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Chancery Declines to Extend Rent-A-Center Merger Agreement, But Questions Request for Termination Fee

Vintage Rodeo Parent, LLC v. B. Riley Financial, Inc., C.A. No. 2018-0927-SG (Del. Ch. Mar. 14, 2019).

The merger agreement at issue in this case included provisions permitting extensions or terminations to account for potential closing delays.  Relevant here, the agreement allowed either party to terminate after a particular deadline if the other party had not timely exercised its right to extend the contract.  The target exercised that right to terminate after the acquirer inadvertently failed to extend.  This litigation ensued, with the acquirer making various equity-based arguments to prevent the target’s termination.

In this post-trial decision, the Court of Chancery rejects the acquirer’s arguments and upholds the target’s right to terminate.  The acquirer argued that the contractual written notice requirement for extensions had been satisfied or waived, but the Court disagreed.  In this regard, the parties’ conduct working towards closing was not determinative.  While the parties had been cooperating to obtain regulatory approval, and their communications with each other and third-parties were consistent with a future closing date, the merger agreement required the parties to use commercially reasonable efforts to carry out those tasks regardless of a potential termination.  Under the facts and circumstances, the parties’ conduct did not satisfy the contractual notice requirements for a written election to extend, nor did it constitute a waiver of that requirement. 

The Court also rejected the acquirer’s arguments under the implied covenant, equitable estoppel, and the like, finding the termination was valid.  In this regard, the target’s decision to conceal its intent to terminate if the opportunity arose was inconsequential.  Either party had the right to terminate the merger agreement under the relevant provision, which required no advance notice.  Further, the acquirer was presumed to know its rights, and the target had no duty to offer a reminder under the circumstances.  Accordingly, the target validly terminated.

While the Court upheld the termination, it reserved decision on another important issue: the target’s request for what the Court deemed an “enormous” reverse termination fee, comprising roughly 15% of the transaction’s value.  The acquirer argued the break-up fee was not contractually required in the circumstances and was an unenforceable penalty in any event.  The Court questioned whether the parties considered the fee’s application in a scenario like this, where the acquirer wanted to close.  The Court ordered supplemental briefing on that subject addressing whether the implied covenant of good faith and fair dealing should apply and prevent liability.