Delaware Court Discusses Acquisition Agreement Provisions
By Robert S. Reder
Robert S. Reder,a Professor of the Practice of Law at Vanderbilt Law School, has been serving as a consulting attorney at Milbank, Tweed, Hadley & McCloy LLP since his retirement as a partner in April 2011.
The Delaware judiciary does not frequently have an opportunity to review and interpret acquisition agreement provisions which many businessmen and legal practitioners probably take for granted. Most M&A transactions, of course, do not end in dispute, so there is no need to test the feasibility of any particular acquisition agreement provision. And even when acquisition agreement terms are disputed, the dispute is often settled through negotiation, or perhaps arbitration. Thus, when a court does get the chance to interpret one or more acquisition agreement provisions, the result is generally instructive.
Delaware Vice Chancellor Sam Glasscock III’s recent informal letter opinion in Cooper Tire & Rubber Co. v. Apollo (Mauritius) Holdings Pvt. Ltd.1 demonstrates how the choice of language–even language that practitioners might consider to be standard, or even boilerplate–can impact a court’s decision. This is particularly the case when distinct provisions of an acquisition agreement cover the same or arguably similar concepts, but employ somewhat different terminology.
Earlier this year, subsidiaries of Apollo Global Management (“Apollo”), the well-known private equity firm, entered into a merger agreement providing for the acquisition of Cooper Tire & Rubber Co. (“Cooper”) for $35 per share, payable in cash. After the transaction was first publicly announced, labor unions at both Cooper’s Chinese joint venture (the “JV”) and two of its U.S. domestic plants sought to disrupt the transaction:
• The Chinese labor union, among other things, “blocked certain Cooper-appointed managers from accessing [the JV]’s facility, barred Cooper from obtaining certain of [the JV]’s business and financial records, and is preventing [the JV] from inputting certain financial data into computer systems to which Cooper has remote access.” As a result, Cooper was prevented from supplying Apollo with information required by Apollo to arrange its acquisition financing.
• In the U.S., an arbitrator found that the transaction triggered a consent provision in the union’s collective bargaining agreement with Cooper, and ordered Cooper to negotiate a new contract with the union. Apollo in turn sought a court order compelling Cooper to “use its best efforts to negotiate a new contract with” the union.
For its part, Cooper, citing Section 9.10 of its merger agreement with Apollo, undertook the “difficult task” of asking the Delaware Court of Chancery to compel Cooper to “specifically perform its obligations under the Merger Agreement, or in the alternative, awarding money damages for breaches of this Agreement.” Entitlement to specific performance under Section 9.10 requires that Cooper prove (among other things) that Section 7.2 of the merger agreement, setting forth the conditions to Apollo’s obligation to perform under the merger agreement, had been satisfied. Section 7.2 contains three relatively typical subparagraphs relevant to Cooper’s efforts to win specific performance:
• Section 7.2(a) requires that “[t]he representations and warranties of the Company set forth herein shall be true and correct in all respects … except where the failure … to be so true and accurate would not reasonably be expected to have or result in, individually or in the aggregate, a Material Adverse Effect … ”
• Section 7.2(b) requires that “[Cooper] shall have in all material respects performed or complied with the covenants and agreements contained in this Agreement to be performed or complied with by it prior to or on the Closing Date.”
• Section 7.2(c) requires that “there shall not have occurred any event, state of facts or circumstances which, individually or in the aggregate, would reasonably be expected to have a Material Adverse Effect” on Cooper.
Perhaps sensing that its labor unions might seek to disrupt the transaction, Cooper made sure to include in the merger agreement’s definition of “Material Adverse Effect” an exception, found in many, if not most, merger agreements, for “circumstances attributable to the parties’ execution of the Merger Agreement and the announcement of the merger, including the resulting impact on relationships between Cooper and its subsidiaries, and their ‘employees, labor unions, customers, suppliers or partners.’”
Apollo sought to defeat Cooper’s effort to obtain specific performance by filing a Motion for Judgment on the Pleadings (the “Motion”). In the Motion, Apollo asserted that Cooper was not entitled to specific performance under Section 9.10 “as a matter of law” because (among other problems) the conditions to Apollo’s obligation to close under Section 7.2 had not been satisfied. Specifically, Apollo claimed that Section 7.2(b)’s requirement that Cooper shall have “performed or complied with” its covenants and agreements under the merger agreement “in all material respects” had not been satisfied due to Cooper’s inability–as a result of the union’s blocking actions to provide information with respect to the JV. As Vice Chancellor Glasscock pointed out in his letter ruling, Section 7.2(b)’s use of a simple materiality standard–as distinguished from the “Material Adverse Effect” qualifier employed in both Sections 7.2(a) and (c)–presented a lower hurdle for Apollo to establish Cooper’s failure to fulfill one of its covenants.
As for the specific covenant that Apollo claimed Cooper had not fulfilled, Apollo pointed to Section 6.5 of the merger agreement, which requires Cooper to provide to Apollo:
“reasonable access during normal business hours to (i) [Cooper's] and its Subsidiaries’ respective properties, books, Contracts, commitments, personnel and records and (ii) such other information as [Apollo] shall reasonably request with respect to [Cooper] and its Subsidiaries and their respective businesses, financial condition and operations, in each case, to the extent related to the consummation of the Transactions or the ownership or operation of the respective businesses of [Cooper] and its Subsidiaries from and after the Closing ….”
