As I mentioned previously, Alliance Data Systems and Blackstone Group are in litigation over Blackstone’s proposed acquisition of ADS.
More specifically, ADS has filed a complaint alleging that Blackstone breached its obligations under the merger agreement by failing to use its “reasonable best efforts” to obtain the approval of the Office of the Comptroller of the Currency to transfer of ADS’s World Financial Network National Bank to Blackstone in connection with the acquisition.
I don’t think this is anywhere near as juicy, from a contract-drafting perspective, as the United Rentals–Cerberus litigation. But here’s part of the merger agreement provision at issue, section 9.8.2, with the relevant bit in bold italics:
Notwithstanding the first sentence of this Section 9.8.2, however, the Parties acknowledge that the Company shall be entitled to an injunction or injunctions to prevent breaches of this Agreement by Parent or Merger Sub or to enforce specifically the terms and provisions of this Agreement only to prevent breaches of or enforce compliance with those covenants of Parent or Merger Sub that require Parent or Merger Sub to (x) use its reasonable best efforts to obtain the financing contemplated by the Commitments, including without limitation, the covenants set forth in Section 6.5 (Reasonable Best Efforts) and Section 6.14 (Financing) and (y) consummate the Merger, if in the case of clause (y), the financing provided for in the Commitments (and, if alternative financing is being used, pursuant to commitments with respect thereto) is available to be drawn down by Parent pursuant to the terms of the applicable agreements but is not so drawn solely as a result of Parent refusing to do so in breach of this Agreement.
Here’s what Blackstone said about this provision in its motion to dismiss:
The reference to Section 6.5 (the reasonable best efforts provision) in Section 9.8.2 modifies and is subordinate to the clause “to obtain the financing contemplated by the Commitments” and therefore the remedy of specific performance is available with respect to the portion of Section 6.5 that the parties shall use “reasonable best efforts to take … all actions … to consummate and make effective, in the most expeditious manner practicable, the transactions provided for in this Agreement …” only in so far as it relates to the financing commitments. (Ex. A (Merger Agreement), § 6.5.1.) Based on the plain language of Section 9.8.2, the reference to Section 6.5 cannot be reasonably read to undo the limited specific performance right spelled out therein and indirectly give ADS a right to enforce every reasonable best efforts obligation of the Aladdin Entities under the Merger Agreement by injunction.
So according to Blackstone, the Blackstone entities that were party to the merger agreement were required to use “reasonable best efforts” to obtain the financing, but not to obtain the approval of the OCC.
In its letter in opposition, ADS argued that “including without limitation” serves to include the right to specific enforcement of obligations under section 6.5.1. It also argued that “reasonable best efforts” to obtain financing necessarily includes obtaining OCC approval, as that approval is a condition to obtaining the financing. According to ADS, Blackstone’s interpretation would render the “reasonable best efforts” provision superfluous, as the Blackstone entities could simply elect to do nothing regarding the OCC approval and thereby effectively scupper the financing.
The drafting problem here is that you have two sides of an equation that don’t quite balance. On one side is “those covenants of Parent or Merger Sub that require Parent or Merger Sub to … use its reasonable best efforts to obtain the financing contemplated by the Commitments.” On the other side is, among other things, “the covenants set forth in Section 6.5.”
Section 6.5.1 refers to “all things necessary, proper or advisable under applicable Laws to consummate and make effective, in the most expeditious manner practicable, the transactions provided for in this Agreement.” And it and the remaining sections of section 6.5 address in detail various regulatory matters. So it would seem that “the covenants set forth in Section 6.5” cover more than the financing, even accepting ADS’s broad interpretation. So the drafter would have done well to be more specific as to what obligations under section 6.5 were being referred to.
But I’m not sure that that disconned is enough to neutralize ADS’s argument.
More to the point, however, I agree with the Deal Professor that for ADS, the bigger problem is that Blackstone isn’t party to the merger agreement.
Incidentally, the Deal Professor suggested in this post that a comma plays an important part in how you read section 9.8.2. I don’t see it.
So there you have it. Again, not too much excitement on the contract-drafting front. Please let me know if you think I’m missing something. Of course, if they start fighting about what “reasonable best efforts” means …
1 thought on “More on Alliance Data Systems and Blackstone Group”
One thing this case has going for it over URI is that Leo Strine is going to hear the arguments and write any necessary opinions. The URI decisions was a muddled mess.
This case (and a junior attorney whose drafting I had to correct recently) has had me thinking about what I’ve taken to calling “efforts obligations” and “flat obligations.” 9 times out 10, the result is what’s important in the work that I do… there’s not a whole lot of stuff that is outside the parties’ control, so “efforts obligations” drive me nuts. Others, apparently, take the view that even with a “flat obligation,” if they have expended commercially reasonable efforts, their breach will be excused. Am I missing something here? Doesn’t this shift the burden to the non-breaching party? Now I have to prove that you failed to expend whatever level of effort was necessary, not merely that the desired result was not achieved?