Last week, the Delaware Court of Chancery found that a target company in an agreed merger properly terminated the merger agreement following the passage of the specified “end date” where the buyer failed to exercise its right under the agreement to extend the end date.  See Vintage Rodeo Parent, LLC v. Rent-a-Center, Inc., C.A. No. 2018-0927-SG (Del. Ch. Mar. 14, 2019).  The decision is a stark reminder that courts will enforce the terms of a merger agreement as written, and that the failure to comply with seemingly ministerial formalities can have severe consequences.   


Vintage Capital Management, LLC and its affiliates (collectively, “Vintage”) entered into a merger agreement to acquire Rent-a-Center, Inc. (“Rent-a-Center”).  As is customary, the merger agreement provided that if the merger were not consummated on or before a prescribed “end date,” either party would have the unilateral right to terminate the merger agreement.  The parties agreed that the end date would occur six months from the signing date.

The merger agreement also provided that the parties would use their commercially reasonable efforts to obtain antitrust regulatory clearance under the Hart-Scott-Rodino Antitrust Improvements Act of 1976.  Presumably because Rent-a-Center was concerned that such clearance might not be obtained notwithstanding both parties’ exercise of commercially reasonable efforts, it negotiated a reverse termination fee in the amount of $126.5 million, to be payable if such clearance were not obtained by the end date and either party terminated the merger agreement as a result.  However, each party also had the unilateral right to extend the end date by three months (and then by an additional three months) simply by delivering to the other party a written extension notice.

The merger agreement was signed on June 17, 2018.  The initial end date was thus December 17, 2018.  As anticipated, antitrust regulatory clearance did not materialize by the scheduled end date.  Indeed, as early as October 29, 2018, Vintage and Rent-a-Center entered into a joint timing agreement with the Federal Trade Commission which suggested (according to Rent-a-Center’s press release) that the merger would not close until the end of the first quarter of 2019.  In the meantime, the parties were diligently working together to obtain antitrust clearance, secure financing, and ensure a smooth integration.

On the morning of December 18, 2018, Rent-a-Center delivered to Vintage written notice of termination of the merger agreement and a demand for payment of the reverse termination fee.  Neither party had previously delivered to the other a written extension of the end date.  Three days later, Vintage initiated expedited litigation in the Delaware Court of Chancery seeking to compel Rent-a-Center to close the merger.  After expedited discovery and a two-day trial, Vice Chancellor Glasscock found that Rent-a-Center’s termination was valid and effective.

Key Takeaways From The Court’s Decision

Vintage raised a number of arguments as to why, notwithstanding the seemingly unambiguous provisions of the merger agreement, formal notice of its election to extend the end date was unnecessary in the circumstances.  But the court dismissed Vintage’s arguments, reaffirming several principles that M&A practitioners should keep in mind:

