc. v. Fresenius Kabi AG, 2018 WL 4719347, at *91 (Del. Ch. Oct.
1, 2018), aff’d, 198 A.3d 724 (Del. 2018). In Akorn, this Court described the analysis of
“reasonable best efforts” as “whether the party subject to the clause (i) had reasonable grounds to
take the action it did and (ii) sought to address problems with its counterparty.” Id. This Court
also noted that prior decisions “criticized parties who did not raise their concerns before filing suit,
did not work with their counterparties, and appeared to have manufactured issues solely for
purposes of litigation.” Id. (internal citations omitted).
211
The Plaintiffs argue that the Chairman of Rent-A-Center admitted at his deposition that given
the extension of the closing date in the Joint Timing Agreement, the End Date had to be extended.
Written Closing Argument of Pls. and Intervenor-Pl. at 17–18. However, the Plaintiffs quote from
the question posed by counsel, not the Chairman’s response. See Written Closing Argument of Pls.
and Intervenor-Pl. at 17–18; Lentell Dep. 157:3–7. The Chairman, in fact, answered, “That was
the intent.” Lentell Dep. 157:3–7. This is consistent with Rent-A-Center’s belief that Vintage
would bind them with a notice of election to extend before the deadline, not evidence that Vintage
had already done so.
212
See, e.g., Trial Tr. 404:24–405:8 (Ressler); id. at 519:17–22 (Fadel).
52
working under a mistaken understanding. 213 The Plaintiffs offer—among other
documents and conduct—the “white paper,” which was submitted to the FTC on
December 14, 2018, as evidence of the deceit. The Plaintiffs also offer as evidence
the fact that the Board kept its conditional decision to terminate the Merger
Agreement confidential, including confidential from many within Rent-A-Center
who frequently interacted with Vintage, among them antitrust counsel, O’Rourke,
and Rent-A-Center’s General Counsel.
In the white paper the filing parties represented to the FTC that the Merger
was an opportunity to “revitalize” Rent-A-Center, and that “[o]ver the last five years,
[Rent-A-Center] has been experiencing declining revenues and its store count has
reduced significantly because it has closed underperforming stores.”214 This
representation was literally true; the Plaintiffs, however, submit it was deceitful,
indeed it is the quintessence of their fraud claim, because Rent-A-Center’s
operational performance had, in fact, recently improved, and the Board had, by this
time, decided it was in the corporate interest to terminate the Merger, if given the
opportunity, and proceed without Buddy’s and Vintage. Per the Plaintiffs, the white
paper is evidence of Rent-A-Center’s active deception. I find the facts otherwise.
213
The Plaintiffs seek to shoehorn this deception under the commercially reasonable efforts
rubric—I suspect, because Vintage’s behavior does not constitute actionable legal fraud.
214
JX 600, at 21.
53
Prior to submitting the white paper, I note, Rent-A-Center’s counsel informed
Vintage that the white paper’s comment on declining operational performance no
longer reflected Rent-A-Center’s operations, which had turned for the better, and
that the white paper argument had thus lost some of its force. 215 If the statement in
the white paper on operational performance was misleading, it was only misleading
to the FTC, not Vintage. I find no fraud or deceit as to Vintage in the white paper,
or in similar documents and conduct.
The Plaintiffs also contend that the Board’s decision to keep the plan to
terminate confidential is evidence that Rent-A-Center knew that Vintage was
mistaken about the extension of the End Date. According to this view, by keeping
their decision confidential, the Board hoped to avoid tipping off Vintage, which
supposedly the Board knew would, if clued in, timely perfect its unilateral right to
extend the End Date through compliance with Section 8.01(b)(i). However, the
Plaintiffs’ only evidence of this theory is the fact that the Board kept the plan to
terminate confidential.
Fadel testified at trial that decisions made by the Board during executive
sessions are, by nature, confidential.216 There are also business reasons why the
Board may have chosen to keep this specific decision confidential. Legal counsel
215
JX 1215, at 1 (“Given our recent improving financial and business performance, this argument
loses some of its impact or relevance in any event . . . .”).
