Alliance Data Systems Corp. v. Blackstone Capital Partners V  L.P. and Aladdin Solutions, Inc. , (Del. Ch., Jan. 15, 2009), read opinion here.

We are fortunate to have another guest post by Delaware lawyer Kevin Brady  who provided the following summary of this important decision.

This Chancery Court decision is another example of merger partners after the “deal is signed,” trying to use extrinsic evidence to extract contractual obligations that were not expressly stated in a merger agreement. The Court dismissed the complaint filed by Alliance Data Systems Corporation (“ADS”) because it failed to plead a viable claim for breach of the Merger Agreement. ADS brought this action to recover a $170 million termination fee that ADS claimed Blackstone Capital Partners V L.P. (“BCP V”) owed it after the potential purchaser, Aladdin, failed to complete the acquisition of ADS.

A merger agreement was entered into on May 17, 2007, between ADS, Aladdin Solutions, Inc. and Aladdin Merger Sub, Inc. (Aladdin”), two companies formed by BCP V and its affiliates for the purpose of acquiring ADS. One of the conditions to Aladdin’s obligation to close the deal was regulatory approval from, among others, the Office of the Comptroller of the Currency (“OCC”) because ADS owned World Financial Network National Bank. The Merger Agreement contained a provision that if all of the necessary regulatory approvals were not obtained, neither party had to consummate the merger.

The Merger Agreement also contained specific language that Aladdin would use its “reasonable best efforts” to obtain the OCC’s approval. When the OCC’s approval was sought for the merger, the OCC refused to give approval unless Blackstone Group, L.P. (“Blackstone”) would “promise to provide any financial support necessary to make sure that World Financial complied with its minimum liquidity and capital requirements.” While BCP V was controlled by Blackstone, neither BCP V nor Blackstone signed the Merger Agreement (only Aladdin did). Moreover, the merger agreement imposed no direct contractual obligations on either Blackstone or BCP V to act to obtain OCC approval.

Blackstone rejected the OCC’s condition because it was not interested in putting up its own assets or the assets of its investment funds. Blackstone had formed BCP V, a $20 billion acquisition fund and a Delaware limited partnership, specifically for the purpose of acquiring ADS. After months of negotiations, Aladdin and OCC were at an impasse. The OCC refused to grant approval without Blackstone’s pledge of support for World Financial and a signed acknowledgement of “World Financial’s regulatory requirements.” The Court noted that “[a]s a bottomline, the OCC made it clear that ‘Blackstone must provide some type and measure of financial support for [World Financial].’” Blackstone ultimately refused to be responsible for ensuring that World Financial met its capital and liquidity requirements. As a result, the merger did not close on time prompting Aladdin to purport to terminate the Agreement and seek damages. In the Merger Agreement, specific performance was not an available remedy except in certain, defined circumstances. ADS accepted a cap on its ability to recover monetary damages for breach a — “Business Interruption Fee” — in the amount of $170 million from Aladdin.

ADS claimed that under the terms of the Merger Agreement, Aladdin was responsible for forcing Blackstone and its affiliated funds to agree to the OCC proposal and because Blackstone did not agree to what ACS considered to be a fair proposal, there was a breach of the merger agreement by Aladdin. Indeed, ADS characterized the demands from the OCC as “virtually costless” to Blackstone and as support for its claim, ADS referred to three provisions of the Merger Agreement: (i) §6.5.1, a covenant by Aladdin to use its reasonable best efforts to secure necessary regulatory approval, including OCC approval; (ii) § 6.5.6, a covenant by Aladdin to keep Blackstone from preventing the completion of the Merger; and (iii) §5.2, a representation by Aladdin that it had the power to fulfill its commitments under the Merger Agreement.

Unfortunately for ADS, as the Court noted, all three of the provisions ADS cited related to obligations of Aladdin and not Blackstone. While Aladdin did make certain promises in the Merger Agreement about Blackstone, those promises were “carefully cabined.” For example, in conjunction with the merger, BCP V entered into a “Limited Guarantee“ with ADS under which it promised ADS that it would guarantee Aladdin’s payment of the $170 million “Business Interruption Fee,” as well as up to $3 million in ADS costs related to the financing and debt tender offers. In addition, the Merger Agreement contained a negative covenant about what Blackstone would not do — Aladdin agreed to a negative covenant for assurance that Blackstone would not thwart the Merger by taking action to impede its closing. There was no obligation on the part of Aladdin to ensure that Blackstone took affirmative steps to get the regulatory approvals or assent to OCC’s demands. In short, when Aladdin was contractually obligated for “causing Blackstone to do or not to do something, the parties made that explicit.”

Moreover, Vice Chancellor Strine found that as a preliminary matter “any contractual claim against the defendants must be predicated on a breach by Aladdin because it is the only party, aside from ADS, that signed the Merger Agreement.” The Court also noted that the “complaint only faults Aladdin because Blackstone, a non-party to the Merger Agreement, would not enter into arrangements with the OCC. But, Blackstone had no contractual obligation to enter into such arrangements, and Aladdin made no contractual promise that it would get Blackstone to do so.”
ADS tried to salvage the complaint by referencing extrinsic evidence in terms of what the parties discussed around the time the merger agreement was signed but the Court rejected that argument. ADS claimed that during “detailed due diligence and negotiations,” Blackstone knew that the OCC would require that Blackstone submit to some form of liability. The Court dismissed this argument stating that:

[i]f, as ADS alleges, it was obvious that the OCC would require not just Aladdin, but Blackstone itself, to enter into certain regulatory agreements, then ADS should have insisted that Aladdin be held responsible in the event that Blackstone failed to use best efforts to obtain regulatory approval.

* * * *

The time for ADS to have protected itself from the risk that the OCC would make demands that Blackstone would not accept was when negotiating the words of the Merger Agreement.

* * * *

Having struck a clear bargain, ADS cannot resort to extrinsic evidence to manufacture contractual obligations that are clearly foreclosed by an unambiguous Merger Agreement.

ADS also argued that “the implied covenant of good faith and fair dealing holds Aladdin responsible for the failure of Blackstone, a non-party, to enter into a regulatory agreement that Blackstone had no duty to accept is without force.” The Court rejected that argument on the basis that the expressed terms of the merger agreement were “inconsistent with any implied duty on Aladdin of this kind.”

Based upon the failure to state a claim under the Merger Agreement for breach, the Court dismissed the complaint.