Excerpt from FactSet Flashwire News

The Delaware Court of Chancery should have its hands full next year as another private equity target abandoned by its buyer goes to court. The most recent complaint will test the “specific performance” term in merger agreements and might even make reverse merger fees a thing of the past.

In the latest and most surprising pullback by Cerberus Capital Management, it pulled out of its deal to buy United Rentals Inc. No official reason was given as to why the $4 billion deal was axed. Moreover, there were no signs of buyer’s remorse leading up to the announcement that would have tipped off arb traders, sophisticated investors and the financial press, as to the unlikelihood of the deal’s closure.

A few days before Cerberus Capital announced that it was getting cold feet and walking out on Affiliated Computer Services Inc., the company’s stock traded17% to 22% lower than the buyout price. In another case, shares of Acxiom traded 26% to 29% lower than the buyout price a few days before buyout buyers Silver Lake and Value Act Capital said they wanted out.

However, United Rentals shares were trading at a slim1% to 1.5% discount before Cerberus Capital dropped the bomb and halted the deal two days before closing. The move even surprised the banks that had started marketing their offers on buyout-related debt, including Credit Suisse, Banc of America Securities, Lehman Brothers Holdings and Morgan Stanley. United Rentals shares plummeted 31% following the cancellation news.

At the heart of the case that the Delaware court must rule on is the broad-based question of paying the reverse merger fee to get out of a deal in breach of “specific performance.”

Cerberus cites a line in the merger agreement that says, in part: “In no event…shall [Cerberus or affiliates] be subject to any liability in excess of the” $100 million breakup fee. And in an interview with The Wall Street Journal, Cerberus Chief Operating Officer Mark Neporent said, “RAM (the acquisition vehicle of Cerberus) negotiated an agreement that allows it to pay $100 million to walk away, unconditionally and under any circumstances. RAM has lived up to the contract it negotiated.”

United Rentals and some critics including the buyout firm’s bankers believe otherwise. They say that the interpretation does not take into account the specific performance language in the same document.

Indeed, section 7.4 of the merger agreement, says “Neither the Company nor Parent may rely either as a basis for not consummating the Merger or terminating this Agreement and abandoning the Merger, on the failure of any condition set forth in Sec. 7.1, 7.2, or7.3, as the case may be, to be satisfied if such failure was caused by such party’s breach in any material respect of any covenant set forth in this Agreement.”-meaning that unless the target breached its representations and warranties or suffered a Material Adverse Change, the buyer must follow through.

Either way, Cerberus is certainly in the doghouse for this one.

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