216
Trial Tr. 533:14–18, 555:19–23, 556:19–557:1, 567:16–22, 568:16–569:6 (Fadel).
54
told the Board that Vintage was likely to send written notice extending the End Date,
and the Board resolved to continue working toward a close. However, had Rent-A-
Center shared its desire to terminate—again, an option only if Rent-A-Center was
given the contractual opportunity—it could have upset its merger partner and
complicated their relationship going forward, as Rent-A-Center would have been
bound to continue working toward a close if Vintage extended the End Date as
expected. Additionally, sharing the decision—even internally—could have affected
the level of effort Rent-A-Center staff put towards closing, including in ongoing
interactions with the FTC, and could have put Rent-A-Center at risk of breach by
falling short of using commercially reasonable efforts.
There are many possibilities as to why the Board kept its decision confidential,
and the Plaintiffs have not shown that this confidentiality was to avoid “tipping off”
Vintage. 217 In fact, the evidence shows that the Board was informed by counsel, and
believed, that Vintage would give notice of election to extend, which implies a
reasonable assumption that Vintage was aware of the End Date, its implications, and
Vintage’s explicit rights therewith. 218 I do not find that Rent-A-Center was aware
of Vintage’s mistaken belief about its contractual rights.
217
Written Closing Argument of Pls. and Intervenor-Pl. at 38.
218
I do not doubt that the Rent-A-Center Board hoped for, and welcomed, the opportunity to
terminate, whether that opportunity arrived by conscious decision or inadvertence on Viintage’s
part.
55
What remains of the Plaintiffs’ argument is, effectively, that commercially
reasonable efforts means that Rent-A-Center had a “duty to warn.”219 In other
words, the Plaintiffs argue that a commercially reasonable effort by Rent-A-Center
required notice that Rent-A-Center would not extend, and would terminate if
Vintage did not extend, which would thereby remind Vintage of the impending End
Date and its related rights. Finding that commercially reasonable efforts require
such notice is inconsistent with the terms of the Merger Agreement. Section
8.01(b)(i) does not require advance notice, either of the election to extend or of
termination. Advance notice provisions, however, are common; in fact, the Merger
Agreement requires a party to give advance notice before it exercises several of the
other termination rights in Section 8.01 itself. 220 As a matter of contractual
interpretation, I should refrain from writing a provision into a contract when the
parties could have done so themselves, but chose not to.221 In any event, I need not
219
The Plaintiffs also suggest, in a footnote in their briefing, that the Defendant had a duty to
disclose under Delaware Law, independent of its contractual obligation to use commercially
reasonable efforts. Written Closing Argument of Pls. and Intervenor-Pl. at 37 n.67. In In re
Wayport, Inc. Litigation, this Court wrote that “[a] duty to speak can arise because of statements a
party previously made. A ‘party to a business transaction is under a duty to disclose to the other
party before the transaction is consummated subsequently acquired information that the speaker
knows will make untrue or misleading a previous representation that when made was true.’” 76
A.3d 296, 323 (Del. Ch. 2013) (quoting Restatement (Second) of Torts § 551 (1977)). However,
no such duty to disclose attaches here; Rent-A-Center did not make a representation that it would
not terminate the Merger Agreement if given the opportunity, nor did it make a representation that
it considered Vintage to have already made an election to extend the End Date.
220
See JX 272 §§ 5.03(d)(ii), 8.01(d), 8.01(c).
221
See Allied Cap. Corp. v. GC-Sun Hldgs., L.P., 910 A.2d 1020, 1035 (Del. Ch. 2006) (“[C]ourts
should be most chary about implying a contractual protection when the contract easily could have
been drafted to expressly provide for it.”).
