United Rentals, Inc. v. RAM Holdings, Inc.
937 A.2d 810 (2007)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
When a contract is ambiguous, a court may apply the forthright negotiator principle, which binds a party to the other party's understanding if the first party knew or had reason to know of that understanding and failed to clarify its own position.
Facts:
- In the spring of 2007, United Rentals, Inc. (URI) initiated a process to sell the company.
- Cerberus Capital Management, L.P. (CCM), acting through newly formed shell entities RAM Holdings, Inc. and RAM Acquisition Corp. (collectively, RAM), entered into negotiations to acquire URI.
- Over several months, the parties' lawyers exchanged multiple drafts of a Merger Agreement, with URI's drafts including a right to specific performance and RAM's drafts seeking to limit URI's remedy to a $100 million termination fee.
- The final Merger Agreement, executed on July 22, 2007, contained conflicting clauses: Section 9.10 granted URI the right to seek specific performance, while also stating it was 'subject in all respects to Section 8.2(e).'
- Section 8.2(e) stated that upon certain terminations, a $100 million fee was the 'sole and exclusive remedy,' and also contained a broad sentence providing that 'in no event shall the Company seek equitable relief.'
- Shortly before the agreement was signed, a RAM executive, Steven Mayer, told URI's investment bankers he viewed the deal as an 'option' to purchase, a position URI's bankers strongly refuted but which was not resolved between the lawyers.
- On November 14, 2007, RAM notified URI that it would not proceed with the acquisition on the agreed-upon terms, offering either to negotiate a new price or pay the $100 million termination fee.
Procedural Posture:
- United Rentals, Inc. (URI) filed a complaint against RAM Holdings, Inc. and RAM Acquisition Corp. in the Delaware Court of Chancery (a trial court of equity).
- URI sought an order of specific performance to compel RAM to consummate the merger.
- URI moved for summary judgment.
- The Court of Chancery denied URI's motion for summary judgment, finding that the Merger Agreement was ambiguous.
- The case proceeded to a two-day trial on the merits before the Chancellor to determine the meaning of the agreement.
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Does a merger agreement that contains conflicting provisions regarding remedies permit the seller to obtain specific performance to compel the buyer to consummate the merger?
Opinions:
Majority - Chandler, Chancellor
No, the Merger Agreement does not permit specific performance because, although the agreement is ambiguous, extrinsic evidence establishes that RAM understood the agreement to preclude specific performance and that URI knew or should have known of RAM's understanding. The court found the Merger Agreement ambiguous because Section 9.10 expressly granted URI the right to seek specific performance, while Section 8.2(e) stated that URI could 'in no event... seek equitable relief.' Since both parties offered reasonable interpretations of the text, the court turned to extrinsic evidence from the negotiations. This evidence, including testimony and draft agreements, revealed a 'deeply flawed negotiation' with no shared understanding of the remedies. The court then applied the 'forthright negotiator principle.' It found that RAM subjectively believed its liability was capped at the $100 million termination fee and had clearly communicated this position by inserting language to limit remedies and making the specific performance clause subordinate to the limitation of liability clause. Conversely, URI failed to effectively communicate its continued belief that specific performance was available, especially after RAM's attorneys insisted on reinserting the ban on 'equitable relief' and URI's lead negotiator acquiesced by saying 'I get it.' URI also failed to address the red flag raised when a RAM executive called the deal an 'option.' Because URI knew or should have known of RAM's interpretation and failed to clarify the issue, RAM's understanding prevails.
Analysis:
This decision provides a significant application of the 'forthright negotiator principle' in Delaware M&A litigation, establishing that a party's silence or failure to clarify its position in the face of known disagreement over an ambiguous term can be fatal to its claim. The case serves as a crucial cautionary tale for deal lawyers, emphasizing that sophisticated parties have a duty to resolve manifest ambiguities during negotiations rather than hoping for a favorable post-hoc interpretation. It reinforces that courts will delve deeply into negotiation history to uncover the parties' objective manifestations of intent when contract language is irreconcilable. The ruling demonstrates that even a detailed specific performance clause can be effectively nullified by conflicting limitation of liability language if the extrinsic evidence shows that was the operative understanding of one party, known to the other.
Unlock the full brief for United Rentals, Inc. v. RAM Holdings, Inc.