Dec. 21 (Bloomberg) -- United Rentals Inc., the largest U.S. construction-equipment rental company, lost a bid to force a $4 billion takeover by Cerberus Capital Management LP when a judge ruled the agreement allowed the buyer to pull its offer.

United Rentals fell 17 percent, after reaching a one-year low of $17.32. More than 10.1 million shares were traded, almost four times the three-month daily volume.

Delaware Chancery Court Judge William B. Chandler III ruled today that United Rentals officials should have known that Cerberus executives believed they had a right to pull out of the deal at any time as long as they paid a $100 million fee.

``There's some clarity here for the private-equity firms that if you have an agreement, you're protected,'' Steven Kaplan, a professor at the University of Chicago Graduate School of Business, said in a phone interview. ``For United Rentals, part of this can't be recovered because it was predicated on debt markets that no longer exist.''

United alleged Cerberus's RAM Holdings buyout entities agreed in July to pay $34.50 per share for United Rentals' stock, and reneged on the deal in November amid weakened U.S. credit markets. The stock has been trading in the low-$20 range. United Rentals fell $3.69 to $17.91 today.

``The board of directors and management team of United Rentals will consider its alternatives under the circumstances and they continue to believe strongly in United Rentals' future prospects,'' spokesman Mark Semer said in an e-mailed statement.

Termination Fee

Cerberus officials declined to say whether they plan to dispute the potential $100 million termination fee.

``We have not received a request for payment from URI,'' Cerberus spokesman Peter Duda said in a phone interview.

United Rentals based in Greenwich, Connecticut, argued in court papers that New York-based Cerberus's RAM Holdings unit was attempting to use the turmoil in U.S. credit markets from subprime mortgage concerns as a pretext to extract a lower price in the buyout.

Other buyouts have collapsed as credit investors balked at buying bonds and loans committed to fund the transactions. Kohlberg Kravis Roberts & Co. and Goldman Sachs Group Inc. in October abandoned their $8 billion purchase of Harman International Industries Inc.

Investors led by J.C. Flowers & Co. walked away from their $25.3 billion deal to buy SLM Corp., the biggest U.S. education lender, after the Reston, Virginia-based company refused to consider a lower offer.

Flowers Suit

A suit over Flowers' decision to renege on the offer is pending in Delaware Chancery Court.

The agreements that have fallen apart threaten to ``chill'' merger activity, said Roy Behren, who helps manage $2 billion at Westchester Capital Management in Valhalla, New York.

Westchester, which owned 1.31 million shares of United Rentals as of a September filing with the U.S. Securities and Exchange Commission, buys shares in companies targeted for takeover and sells them when the transactions are completed.

``It's bad for corporate America to allow acquiring companies to be released from their obligations under a merger agreement at their whim,'' Behren said in a telephone interview. ``The lawyers for target companies need to start drafting agreements that are more airtight and less Swiss cheese.''

United Rentals officials said their agreement didn't provide any basis for Cerberus to cancel the buyout and that only they had the right to do so.

Cerberus executives countered that the agreement provided specific language that allowed RAM Holdings to pull out of the deal after payment of the termination fee.

Cancellation Rights

``URI knew or should have known what Cerberus' understanding of the merger agreement was,'' Chandler said in his ruling after a two-day trial that ended Dec. 19. Chandler said the agreement's language on the fee was confusing and evidence of the negotiation process was ``muddled.''

``One may plausibly upbraid Cerberus for walking away from this deal, for favoring their lenders over targets or for suboptimal contract editing,'' the judge said.

``But one cannot reasonably criticize the firm for a failure to represent its understanding'' of the termination language, he said.

The judge concluded that the contract was ``ambiguous on account of its conflicting provisions'' and involved ``a deeply flawed negotiation'' process.

He said that based on testimony, United Rentals ``could not overcome the apparent lack of communication of its intentions and understandings'' to the buyers.

Clear Wording

Mergers-and-acquisition lawyers said Chandler's decision will serve as a reminder to attorneys to focus more closely on the wording of agreements.

``People are going to be much more careful going forward on the termination fee clauses and specific performance clauses,'' said Chip MacDonald, a partner at Jones Day's Atlanta office. The law firm is based in Washington.

United Rentals leases equipment such as forklifts and backhoes at almost 700 locations in the U.S., Canada and Mexico, supplying builders, utilities and homeowners in a $33 billion market. The company has about 11,500 workers.

Cerberus, founded in 1990, initially focused on distressed assets. The firm pushed into the spotlight during a year of record leveraged buyouts with its $7.4 billion purchase of U.S. automaker Chrysler Corp. in August.

United Rentals agreed to sell to Cerberus four months after saying it was considering a sale because its shares were undervalued. The stock dropped 22 percent in the 12 months before that announcement as the housing industry weakened.

The agreement followed the purchases last year of competitors NationsRent Cos., the second-largest equipment renter, for $600 million and third-biggest Rental Service Corp. for $4.1 billion.

The case is United Rentals Inc. v. RAM Holdings Inc., CA3360, Delaware Chancery Court (Wilmington).

To contact the reporters on this story: Jef Feeley in Wilmington, Delaware, at jfeeley@bloomberg.net; Jason Kelly in New York at jkelly14@bloomberg.net.

Last Updated: December 21, 2007 20:04 EST