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Chancery Court Enforces Contractual Termination Provision—but Questions Fairness of Related Termination Fee

Posted by on Wednesday, December 30, 2020 in Delaware Corporate Law Bulletins, En Banc, Volume 73.

Robert S. Reder & Kenton B. Wilson | 73 Vand. L. Rev. En Banc 257 (2020) |

In Vintage Rodeo Parent, LLC v. Rent-A-Center, Inc., No. 2018-0927-SG, 2019 Del. Ch. LEXIS 87 (Del. Ch. Mar. 14, 2019) (“Vintage Rodeo”), the Delaware Court of Chancery (“Chancery Court”) rejected claims of invalidity and unfairness in upholding a merger agreement’s termination provision. Due to changed circumstances, a target company elected to abort the transaction when the buyer failed to exercise its right to extend the scheduled outside date. Vice Chancellor Sam Glasscock III found the contract clear and unambiguous and, therefore, was reluctant to ignore rights negotiated by “sophisticated” parties.

In an interesting twist, Vice Chancellor Glasscock requested supplemental briefing on whether the buyer should be relieved of its contractual obligation to pay a relatively large fee triggered by the termination. The Vice Chancellor questioned whether this fee represented, under the circumstances, an unintended consequence for which the implied covenant of good faith and fair dealing, which is inherent in every contract governed by Delaware law, might provide a remedy. Although the parties ultimately settled their dispute, this is a development warranting due consideration.

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Robert S. Reder and Kenton B. Wilson