George P. Shenas

"Forthright Negotiator's" Manifested intent Resolves Ambiguity in M&A transaction
April 1, 2008

On December 21, 2007, the Delaware Chancery Court issued an opinion in United Rentals, Inc. v. RAM Holdings Corp. in which the plaintiff sought specific performance of a merger agreement under which Cerberus (through wholly-owned subsidiaries known as "RAM") was to acquire United Rentals ("URI") for $34.50 per share in cash. Prior to the closing, Cerberus experienced buyer's remorse and advised United Rental that it was not prepared to proceed with the acquisition on the original terms, but was willing to re-negotiate the price or simply pay URI a $100 million "reverse" termination fee to walk away from the deal. As presented to the court in United Rentals' motion for summary judgment, the key issue in the case was whether the provisions in the merger agreement providing for specific performance of the agreement and the paragraph pertaining to termination of the agreement provided United Rentals with the right to seek specific enforcement of the deal, or whether RAM could walk away from the deal by paying a $100 million termination fee.

The motion for summary judgment was denied by the Court on the grounds that the provisions were too ambiguous. However, the more important aspect of the case resulted from the trial which then followed, in which the Court carefully reviewed the extrinsic evidence pertaining to the negotiating history between the parties and their respective advisors. In finally assessing the evidence the Court concluded that, since it was clear that there was no agreement between the parties concerning the availability of the remedy of specific performance, it was required to employ the "forthright negotiator" principle, stating: "In cases where the extrinsic evidence does not lead to a single, commonly held understanding of a contract's meaning, a court may consider the subjective understanding of one party that has been objectively manifested and is known or should be known by the other party."

Under the facts before the Court , it was compelled to conclude that URI had failed to adequately communicate its belief that the merger agreement provided for specific performance, but that RAM had stated its position clearly that no such right to specific performance was intended to be provided.

It is an important example of the extent to which a Court is willing to scrutinize written and oral communications of counsel to parties to a merger agreement to finally give meaning to ambiguous language. Thus, those counsel negotiating a deal must be aware that all communications with the other party, including drafts of agreements, emails discussing relevant provisions, may end up as exhibits in a trial where they will be called to testify. In addition, the opinion in this case suggests that, when faced with an ambiguous contract provision, a party may have an affirmative duty to clarify its position when it knows (or should have known) that the other party has a different understanding about the meaning of the provision.

George P. Shenas