Takeaways
- The trial related to the dispute between Vintage Capital Management and Rent-A-Center over Rent-A-Center’s purported termination of the parties’ June 17 merger agreement began yesterday, Monday, Feb. 11. The trial is being held before Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery.
- During yesterday’s proceedings, Vintage Capital put on its case-in-chief to show that the parties had reached a mutual agreement through the testimony of Vintage Capital’s managing partner and outside antitrust counsel at Wilson Sonsini. Rent-A-Center sought to discredit Vintage Capital’s case by questioning the witnesses on why Vintage Capital did not provide written notice of an extension of the initial termination date as required under Section 8.01(b)(i) of the merger agreement.
- Vintage Capital’s key witnesses testified that they regularly communicated with Rent-A-Center’s executives and advisors up until Dec. 18, and that Rent-A-Center’s executives and advisors repeatedly conveyed that the parties were working toward consummating the transaction in early 2019.
- Rent-A-Center countered by questioning certain witnesses on Vintage Capital’s and its advisors’ understanding of the parties’ rights and obligations under the termination provisions of the merger agreement.
- The trial is scheduled to continue for a second day today, Feb. 12.
Trial began yesterday, Monday, Feb. 11, in the dispute between Vintage Capital Management and Rent-A-Center over Rent-A-Center’s purported termination of the parties’ June 17 merger agreement. The trial is being held before Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery.
During the proceedings, Vintage Capital put on its case-in-chief to show that the parties had reached a mutual agreement through the testimony of Vintage Capital’s managing partner and outside antitrust counsel at Wilson Sonsini. Rent-A-Center sought to discredit Vintage Capital’s case by questioning the witnesses on their understanding of the written notice requirement under Section 8.01(b)(i) of the merger agreement.
At the start of trial, William Lafferty, lead counsel for Vintage Capital, made opening an statement setting forth Vintage Capital’s theory of its case. Lafferty argued that the evidence will show that Rent-A-Center cannot terminate the merger agreement because Rent-A-Center materially breached the merger agreement in December 2018. Lafferty asserted that Rent-A-Center continued to submit documents to the FTC and continued to cooperate with Vintage Capital in the antitrust review process despite having determined behind-the-scenes that the company no longer wanted to continue with the transaction. Lafferty argued that Rent-A-Center intentionally failed to communicate its change of thought with the intention of misleading Vintage Capital into believing that the parties were still working toward consummating the transaction well past the initial Dec. 17 termination date.
John Spiegel, co-lead counsel for Rent-A-Center, made an opening response statement setting forth Rent-A-Center’s theory of its case. Spiegel asserted that the merger agreement required either of the parties to provide written notice to the other of any extension of the termination date, and that no evidence exists that Vintage Capital provided any such notice. Spiegel disputed Lafferty’s theory and argued that none of the parties’ key material executives based any of their actions on the initial Dec. 17 termination date.
At the conclusion of opening statements, Vice Chancellor Glasscock advised the parties that he has been surprised that this case has left him with such a binary choice of resolution. Glasscock asked the parties about the prospects for any kind of settlement. Lafferty, on behalf of Vintage Capital, advised the court that some minor settlement discussions had taken place, but that the parties intended to move forward with the trial.
Vintage Capital first called Brian Kahn, Vintage Capital’s managing partner. Kahn testified that the parties agreed to the $15 per share price based on Rent-A-Center’s recent financial performance and the prospects of the buyers injecting approximately $800 million in debt and equity financing into Rent-A-Center’s operations. Kahn stated that Rent-A-Center sought the $126.5 million reverse termination fee because Rent-A-Center needed the transaction to close in light of the company’s financial difficulties at the time.
Kahn testified that he regularly communicated with Rent-A-Center executives by email and text message, including giving Rent-A-Center’s head of franchising Vintage Capital’s consent to a $100,000 franchise sale transaction in Maryland in the late summer of 2018. Kahn also asserted that, once the parties received second requests from the FTC, it became clear to both sides that there was no chance the transaction would close by the end of 2018.
Kahn further testified that he had regular communications with Mitchell Fadel, Rent-A-Center’s CEO, in the fall of 2018 regarding the anticipated timing of the antitrust review and the closing of the transaction. Kahn stated that he and Fadel communicated almost daily, including a phone call on Dec. 4 about the scope of the FTC’s review, which was going to be discussed at a Rent-A-Center board meeting on Dec. 6. Kahn and Fadel also thereafter met in person on Dec. 10 in Orlando, Florida to discuss the transaction.
Kahn testified that at no point did Fadel communicate any indication that Rent-A-Center was having second thoughts about consummating the transaction, or that Rent-A-Center was eyeing taking action with respect to the upcoming initial termination date. Kahn also stated that Fadel had communicated his expectation on several occasions that the closing was most likely to occur no earlier than March 2019. Several evidentiary exhibits were also shown involving email or text communications between Kahn and Rent-A-Center executives regarding the transaction between Dec. 7 and Dec. 17, 2018, and in none of those communications did any of the Rent-A-Center executives mention the upcoming initial termination date.
Kahn further testified that Rent-A-Center’s fall 2018 financial turnaround was due to the company’s having adopted Vintage Capital’s business model for Buddy’s Home Furnishing “to a T,” and that Rent-A-Center’s attempt to thwart the transaction after having used Buddy’s business model to its advantage is “fraud.” Kahn asserted that Rent-A-Center was “at death’s door” prior to the agreement with Vintage Capital, and that no other lender in the industry was willing to get involved with Rent-A-Center at the time Vintage Capital and Rent-A-Center reached their agreement.