The JV union’s job action prevented Cooper from providing such access to Apollo. Because, Apollo argued, (i) Cooper was unable to provide any access to data and information of the JV, much less reasonable access, (ii) Section 6.5 “includes no limitation regarding ‘commercially reasonable efforts’ … and no Material Adverse Effect limitation,” and (iii) Section 7.2(b), unlike the other two subparagraphs of Section 7.2, is not limited by a “Material Adverse Effect” qualifier, it should be clear “from the face of the Complaint” that Cooper’s failure to comply with Section 6.5 prevented the condition in Section 7.2(b) from being satisfied, thereby defeating Cooper’s effort to obtain specific performance under Section 9.10.
Cooper disputed this line of reasoning. Because Apollo needed the information in question in connection with its efforts to secure acquisition financing, Cooper argued that Section 6.11 of the merger agreement, rather than Section 6.5, is applicable. First, Cooper noted that Section 6.5 requires that the data and information in question be used in connection with the “Transactions.” The merger agreement defines “Transactions” to expressly exclude the financing of the acquisition. Section 6.11 is similar to Section 6.5 insofar as it requires Cooper to furnish Apollo with various information and materials. However, unlike Section 6.5, Section 6.11 requires only that Cooper use its “reasonable best efforts” to provide materials “reasonably requested” by Apollo. Cooper argued that this qualifier triggered a need for greater development of the relevant facts and circumstances, a factor which should lead the court to deny Apollo’s Motion.
Cooper also argued, in the alternative, that even if Section 6.5 was applicable, the facts that this section called on Cooper to provide “reasonable” access and limited Apollo to information “reasonably” requested were sufficient to defeat the Motion. According to this line of reasoning, “while Apollo argues that ‘reasonable access’ presumes some access to the books and records, … in some circumstances, no access could be reasonable,” particularly in light of “the circumstances surrounding the parties’ negotiations and expectations in signing the agreement … ” In this case, Cooper argued, the parties’ recognition in the merger agreement that labor strife triggered by announcement of the transaction could not trigger a “Material Adverse Effect” should inform the court as to the parties’ understanding of the term “reasonable access.”
The Court’s Analysis
At the outset, Vice Chancellor Glasscock noted that, under applicable rules of contract interpretation, he could grant Apollo’s Motion “only if the contract provisions at issue are unambiguous.” The Vice Chancellor further explained that “[m]ultiple reasonable interpretations may arise where … a contract ‘requires harmonization of seemingly conflicting contract provisions.’” Moreover, “[a]s the moving party here, Apollo has the burden of establishing that its interpretation … is the only reasonable interpretation.” As a result, if the Vice Chancellor were to determine that “both Apollo’s and Cooper’s interpretations of the Merger Agreement are reasonable, then Apollo’s Motion … must be denied, and the court must determine the intent of the parties at trial.”
Next, Vice Chancellor Glasscock turned to the parties’ dispute as to whether Section 6.5 (Apollo’s position) or Section 6.11 (Cooper’s position) governed the information which Cooper was unable to provide. Focusing on the merger agreement’s definition of “Transactions,” the Vice Chancellor concluded that Cooper’s position was “a reasonable reading,” particularly in view of the fact that Section 6.11 expressly makes reference to acquisition financing, while Section 6.5, by using the term “Transactions,” expressly excludes acquisition financing as a legitimate reason for requesting information.
While this conclusion would have been sufficient to defeat Apollo’s Motion, the Vice Chancellor continued with his analysis of the merger agreement, as follows:
• First, by basing its argument on Section 6.5, Apollo had obviously recognized that Section 6.11 employs a “reasonable best efforts standard,” necessitating a factual determination that could only be made at trial.
• Second, the record was bereft of any indication that Apollo actually made a request under Section 6.5 for JV information. Thus, Cooper’s claim that no such request had been made created another issue of fact not appropriate for a judgment on the Motion.
• Third, in response to Apollo’s claim that clause (i) of Section 6.5 (unlike clause (ii)) does not expressly require Apollo to make a formal “request” for information, the Vice Chancellor explained that such a reading “would require me to find that the parties intended that Cooper be in material breach of the access requirement if it found itself at any time unable to provide such access despite the fact that Apollo never made a request for such access.” In any event, because Cooper “has only promised reasonable access” in Section 6.5, “it is difficult to see how access has been unreasonably denied in the absence of a request.” Further, inasmuch as “Cooper’s reading, applying the reasonable request trigger, is a reasonable reading of the contractual language,” this, too, was an issue properly addressed only at trial.
• Finally, even had Apollo made a formal request under Section 6.5, there remained a triable issue whether “Cooper’s failure to provide access was unreasonable in the context of a strike” at the JV. The “Material Adverse Effect” definition’s specific exclusion of labor unrest following announcement of the transaction indicated to the Vice Chancellor that this “was an occurrence contemplated by the parties.”
Vice Chancellor Glasscock’s informal letter opinion in Cooper Tire & Rubber demonstrates just how interrelated the various provisions of the typical acquisition agreement are, particularly when put to the test of a judicial analysis. In the words of the Vice Chancellor, “[w]hen interpreting contracts, we construe them as a whole and give effect to every provision if it is reasonably possible.” Thus, as a practical matter, every defined term will be given meaning, and the parties must be acutely aware of how these terms are defined and where they are used in the agreement. What might make sense in one provision may have unintended consequences in another. Further, when more than one provision is arguably applicable to a right or obligation of one of the parties, the court will look to the provision that fits more closely, which might not necessarily be what the parties had in mind. Clearly, care in drafting is paramount, and no provision should be given less attention simply because it might be viewed as “standard” or “boilerplate.”