Delaware Court Orders Hexion to Pursue Financing of Huntsman Acquisition; Rules Huntsman Has Not Suffered an MAE
October 2, 2008
The Delaware Chancery Court ruled on Monday that Hexion Specialty Chemicals, Inc. must specifically perform its covenants under its merger agreement with Huntsman Corporation, including taking all actions necessary to consummate the financing of the transaction and to satisfy antitrust regulators, but the Court stopped short of requiring Hexion, a portfolio company of Apollo Global Management, to consummate the transaction. The Court rejected Hexion's claim that Huntsman had suffered a "Material Adverse Effect" or MAE (as discussed more fully below), and found that Hexion deliberately breached its obligations under the merger agreement and that any damages caused by such breach will not be subject to the $325 million liquidated damages cap in the contract.
While this decision is a clear victory for Huntsman and stands out from other recent instances where private equity buyers have successfully negotiated or litigated to extricate themselves from highly leveraged transactions entered into before the credit crunch, when contemplating its wider implications, the Court's rulings must be analyzed in the context of a merger agreement that was particularly favorable to the seller. The merger agreement was negotiated in a competitive "deal jump" situation, with an industrial counterparty, after Huntsman had already entered into a signed agreement to sell itself to a third party. Huntsman's leverage was reflected in a number of strongly seller-favorable deal terms, including:
Viewed in this context, the Court's rulings simply ensure that Huntsman gets what it bargained for. The choice of different enforcement options for Hexion's obligation to obtain financing and antitrust approval (specific performance available) and Hexion's ultimate obligation to consummate the transaction (specific performance not available) was negotiated in the agreement itself, not manufactured by the Court.
Reviewing Hexion's actions after Huntsman first reported disappointing quarterly results in the spring of 2008, nearly a year after the merger agreement was signed, the Court found that Hexion and Apollo were focused on extricating Hexion from the transaction, first by exploring whether Huntsman had suffered an MAE and then by retaining a valuation firm to analyze the solvency of the combined entity even though its solvency was not a condition to Hexion's obligations under the merger agreement. V.C. Lamb held that in obtaining an "insolvency" opinion that Hexion then published in a press release and sent to the lead bank under the commitment letter, Hexion deliberately breached both its affirmative obligation under the merger agreement to arrange and consummate the financing and its negative covenant not to take any action that could impair the financing, as well as its obligation to give Huntsman prompt notice if it no longer believed it could obtain the financing. Indeed, V.C. Lamb concluded that "Hexion's utter failure to make any attempt to confer with Huntsman when Hexion first became concerned with the potential issue of insolvency both constitutes a failure to use reasonable best efforts to consummate the merger and shows a lack of good faith." Similarly, the Court held that Hexion had been "dragging its feet on obtaining [antitrust] clearance, pending the outcome of its attempts to avoid the transaction, in contravention of its obligations under the merger agreement."
The Court’s analysis with respect to the proper application of the MAE clause is consistent with IBP and Frontier Oil, but provides additional clarity on several issues:
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