On cross-examination, Michael Pittenger, co-lead counsel for Rent-A-Center, questioned Kahn on the provisions of Section 8.01(b)(i) of the merger agreement related to termination and the obligation to extend by notice. Kahn admitted that he had no understanding of the Dec. 17, 2018 initial termination agreement or the written notice requirement at the time of execution of the agreement. Kahn signed the definitive merger agreement on behalf of Vintage’s transaction entities, Vintage Rodeo Parent and Vintage Rodeo Acquisition. Kahn stated that he never had any discussions with anyone at Rent-A-Center about the Dec. 17 date, and that his understanding was that Vintage Capital had one year from execution of the agreement to close the transaction.
Pittenger also questioned Kahn on whether Vintage Capital and B. Riley ever materially changed their positions on closing as soon as possible. Kahn admitted that, with Rent-A-Center’s improved financial performance in the fall of 2018, Vintage Capital and B. Riley agreed in Nov. 2018 that a slower FTC process was beneficial, as Rent-A-Center’s improved cash flow meant that the buyers would need less debt and equity to fund the transaction the further the closing got pushed out.
Vintage Capital then called Jamillia Ferris, an antitrust partner at Wilson Sonsini. Ferris testified that her firm represented Vintage Capital in the transaction, and that she personally engaged with Rent-A-Center’s antitrust counsel at Winston & Strawn and Sullivan & Cromwell on a daily basis.
Ferris stated that she and Rent-A-Center’s antitrust counsel agreed that the companies were likely to receive a second request from the FTC regarding the transaction, and that the parties were prepared for the second request when it was issued on Sept. 13, 2018. Ferris testified that, after the second request was issued, she and Rent-A-Center’s antitrust counsel agreed in numerous communications that the earliest the merger was likely to close was in early 2019.
Ferris also testified about the extensive efforts both Vintage Capital and Rent-A-Center had undertaken prior to Dec. 17 to work toward ultimately obtaining FTC approval. Ferris stated that the parties’ legal advisors had invested hundreds of hours in negotiation and dialogue with one another and with the FTC, and that on Dec. 14, the parties submitted to the FTC their jointly-drafted “white paper” outlining preliminary store divestitures in overlap markets, and store closures for underperforming Rent-A-Center stores.
Ferris also stated that, throughout her extensive communications with Rent-A-Center’s counsel, no one from the Rent-A-Center side ever raised the Dec. 17 date as an issue or concern, and that Rent-A-Center’s purported termination action on Dec. 18 was “baffling.”
On cross-examination, Pittenger questioned Ferris on her understanding of Section 8.01(b)(i)’s written notice requirement. Ferris responded that she only reviewed the merger agreement for the regulatory best efforts provisions, and not the termination rights provisions. Ferris stated that she always operated under the assumption that the parties had a full 12 months to close the transaction, and that Rent-A-Center’s antitrust counsel was working with the same understanding. Ferris also testified that she was not aware of whose responsibility it was at Wilson Sonsini to track the applicable termination dates and the parties’ rights therefrom, and that she did not direct anyone from Wilson Sonsini to provide notice of extension to Rent-A-Center because such notice was “not necessary” in light of a timing agreement with the FTC.
Vintage Capital also showed videotaped testimony of J.V. Lentell, chairman of the Rent-A-Center board, taken from Lentell’s deposition. During the video excerpts, Lentell was questioned on his understanding of the FTC timing agreement and the effects of that agreement on the timing of the closing of the transaction. Lentell responded to several questions that his understanding was that the parties were working toward closing in January 2019 at the earliest, and perhaps later in 2019. Lentell also disclosed that the first time he became aware of the Dec. 17 initial termination date was at the Dec. 5 meeting of the Rent-A-Center board, which was after the parties had entered into the FTC timing agreement.
Vintage Capital then called Christopher Korst, Rent-A-Center’s chief administrative officer and general counsel. Korst is identified in the merger agreement as the appropriate recipient for any notices directed to Rent-A-Center. Korst testified that he was tasked with waiting until 12 a.m. ET on Dec. 17 to see if Vintage Capital provided the requisite notice of extension of the initial termination date.
Vintage Capital also produced a text message from Kahn on Dec. 17 asking Korst to approve certain financing arrangements in connection with the consummation of the transaction. Korst was asked whether Kahn’s message implied that the parties were operating under an implied understanding that the merger agreement would continue beyond Dec. 17, to which Korst responded “yes.”
Finally, Vintage Capital called Bryant Riley, chairman and co-CEO of B. Riley Financial. Riley testified that he did not view the Rent-A-Center transaction as risky because the parties had a year to close the transaction, and B. Riley’s obligation was limited to raising the necessary capital within that one-year period. Riley also stated that his understanding was that the $126.5 million reverse termination fee was intended to be a maximum incentive for Vintage Capital and B. Riley to close the transaction, and that Rent-A-Center’s demand for payment of the fee when Rent-A-Center is the party seeking to terminate is “unfathomable.”
Riley further testified that he met with Fadell, Rent-A-Center’s CEO, on Dec. 7 in Los Angeles, the day after the Rent-A-Center board determined that it had changed its intentions to continue consummating the transaction at its Dec. 6 meeting. Riley testified that Fadell made several statements during the meeting conveying his optimism and excitement for the transaction, and never mentioned any intention on the part of Rent-A-Center to look towards the Dec. 17 date as an opportunity to terminate the transaction.
Riley’s testimony will continue into tomorrow’s proceedings.
The trial is scheduled to continue for a second day, today, Feb. 12.
Reorg M&A’s previous coverage of this transaction can be found
HERE.
--Patrick Flavin