56
consider imposing an advance notice provision, because commercially reasonable
efforts under these circumstances do not require it. The Plaintiffs argue that Rent-
A-Center’s apparent enthusiasm for the merger misled Vintage about Rent-A-
Center’s decision to terminate if possible, and that had Vintage known the truth, it
might have informed itself of its contractual rights, and given notice of an election
to extend. Commercially reasonable efforts do not require that sophisticated parties
remind one another of their contractual rights. 222
I have attempted, in the preceding paragraphs, to grapple with the Plaintiffs’
contentions that Rent-A-Center failed to use commercially reasonable efforts.
However, the Plaintiffs’ argument fails for a more fundamental reason. For Rent-
A-Center to lose its right to terminate under Section 8.01(b)(i), its breach must be
one that causes a failure to consummate the Merger by the End Date. 223 The
Defendants point out that what prevented consummation of the Merger by the End
Date was the ongoing antitrust approval process, with respect to which Rent-A-
222
The Plaintiffs also argue that Rent-A-Center’s efforts towards closing in fact exceeded what
was required by commercially reasonable efforts. See Written Written Closing Argument of Pls.
and Intervenor-Pl. at 33–38. This excess was, to the Plaintiffs’ eyes, deceptive. However, the
Plaintiffs have not shown, or even argued, that if Rent-A-Center had displayed only the bare
minimum “commercially reasonable enthusiasm,” the Plaintiffs would then have been aware that
Rent-A-Center did not consider the End Date extended. As a result, it makes no difference, for
purposes of this analysis, whether Rent-A-Center did only what commercially reasonable efforts
required, or went beyond.
223
The right to terminate the Merger Agreement under Section 8.01(b)(i) is not available “to any
party whose breach of any provision of [the Merger Agreement] causes the failure of the Closing
to be consummated by the End Date.” JX 272 § 8.01(b)(i).
57
Center was, I find, using commercially reasonable efforts. Even had the Plaintiffs
demonstrated a breach of commercially reasonable efforts inhering in Rent-A-
Center’s failure to warn, they have, nonetheless, not shown that such a breach
prevented consummation of the Merger by the End Date.
Rent-A-Center’s efforts toward closing cannot be a breach of the
commercially reasonable efforts provision. If Rent-A-Center had not entered into
the Joint Timing Agreement, participated in meetings with Vintage, and shared
financial information, it would have, by such inactions, presumably breached the
commercially reasonable efforts clauses of the Merger Agreement. A party’s
obligation to use commercially reasonable efforts must be cabined by its bargained-
for contractual rights. 224 If an agreement to use commercially reasonable efforts to
comply with obligations in a contract means that a party cannot exercise its
bargained-for right to terminate that contract, that bargained-for right would be
illusory. The Plaintiffs have argued that the Defendant’s actions after the December
224
This Court expressed a similar sentiment in Akorn, writing that:
[T]he parties agreed in the Reasonable Best Efforts Covenant to seek ‘to
consummate and make effective’ the transaction that they had agreed to in the
Merger Agreement on the terms set forth in that contract. They were not committing
themselves to merge at all costs and on any terms. Instead, they were committing
themselves to fulfill the contract they had signed, which contained representations
that formed the basis for the transaction, established conditions to the parties’
performance, and gave both sides rights to terminate under specified circumstances.
As I see it, the Reasonable Best Efforts Covenant did not require either side of the
deal to sacrifice its own contractual rights for the benefit of its counterparty.
Akorn, Inc. v. Fresenius Kabi AG, 2018 WL 4719347, at *91 (Del. Ch. Oct. 1. 2018) (emphasis
added), aff’d, 198 A.3d 724 (Del. 2018).
58
5 and 6, 2019 Board meetings were not commercially reasonable, in a way that
vitiates the termination right, because the Defendant did not share with the Plaintiffs
its decision not to extend the End Date and to terminate, should Vintage not so
extend. I reject this argument. Given the foregoing, I find that the Defendant
retained its right to terminate the Merger Agreement under Section 8.01(b)(i).
