• Court Of Chancery Holds That a Merger Party Is Not Required Under the Merger Agreement to Force Its Non-Party Parent To Obtain Certain Regulatory Approvals
  • December 21, 2009
  • Law Firm: Richards, Layton & Finger, P.A. - Wilmington Office
  • In Alliance Data Systems Corp. v. Blackstone Capital Partners V L.P., C.A. No. 3796-VCS (Del. Ch. Jan. 15, 2009), the Delaware Court of Chancery addressed whether the buyer's failure to obtain regulatory approval under a merger agreement constituted a breach of the merger agreement requiring payment of the termination fee. Because the buyer had not agreed to cause its parent to undertake any affirmative action to obtain regulatory approval, the Court found no breach and dismissed the suit in its entirety.

    Plaintiff Alliance Data Systems Corporation ("ADS") filed the suit to recover a termination fee from defendants Blackstone Capital Partners V L.P. ("BCP V") and Aladdin Solutions, Inc. ("Aladdin"), after Aladdin's failure to obtain regulatory approval prevented a merger with ADS. Aladdin was formed by BCP V to acquire ADS; BCP V is a fund operated by the Blackstone Group ("Blackstone"), who was not a defendant in the suit. The defendants moved to dismiss the complaint for failure to state a claim.

    ADS and Aladdin entered into an Agreement and Plan of Merger (the "Merger Agreement") in May 2007, but neither BCP V nor Blackstone were parties to the Merger Agreement, which provided that ADS's sole monetary remedy for breach by Aladdin was a $170 million termination fee. Aladdin's payment of the termination fee was guaranteed by BCP V, but nothing in the guarantee obligated BCP V or Blackstone to ensure that the merger was consummated.

    Because ADS owned World Financial Network National Bank ("World Financial"), the Merger Agreement required Aladdin to use its reasonable best efforts to obtain approval of the merger from the Office of the Comptroller of the Currency (the "OCC"). The OCC refused to give that approval unless Blackstone provided certain assurances to the OCC. Because Blackstone refused to pledge its own assets to ensure that World Financial met capital and liquidity requirements, the OCC's approval was not obtained.

    ADS terminated the Merger Agreement under a provision allowing it to terminate in the event of a breach by Aladdin and entitling it to the termination fee. While ADS did not dispute that Aladdin itself used its reasonable best efforts to negotiate and address the OCC's concerns, ADS contended that Aladdin was required to pay the termination fee because Aladdin had failed to cause Blackstone to assent to the OCC's demands.

    The Court noted that the Merger Agreement did not impose any direct obligation on Blackstone to affirmatively act to obtain OCC approval. Further, the Merger Agreement did not impose any obligation on Aladdin to ensure Blackstone's cooperation in obtaining OCC approval. This was particularly clear, the Court found, because the Merger Agreement did include certain express covenants relating to Blackstone's actions, including one imposing an obligation on Aladdin to ensure Blackstone's cooperation in obtaining antitrust approval. Thus, the Court found, if the parties had intended to impose an obligation on Aladdin to cause Blackstone to accede to the OCC's demands, they would have expressly included such an obligation in the Merger Agreement.

    ADS also argued that Aladdin had breached a negative covenant in the Merger Agreement providing that Aladdin and Blackstone would not "take any action which would reasonably be expected to prevent or materially impair or delay [the Merger]." The Court found that, by only alleging that Blackstone refused to consent to the OCC's demands, ADS had failed to identify any affirmative step taken by Blackstone impeding the closing of the merger. Because liability under a negative covenant can only arise from an affirmative action, the Court found that the refusal to consent to the OCC's demands did not violate the negative covenant.

    ADS also alleged that Aladdin breached the Merger Agreement by falsely representing that it had the power to control Blackstone. ADS argued that the antitrust covenant and the negative covenant mentioned above, coupled with other provisions, constituted representations by Aladdin that it controlled Blackstone (in contrast to Blackstone's and Aladdin's actual relationship). The Court found instead that Aladdin had promised only that it had the power and authority to fulfill its own obligations under the Merger Agreement, not that it could force Blackstone to agree to financial commitments that were not in the Merger Agreement. Noting that ADS had failed to make Blackstone a party to the Merger Agreement, the Court held that the Merger Agreement imposed no obligations on Blackstone directly.

    Deciding that ADS could not hold Aladdin responsible for the failure of Blackstone--a non-party to the Merger Agreement--to enter into a regulatory agreement that Blackstone had no duty to accept, the Court dismissed ADS's complaint.