United Rentals said Monday it filed a lawsuit seeking to force Cerberus Capital Management to complete its $4 billion leveraged buyout of the equipment rental company.
Cerberus pulled its takeover offer of $34.50 per share last Wednesday, a move that sent the rental company's stock down 31 percent on the day.
The battle between the company and the private equity firm comes as several leveraged buyouts have collapsed recently, with buyers and banks feeling the heat from the weakening debt and credit markets, as well as a cloudy economic picture.
Taking center stage in United Rentals' legal case is a clause in the merger agreement known as "specific performance," which the company says gives it the right to force Cerberus to complete the deal at the original price.
The company also argues the clause gives United Rentals , and not Cerberus, the right to end the agreement.
RAM Holdings, the Cerberus acquisition vehicle for the deal, has said its liability is limited to the $100 million break-up fee, which it has offered to the company.
Cerberus has said it increased the offer price when negotiating the deal in order to have the option to walk away and pay the break-up fee if it decided against buying the company. United Rentals disputes the assertion.
A clause right below "specific performance" in the merger agreement, titled "limited guarantee," says that Cerberus' maximum liability is $100 million plus costs.
By suing the Cerberus acquisition vehicle, United Rentals moved on Monday to settle the dispute in court rather than in the boardroom.
There are few cases in which a court successfully forced a buyer to complete a deal it does not want, M&A lawyers say.
Through RAM Holdings and another affiliate, RAM Acquisition, Cerberus responded that United Rentals had been "less than forthright" in its filings and communications.
"This ability to walk away from the transaction with limited exposure was specifically bargained for (and) is clearly and unambiguously stated in the merger agreement," the two Cerberus affiliates said.
United Rental shares fell 3.7 percent to close at $22.50 on Monday on the New York Stock Exchange.
Cerberus has said it is willing to lower the price of its offer, something United Rentals appears unwilling to consider.
"United Rentals believes that the repudiation ... is nothing more than a naked ploy to extract a lower price at the expense of United Rentals' shareholders," the company said in a statement.
Unlike other broken private equity deals in the last few months, Cerberus is not citing a material adverse change in the business as a reason for backing out. Rather, it is citing uncertainty in the credit and financing markets.
United Rentals repeated its assertion that Cerberus had binding commitment letters from its financing sources and that pulling the offer is "unwarranted and incompatible" with the deal.
Other private equity deals that have fallen apart in recent weeks include audio equipment maker Harman International Industries and data management company Acxiom .
The leveraged buyout of student loan provider SLM , or Sallie Mae, is being fought out in court, where the United Rentals deal is headed if the two sides cannot settle on a revised agreement.