6. The Implied Covenant of Good Faith and Fair Dealing Does Not
Prevent Termination
As our Supreme Court has recognized, “the implied covenant attaches to
every contract.” 225 It is “the doctrine by which Delaware law cautiously supplies
terms to fill gaps in the express provisions of a specific agreement.” 226 Caution in
this regard should be underscored.227 Furthermore, a gap must exist to invoke the
implied covenant, “because ‘[t]he implied covenant will not infer language that
contradicts a clear exercise of an express contractual right.’” 228
The Plaintiffs argue that the implied covenant of good faith and fair dealing
should be applied here to prevent the Defendant from exercising its termination right
under Section 8.01(b)(i), because the implied covenant provides a “no deception”
term. 229 However, the Plaintiffs do not claim that Rent-A-Center committed fraud,
225
Dunlap v. State Farm Fire and Cas. Co., 878 A.2d 434, 441 (Del. 2005).
226
Allen v. El Paso Pipeline GP Co., LLC, 2014 WL 2819005, at *10 (Del. Ch. June 20, 2014).
227
See NAMA Hldgs., LLC v. Related WMC LLC, 2014 WL 6436647, at *16–17 (Del. Ch. Nov.
17, 2014).
228
See id., at *16 (quoting Nemec v. Shrader, 991 A.2d 1120, 1127 (Del. 2010)).
229
Written Closing Argument of Pls. and Intervenor-Pl. at 47.
59
per se. What the Plaintiffs ultimately seek is equitable fairness,230 which is not
promised by the implied covenant.231 The parties vigorously negotiated the right to
extend the End Date—a right that Vintage had, but failed to exercise. There is
simply no gap in Section 8.01(b)(i) for the implied covenant to fill.
B. Rent-A-Center Is Not Estopped From Exercising Its Right to Terminate
The Plaintiffs argue, and seek declaratory judgment, that the Defendant is
estopped in equity from exercising its right to terminate under Section 8.01(b)(i).
The Plaintiffs argue that either equitable estoppel or quasi-estoppel bar the
Defendant from exercising its termination right. Similar to their contractual
arguments, the Plaintiffs base estoppel primarily on the course of conduct between
the parties, which reflected an expected time of close in 2019. I assume, without
finding, that in some circumstances these equitable principals could trump contract
230
See Written Closing Argument of Pls. and Intervenor-Pl. at 49 (“This Court should, using the
implied covenant, prevent that unjust result . . . .”) (emphasis added).
231
As Vice Chancellor Laster explained in NAMA Holdings, LLC v. Related WMC LLC:
When used with the implied covenant, the term “good faith” contemplates
“faithfulness to the scope, purpose, and terms of the parties’ contract.” . . . The
concept of “fair dealing” similarly refers to “a commitment to deal ‘fairly’ in the
sense of consistently with the terms of the parties' agreement and its purpose.”
These concepts turn not on whether a court believes that a particular action was
morally or equitably appropriate under the circumstances, but rather “on the
contract itself and what the parties would have agreed upon had the issue arisen
when they were bargaining originally.”
2014 WL 6436647, at *17 (Del. Ch. Nov. 17, 2014) (emphasis in original) (quoting Gerber v.
Enter. Prods. Hldgs., LLC, 67 A.3d 400, 419 (Del. 2013), overruled in part on other grounds by
Winshall v. Viacom Int’l, Inc., 76 A.3d 808 (Del. 2013)).
60
law, and could thus save a contract terminated under an explicit contractual right.232
Because I find no grounds for estoppel, I need not reach that issue.
