Delaware Business Litigation Report

Court of Chancery Explains the Role of Merger Subs

Alliance Data Systems Corporation v. Blackstone Capital Partners V, LP, C.A. 3796-VCS (Del. Ch. Jan. 15, 2009)

 

Here the target tried to argue that the parent entity should be responsible to pay damages for its sub’s failure to close under the facts of this case. It claimed that as all the parties knew the parent had to support the sub to get the deal done, the merger agreement should be read to imply that obligation. The Court of Chancery rejected that argument as inconsistent with the terms of the merger agreement and noted that if the target knew of the risk and failed to cover that risk by securing the parent's guarantee in its agreements, then that was too bad.

 

Many mergers involve the use of a new, assetless entity that is a subsidiary of the real acquiror, as a merger partner. When the parent does not guarantee the obligations of the sub, however, the merger agreement then is really just an option for the parent to exercise or not as it sees fit. For if the sub does not close the merger, the other parties to the deal are left without a real remedy. This insulation of the parent entity is understood and intended, and is a risk the target is willing to take to get the best price.

 

 

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