Alliance Data v. Blackstone Capital
| Decision Date | 15 January 2009 |
| Docket Number | C.A. No. 3796-VCS. |
| Citation | 963 A.2d 746 |
| Parties | ALLIANCE DATA SYSTEMS CORPORATION, Plaintiff, v. BLACKSTONE CAPITAL PARTNERS V L.P. and Aladdin Solutions, Inc. f/k/a Aladdin Holdco, Inc., Defendants. |
| Court | Court of Chancery of Delaware |
STRINE, Vice Chancellor.
Alliance Data Systems Corporation ("ADS") has brought this action to recover cash it feels it is owed by defendant Blackstone Capital Partners V L.P. ("BCP V") after BCP V's failed acquisition of ADS (the "Merger"). On May 17, 2007—near the end of the most recent mergers and acquisition upsurge—ADS entered into an Agreement and Plan of Merger (the "Merger Agreement") with defendant Aladdin Solutions, Inc. ("Aladdin Solutions") and Aladdin Merger Sub, Inc. ("Aladdin Merger Sub," together with Aladdin Solutions, "Aladdin"), two companies formed by BCP V and its affiliates for the purpose of acquiring ADS. BCP V is controlled by the Blackstone Group, L.P. (the "Blackstone Group," together with its non-Aladdin affiliates, "Blackstone"), a large private equity firm. Neither BCP V nor Blackstone signed the Merger Agreement, and they are outside the clear definition of "Party" used in that Agreement.
Among the conditions in the Merger Agreement to Aladdin's obligation to close the acquisition of ADS is a requirement that certain regulatory approvals be obtained. Because ADS owns World Financial Network National Bank ("World Financial"), the Merger required the approval of the Office of the Comptroller of the Currency (the "OCC"). In the Merger Agreement, Aladdin promised to use its reasonable best efforts to obtain the OCC's approval. But, Aladdin made no promise that it would cause BCP V or any BCP V affiliate to undertake any affirmative action to achieve OCC approval.
When OCC approval was sought for Aladdin's acquisition of World Financial, the OCC refused to give that approval unless Blackstone promised to provide any extra capital and liquidity World Financial might need. Blackstone objected, not wanting to put its own assets, or those of its investment funds, on the line to ensure that a single subsidiary met regulatory requirements. But, there is no dispute that Aladdin itself, consistent with its obligations to use its reasonable best efforts, made substantial concessions to the OCC in order to meet the OCC's concerns. The OCC was not satisfied, however, with assurances offered by Aladdin alone, and insisted on holding the Blackstone Group—and a dozen or so of its affiliates— responsible for certain assurances. In months of negotiations over approval, Blackstone and the OCC never successfully bridged this conceptual gap. Although the OCC changed the extent of the commitment it required over time, it continued to ask that Blackstone pledge some support for World Financial, and it wanted Blackstone and its affiliates to sign a wide-ranging acknowledgment of World Financial's regulatory requirements. As a bottom-line, the OCC made it clear that "Blackstone must provide some type and measure of financial support for [World Financial]."1 Blackstone ultimately refused to sign any agreement that made it and its affiliates—other than Aladdin itself—responsible for ensuring that World Financial met its capital and liquidity requirements. As a result, the Merger was not completed within the time frame set out in the Merger Agreement, and Aladdin purported to terminate the Agreement.
In the Merger Agreement, ADS forewent the remedy of specific performance except in certain, defined circumstances and accepted a cap on its ability to recover monetary damages for breach. When ADS seeks a monetary remedy in the event of a breach by Aladdin resulting in non-consummation of the Merger, as in this case, ADS is limited to the recovery of a termination fee—termed a "Business Interruption Fee"—in the amount of $170 million from Aladdin. The payment of this Fee by Aladdin, in the event it is owed to ADS, is guaranteed by BCP V through a Limited Guarantee that ADS and BCP V entered into on the same day the Merger Agreement was executed.
ADS brought this suit alleging that Aladdin breached its obligations under the Merger Agreement by failing to reach an accord with the OCC, and that the Business Interruption Fee is due and owing. ADS has sued Aladdin and BCP V, seeking to require them to pay the Business Interruption Fee.
ADS argues that Aladdin breached the Merger Agreement by failing to cause Blackstone to assent to the demands the OCC made of Blackstone and its affiliated funds. Characterizing the OCC's final proposal as virtually costless to Blackstone, despite the fact that the OCC thought the proposal important enough to insist on it, ADS argues that Aladdin had a responsibility under the Merger Agreement to force Blackstone to agree to the OCC's terms. To support this argument, ADS cites three provisions of the Merger Agreement: a promise by Aladdin to use Aladdin's reasonable best efforts to get OCC approval; a promise by Aladdin to keep Blackstone from preventing the completion of the Merger; and a representation by Aladdin that it had the power to fulfill its commitments under the Merger Agreement.
In this opinion, I grant the defendants' motion to dismiss ADS's "Amended Verified Complaint" (the "Complaint"). For starters, I find that 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. Next, looking at the Merger Agreement, I find that there was no requirement that Aladdin somehow force Blackstone to enter into any arrangement with the OCC. The first provision ADS cites, which requires that Aladdin use its reasonable best efforts, clearly applies only to Aladdin's efforts. The Complaint is devoid of any contention that Aladdin itself was unwilling to comply with the demanding conditions the OCC asked of it. 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.
What Aladdin did contractually promise is that it would ensure (at the cost of committing a compensable breach) that Blackstone would not "take or cause or permit to be taken any action (including the acquisition of businesses or assets) which would reasonably be expected to prevent or materially impair or delay the consummation of the transactions contemplated by this Agreement."2 That is, Aladdin agreed to a negative covenant promising to assure that Blackstone would not thwart the Merger by taking action to impede its closing. ADS seizes upon this promise and tortures its plain meaning by arguing that Blackstone's failure to assent to the OCC's demands amounted to an action that impaired the consummation of the Merger. In other words, ADS seeks to turn a negative covenant with an accepted commercial meaning into a wide-ranging promise to take any affirmative action necessary to obtain regulatory approval. The language of the covenant will not sustain such a reading, and that reading is also inconsistent with the structure of the Merger Agreement itself. The Merger Agreement has a section that governs the obligations of the parties to take affirmative steps to obtain regulatory approvals. That section creates an affirmative obligation on Aladdin's part to use its own best efforts to achieve OCC approval, but does not, in stark contrast to the negative covenant, obligate Aladdin to get Blackstone to do anything affirmative toward that end.
ADS also seeks to infer from Aladdin's promises about Blackstone that ADS was representing that it had control over Blackstone. But, while Aladdin did make promises about Blackstone, those promises were carefully cabined. Aladdin only promised that it could make Blackstone behave in certain ways, not that it could force Blackstone to agree to financial commitments not found in the Merger Agreement.
As its overarching argument, ADS departs entirely from the text of the Merger Agreement itself. In the Complaint, ADS contends that all the negotiators of the Merger Agreement were aware that the OCC was likely to demand that Blackstone enter into certain commitments with the OCC as a condition to approving the Merger. ADS says that during negotiations Blackstone knew that the OCC would require that Blackstone submit to some form of liability. But, ADS argues, when the debt markets turned and Blackstone was under pressure from its financing partners not to go forth with the Merger, Blackstone refused to agree to any terms from the OCC, even terms that involved minimal risk to it. This behavior, according to ADS, supports its claim of breach.
But, ADS has eschewed any fraud claim and its attempt to introduce parol evidence is unavailing in the face of clear contractual language. If, 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...
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