1. Equitable Estoppel
The Plaintiffs claim that equitable estoppel bars the Defendant from
terminating the Merger Agreement. “[E]quitable estoppel is invoked ‘when a party
by his conduct intentionally or unintentionally leads another, in reliance upon that
conduct, to change position to his detriment.’” 233 As the party asserting equitable
estoppel, the Plaintiffs bear the burden of proof, which is clear and convincing
evidence.234 The Plaintiffs “must demonstrate that: (i) they lacked knowledge or the
means of obtaining knowledge of the truth of the facts in question; (ii) they
reasonably relied on the conduct of the party against whom estoppel is claimed; and
(iii) they suffered a prejudicial change of position as a result of their reliance.”235
This Court does not lightly turn to equitable estoppel to enforce contract rights which
cannot be vindicated as the contract is written.236
232
In Genencor International, Inc. v. Novo Nordisk A/S, our Supreme Court, “[i]n analyzing
whether the remedy [the appellant] seeks is equitable estoppel,” found it “important to consider
that [the apellant] is seeking to enforce a contract supported by valid consideration. 766 A.2d 8,
12 (Del. 2000). Our Supreme Court noted that it had “previously observed that a promissory
estoppel analysis is not applicable to cases in which the alleged promise is supported by
consideration,” and “this observation also applies to equitable estoppel.” Id. “Therefore,” our
Supreme Court wrote, “because this is a dispute about enforcement of a bargained-for contract
right, we conclude that the remedy [the appellant] seeks is not equitable estoppel.” Id.233
Nevins v. Bryan, 885 A.2d 233, 249 (Del. Ch. 2005) (quoting Wilson v. Am. Ins. Co., 209 A.2d
902, 903–04 (Del. 1965)).
234
Id.235
Id.236
See Genencor Inter., Inc. v. Novo Nordisk A/S, 766 A.2d 8, 12 (Del. 2000).
61
The Plaintiffs claim that they had no reason to doubt the impression they
received from Fadel and O’Rourke—that Rent-A-Center remained in enthusiastic
support of the merger—and had no way to discover the Board’s plan to terminate
the Merger Agreement. The Plaintiffs contend that they reasonably relied on Rent-
A-Center’s “business as usual” act following the December 5 and 6, 2018 Rent-A-
Center Board meetings. The Plaintiffs’ argument for equitable estoppel suffers from
the same flaw as their contractual arguments: an agreement to extend the time of
closing into 2019 is not agreement to extend the End Date. Fatal to the Plaintiffs’
equitable estoppel claim, though, is the Plaintiffs’ own ability to unilaterally extend
the End Date and bind Rent-A-Center.
The Plaintiffs argue that they lacked knowledge of, or the means to obtain, the
truth that Rent-A-Center did not consider the End Date extended based on the Joint
Timing Agreement and other conduct between the parties. However, what Rent-A-
Center believed about the End Date would have been immaterial had Vintage merely
exercised its contractual right and sent a written notice explicitly extending the End
Date. Vintage negotiated for this right, and was constructively aware of it.
Therefore, the Plaintiffs cannot have reasonably relied on the demeanor of Rent-A-
Center’s principals. Nor did they change positions based on any reliance. Again,
Vintage did not make a decision that it need not send notice of election to extend
62
before the End Date based on some action by Rent-A-Center. 237 It appears that
Vintage simply forgot the End Date in the Merger Agreement—and its implications.
The estoppel argument is another after-the-fact attempt to excuse Vintage’s lack of
action: Vintage did not change its position based on Rent-A-Center’s actions.
Vintage’s attenuated claim that an honest lack of enthusiasm on the part of Rent-A-
Center might have caused Vintage to read the Merger Agreement and act
accordingly is another version of the misplaced duty to warn.
2. Quasi-Estoppel
Quasi-estoppel applies “when it would be unconscionable to allow a person
to maintain a position inconsistent with one to which he acquiesced, or from which
he accepted a benefit.” 238 Reliance is not required for quasi-estoppel to apply.239
However, the Plaintiffs’ argument for quasi-estoppel is unavailing because the
Defendant’s position is consistent with its position prior to the extension of the
expected time of closing. Prior to the End Date, the Defendant at all times complied
with its contractual obligations to use commercially reasonable efforts. After it
became clear that closing would be impossible in 2018, such efforts included
working toward a closing at some uncertain time in 2019. When faced with an
237
Or, if it did so, it is not reflected in the record.
238
RBC Cap. Mkts., LLC v. Jervis, 129 A.2d 816, 873 (Del. 2015) (internal quotations omitted).
239
Barton v. Club Ventures Invs. LLC, 2013 WL 6072249, at *6 (Del. Ch. Nov. 19, 2013).
