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Hexion Specialty Chems., Inc. v. Huntsman Corp.

Court of Chancery of Delaware, New Castle

September 19, 2008, Submitted; September 29, 2008, Decided; September 29, 2008, EFiled

C.A. No. 3841-VCL

Opinion

 [*720]  LAMB, Vice Chancellor.

In July 2007, just before the onset of the ongoing crisis affecting the national and  [*721]  international credit markets, two large chemical companies entered into a merger agreement contemplating a leveraged cash acquisition of one by the other. The buyer is a privately held corporation, 92% owned by a large private equity group.

Because the buyer and its parent were eager to be the winning bidder in a competitive bidding situation, they agreed to pay a substantially higher price than the competition and to commit to stringent deal terms, including no "financing out." In other words, if the financing the buyer arranged (or equivalent alternative financing) is not available at the closing, the buyer is not excused from performing under the contract. In that event, and in the absence of a material adverse effect  [**3] relating to Huntsman's business as a whole, the issue becomes whether the buyer's liability to the seller for failing to close the transaction is limited to $ 325 million by contract or, instead, is, uncapped.

The answer to that question turns on whether the buyer committed a knowing and intentional breach of any of its covenants found in the merger agreement that caused damages in excess of the contractual limit. Among other things, the buyer covenanted that it would use its reasonable best efforts to take all actions and do all things "necessary, proper or advisable" to consummate the financing on the terms it had negotiated with its banks and further covenanted that it would not take any action "that could be reasonably be expected to materially impair, delay or prevent consummation" of such financing.

While the parties were engaged in obtaining the necessary regulatory approvals, the seller reported several disappointing quarterly results, missing the numbers it projected at the time the deal was signed. After receiving the seller's first quarter 2008 results, the buyer and its parent, through their counsel, began exploring options for extricating the seller from the transaction.  [**4] At first, this process focused on whether the seller had suffered a material adverse effect. By early May, however, attention shifted to an exploration of the prospective solvency of the combined entity, leading them to retain the services of a well-known valuation firm to explore the possibility of obtaining an opinion that the combined entity would be insolvent. After making a number of changes to the inputs into the deal model that materially and adversely effected the viability of the transaction, and without consulting with the seller about those changes or about other business initiatives that might improve the prospective financial condition of the resulting entity, the buyer succeeded in obtaining an "insolvency" opinion.

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965 A.2d 715 *; 2008 Del. Ch. LEXIS 134 **

HEXION SPECIALTY CHEMICALS, INC.; NIMBUS MERGER SUB INC.; APOLLO INVESTMENT FUND IV, L.P.; APOLLO OVERSEAS PARTNERS IV, L.P.; APOLLO ADVISORS IV, L.P.; APOLLO MANAGEMENT IV, L.P.; APOLLO INVESTMENT FUN V, L.P.; APOLLO OVERSEAS PARTNERS V, L.P.; APOLLO NETHERLANDS PARTNERS V(A), L.P.; APOLLO NETHERLANDS PARTNERS V(B), L.P.; APOLLO GERMAN PARTNERS V GMBH & CO. KG; APOLLO ADVISORS V, L.P.; APOLLO MANAGEMENT V, L.P.; APOLLO INVESTMENT FUND VI, L.P.; APOLLO OVERSEAS PARTNERS VI, L.P.; APOLLO OVERSEAS PARTNERS (DELAWARE) VI, L.P.; APOLLO OVERSEAS PARTNERS (DELAWARE 892) VI, L.P.; APOLLO OVERSEAS PARTNERS (GERMANY) VI, L.P.; APOLLO ADVISORS VI, L.P.; APOLLO MANAGEMENT VI, L.P.; APOLLO MANAGEMENT, L.P.; AND APOLLO GLOBAL MANAGEMENT, LLC, Plaintiffs/Counterclaim Defendants, v. HUNTSMAN CORP., Defendant/Counterclaim Plaintiff.

Subsequent History: As Revised November 19, 2008.

Judgment entered by Hexion Specialty Chems., Inc. v. Huntsman Corp., 2008 Del. Ch. LEXIS 143 (Del. Ch., Sept. 29, 2008)

Related proceeding at Matlinpatterson Global Opportunities v. Deutsche Bank Secs., 2014 Tex. App. LEXIS 5253 (Tex. App. Beaumont, May 15, 2014)

Prior History: Hexion Specialty Chems., Inc. v. Huntsman Corp., 959 A.2d 47, 2008 Del. Ch. LEXIS 118 (Del. Ch., 2008)

Disposition:  The court granted the seller's request for an order specifically enforcing the buyer's contractual obligations to the extent permitted by the merger agreement itself. It held that the seller was not entitled to specifically enforce the buyer's duty to consummate the merger. It held that the issue of the solvency of the combined entity was not ripe for decision.

CORE TERMS

merger agreement, insolvency, projections, financing, merger, solvency, combined, banks, consummate, obligations, funding, commitment letter, covenant, buyer, entity, parties, adverse effect, negotiations, billion, termination date, forecasts, Effects, antitrust, team, estimates, breached, specific performance, earnings, gap, pension

Mergers & Acquisitions Law, General Overview, Evidence, Burdens of Proof, Civil Procedure, Declaratory Judgments, State Declaratory Judgments, Mergers, Contracts Law, Contract Interpretation, Ambiguities & Contra Proferentem, Contract Conditions & Provisions, Types of Damages, Compensatory Damages, Breach, Remedies, Defenses, Public Policy Violations, Business & Corporate Compliance, Contracts Law, Immaterial Breach, Standards of Performance, Material Breach, Partial Breach, Total Breach, Justiciability, Ripeness, Parol Evidence