Alliance Data Sys. Corp. v. Blackstone Capital Partners V L.P. (1/15/09)

Plaintiff Alliance Data Systems (“ADS”) sued each of Aladdin Solutions (“Aladdin”) and Blackstone Capital Partners V L.P. (“BCP V”) for breach of a May 2007 merger agreement and enforcement of the $170 million termination fee provided for therein in connection with the failed acquisition of ADS by Aladdin. BCP V, which is controlled by the private equity firm Blackstone Group, L.P. (“Blackstone”), formed Aladdin for the purpose of facilitating the merger but neither BCP V nor Blackstone signed the merger agreement or were otherwise parties thereto. Because ADS owned World Financial Network National Bank (“World Financial”), the merger required the approval of the Office of the Comptroller of the Currency (“OCC”), which was a condition to closing the merger. When Aladdin sought such approval, the OCC refused to give its approval unless Blackstone promised to sign certain agreements that would provide funds and liquidity to World Financial. Blackstone refused to sign any agreement providing for such assurances and, as a result, the conditions to close could not be met and Aladdin attempted to terminate the merger agreement. The core issue of the dispute was whether the merger agreement imposed a duty on Blackstone (or on Aladdin to cause Blackstone) to take any affirmative action to obtain the approval of the OCC in connection with the merger.

In its suit alleging that Aladdin breached the agreement by failing to cause Blackstone to assent to the OCC’s demands, ADS cited three provisions of the merger agreement in support of its argument: 1) Aladdin’s promise to use reasonable best efforts to obtain OCC approval; 2) Aladdin’s promise that Blackstone would not “take or cause or permit to be taken any action . . . which would reasonably be expected to prevent or materially impair or delay” the completion of the merger (a negative covenant); and 3) Aladdin’s representation that it had “all necessary corporate power and authority to execute and deliver” the merger agreement and to consummate the merger. The Court found that any contractual claim against the defendants had to be predicated on a breach by Aladdin because it was the only party that signed the merger agreement. In analyzing the foregoing provisions, the Court held that Aladdin was not required to force Blackstone to enter into any agreement with the OCC because Blackstone had no contractual duty to enter into such arrangements and Aladdin had not made any promise in the merger agreement requiring Blackstone to do so. Likewise, the Vice Chancellor refused to construe the plain meaning of the negative covenant into a “wide-ranging promise to take any affirmative action necessary to obtain regulatory approval.” In so concluding, the Court explained that the negative covenant prevented Blackstone from acting in an affirmative way to thwart or otherwise prevent the closing of the merger and that in rejecting the OCC’s demands Blackstone did not violate the covenant despite ADS’s attempts to recharacterize Blackstone’s inaction (i.e. failing to accede to the demands of the OCC) as an affirmative act. The Court also rejected ADS’ argument that Aladdin represented it could control Blackstone when Aladdin promised it had the power to fulfill its commitments under the merger agreement. The Court explained such covenants were common in acquisition agreements and the provision meant “that Aladdin ha[d] the power to do what it says it [would] do.” (emphasis in original). Aladdin “only represented that it could make Blackstone behave in the specific and narrow ways that it promised, not that it had unlimited control” over Blackstone. The Court again emphasized that reading this covenant to require Blackstone to agree with the OCC’s demands would “undermine all the careful work the parties did in specifically articulating those situations when Aladdin was responsible for Blackstone’s behavior.” For the foregoing reasons, the Court dismissed the complaint.

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