63
opportunity to exercise its contractual termination right, the Defendant seized that
opportunity. For the reasons explained above, these actions are not inconsistent.
C. The Parent Termination Fee
The Plaintiffs seek declaratory judgment that the Parent Termination Fee is
unenforceable. They advance arguments that the Fee is a penalty, is untethered to
anticipated damages and would be a windfall to the Defendant. They also argue that
the contract by, its explicit terms, does not require the Fee to be paid here. The
Defendant disputes these allegations and has counterclaimed for breach of contract
to force payment of the Fee. Both sides have submitted expert reports to advance
their position. However, I have an additional concern: whether the Parent
Termination Fee is applicable here, in light of the implied covenant of good faith
and fair dealing.
The implied covenant of good faith and fair dealing, as discussed above,
serves primarily to fill gaps, including providing terms so obvious that contracting
parties fail to include them. 240 Such “quasi-reformation, however, ‘should be [a]
rare and fact intensive’ exercise, governed solely by ‘issues of compelling
240
See NAMA Hldgs., LLC v. Related WMC LLC, 2014 WL 6436647, at *16 (Del. Ch. Nov. 17,
2014) (“[T]he implied covenant ‘seeks to enforce the parties’ contractual bargain by implying only
those terms that the parties would have agreed to during their original negotiations if they had
thought to address them.’”) (quoting Gerber v. Enter. Prods. Hldgs., LLC, 67 A.3d 400, 418 (Del.
2013), overruled in part on other grounds by Winshall v. Viacom Int’l, Inc., 76 A.3d 808 (Del.
2013)).
64
fairness.’” 241 “Only when it is clear from the writing that the contracting parties
‘would have agreed to proscribe the act later complained of . . . had they thought to
negotiate with respect to that matter’ may a party invoke the covenant’s
protections.” 242
Despite the limited application of the implied covenant, I am dubious whether
the parties meant for a reverse breakup fee to apply in this situation. Specifically,
Rent-A-Center was bound through the End Date to use commercially reasonable
efforts to close the Merger. The End Date was set at six months beyond the entry of
the Merger Agreement, but either party could extend it another three months by
giving written notice. Inadvertently, Vintage failed to notice election to extend.
Rent-A-Center then exercised its right to terminate, for business reasons of its own.
Immediately on learning of the termination, Vintage attempted to give notice and
bind itself and Rent-A-Center to an extended End Date. It is clear that there was no
gamesmanship in Vintage’s actions—it simply forgot to exercise its contractual
right. Vintage is ready to move to closing; it is Rent-A-Center that is causing the
merger to terminate. That is Rent-A-Center’s contractual right. However, I question
whether the parties considered this scenario in contracting for the reverse break-up
fee. As neither side has raised the applicability of the implied covenant of good faith
241
Dunlap v. State Farm Fire and Cas. Co., 878 A.2d 434, 441 (Del. 2005) (quoting Cincinnati
SMSA Ltd. P’Ship v. Cincinnati Bell Cellular Sys. Co., 708 A.2d 989, 992 (Del. 1998)).
242
Id. (quoting Katz v. Oak Industries, Inc., 508 A.2d 873, 880 (Del. Ch. 1986)).
65
and fair dealing, I request supplemental briefing, on this issue alone, before
rendering a decision on whether the Parent Termination Fee must be paid.
III. CONCLUSION
The Plaintiffs were surprised by Rent-A-Center’s termination of the contract.
They had expended six months of effort and considerable funds toward closing; it is
understandable that they are angered by what they see as Rent-A-Center’s sharp
practice. However, the Plaintiffs have failed to show that the Merger Agreement’s
End Date was extended or that the Defendant should otherwise be barred from
exercising its right to terminate. As a result, the Defendant’s termination of the
Merger Agreement pursuant to Section 8.01(b)(i) was valid. I reserve decision on
the parties’ requests for relief pertaining to the Parent Termination Fee, pending
supplemental briefing.
66