  • Strict compliance with notice provisions is critical. Vintage argued that its failure to give formal notice of its election to extend the end date was excused because the parties’ course of conduct, including the joint timing agreement which contemplated that the closing would take place in 2019, clearly evidenced their intent to extend the end date.  The court disagreed.  The court acknowledged that some cases had found substantial compliance with notice requirements despite deviations in the manner of notice, such as when a notice party no longer was employed by the party.  But in this case, the merger agreement’s requirement for express written notice had substantive significance.  In particular, the court noted that an extension of the end date would impose on Vintage a continuing obligation to use its commercially reasonable efforts during the entirety of the three-month extension period.  By not formally extending the end date, Vintage retained the option to terminate the merger agreement and cease its obligations at an earlier time.  The court was also persuaded that the end date extension provision was extensively negotiated by the parties and not intended to be ministerial.
  • There is no implied duty to warn one’s counterparty of its mistake. The court noted that Vintage presented no evidence at trial of the reason why it did not give formal notice of its election to extend the end date, and thus it appeared to be simply an oversight.  On the other hand, the evidence at trial showed that Rent-a-Center had decided almost two weeks before the initial end date that, if given the opportunity, it would terminate the merger agreement, in light of recent improvements in Rent-a-Center’s operational performance that made the terms of the merger less attractive.  Rent-a-Center, however, did not tell Vintage of its change of heart, and Vintage argued at trial that it was lulled into a belief that Rent-a-Center still wanted to close because it continued to exert itself to that end (as it was contractually required to do).  Noting that the merger agreement did not require advance notice of Rent-a-Center’s intention to terminate if neither party extended the end date, the court rejected Vintage’s various arguments that such an obligation should be implied by the duty of good faith or equitable principles.  Among other things, Vice Chancellor Glasscock distinguished Williams Companies v. Energy Transfer Equity, L.P.[1] and Hexion Specialty Chemicals, Inc. v. Huntsman Corp.,[2] where the court found termination of a merger agreement to be wrongful because “[t]he 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 work with, their counterparties.”  In contrast, Vice Chancellor Glasscock found the only “problem” in this case was Vintage’s mistake in failing to give formal notice to extend the end date (and thus retaining for itself the option to terminate the merger agreement).  The court further noted that Rent-a-Center had no way of knowing whether Vintage’s failure to give notice was intentional or inadvertent, and the law did not require it to “warn” Vintage of the consequences of its failure to give notice.
  • An obligation to use commercially reasonable efforts to consummate the merger does not preclude termination of the merger agreement. The merger agreement in this case required Rent-a-Center to use commercially reasonable efforts to take all action necessary to close the merger.  Vintage argued that Rent-a-Center breached that obligation by failing to inform Vintage of its intention to terminate if Vintage failed to elect to extend the end date.  Echoing the Court of Chancery’s recent decision in Akorn, Inc. v. Fresenius Kabi AG,[3] the court explained that “[a] party’s obligation to use commercially reasonable efforts must be cabined by its bargained-for contractual rights.”  The court found that Rent-a-Center’s exercise of its express right to terminate the merger agreement when neither party elected to extend the end date, although perhaps “sharp practice,” was thus not a breach of its commercially reasonable efforts obligation.  This is a reminder that parties should recognize that “efforts” clauses might be limited by other express contractual provisions.
  • Text messages are discoverable. The decision included discussion of certain text messages, reminding those involved in a merger process to be mindful that all written communications – regardless of method – may be subject to discovery in a subsequent court proceeding.

Enforceability Of Reverse Termination Fees

Despite finding that Rent-a-Center validly terminated the merger agreement, the court ordered more briefing on the issue of whether Rent-a-Center was entitled to what it described as an “enormous” $126.5 million reverse termination fee, which constituted 15.75% of the equity value of the transaction.  In addition to Vintage’s argument that the reverse termination fee is an unenforceable “penalty,” the court asked whether it should decline to enforce the provision under the implied covenant of good faith and fair dealing because Vintage’s failure to extend the end date was inadvertent and it is Rent-a-Center that is preventing the merger from closing, a scenario that the parties might not have contemplated when they entered into the merger agreement.

This aspect of the case may ultimately be the most impactful to M&A practitioners.  Unlike the breakup fees that are typically litigated in Delaware, reverse termination fees of this kind are not constrained by the target board’s fiduciary duties, and are simply a matter of private contract between the merger parties.  It is not uncommon for the quantum of such fees to exceed 5% or 10% of the deal value, unlike breakup fees paid by target companies, which typically range between 2% and 4% of the deal value.  Sellers often seek a sizeable reverse termination fee if it is expected that either the antitrust regulatory agencies will demand substantial divestitures or behavioral remedies which the buyer is unwilling to commit to expressly and/or there is a meaningful risk that the agencies will oppose the merger.  While Rent-a-Center will likely point to its bargained-for remedy, Vintage can be expected to characterize the reverse termination fee as a liquidated damages provision that is unenforceable as a “penalty.”  In the event the court agrees, a severability clause in the merger agreement requires the parties to “negotiate in good faith … to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner to the end that the transactions contemplated by this Agreement are fulfilled to the extent possible.”

Should the court side with Vintage on this issue, it could potentially lead sellers to demand more express commitments from buyers in terms of offering specific divestitures and behavioral remedies to the agencies rather than relying on the stick of a large reverse termination fee coupled with a general obligation to use commercially reasonable efforts or reasonable best efforts to obtain clearance.  In addition, sellers may be reluctant to proceed with a transaction involving heightened antitrust risk.  Absent a settlement, the court will address this interesting issue in a separate decision.

[1] 159 A.3d 264 (Del. 2017).

[2] 965 A.2d 715 (Del. Ch. 2008).

[3] 2018 WL 4719347 (Del. Ch. Oct. 1, 2018), aff’d, 198 A.3d 724 (Del. 2018).