C.A. No. 3841-VCL (Del. Ch. Sept. 29, 2008) (Lamb, V.C.)
In this post-trial opinion, the Court evaluated claims arising from a merger agreement entered into between Huntsman Corp. and Hexion Specialty Chemicals, Inc. Ruling against Hexion’s assertion that it was not obligated to close the transaction, the Court concluded that Huntsman had not suffered a material adverse effect (“MAE”) that would excuse Hexion from performing its obligations under the merger agreement. The Court further ruled that, because Hexion had knowingly and intentionally breached certain of the merger agreement’s covenants requiring that it use reasonable best efforts to consummate the merger, in the event that Hexion failed to close, Huntsman would not be limited solely to the collection of the $325 million reverse termination fee contemplated by the agreement, but instead would be entitled to seek an award of damages against Hexion. In addition, the Court concluded that the merger agreement did not provide Huntsman with a right to an order of specific performance with respect to the closing of the merger, but that an order of specific performance with respect to the balance of Hexion’s covenants under the merger agreement would be appropriate, including an obligation to seek a judicial decree requiring the banks to fund in the event that all conditions were otherwise satisfied. The Court declared unripe for judicial resolution Hexion’s claim that the combined entity resulting from the merger between Huntsman and Hexion would be insolvent at closing, a circumstance that would have absolved the banks of their obligation to fund the transaction.
Huntsman and Hexion entered into a merger agreement in July 2007. Although Huntsman had already signed an agreement with a competitor, Hexion offered a higher price at $28 per share in cash, as well as terms that increased the likelihood of closing. These terms included no financing contingency, an obligation by Hexion to use its “reasonable best efforts” to secure financing, liquidated damages in the event of breaches that were not the result of knowing and intentional conduct, and a narrowly tailored MAE clause. Credit Suisse and Deutsche Bank signed a commitment letter to provide financing for the merger. After it received Huntsman’s first quarter results from 2008, however, Hexion grew concerned that the combined entity would not be solvent, and engaged Duff & Phelps, LLC, an experienced solvency firm, for advice. Duff & Phelps concluded that the combined entity would fail each of the three conventional tests for solvency. Accordingly, Hexion filed suit on June 18, 2008, seeking a declaration that it is not obligated to consummate the merger if the combined entity would be insolvent and that its liability under the circumstances would not exceed the $325 million termination fee provided for in the merger agreement. Hexion further sought a declaration that Huntsman had suffered an MAE in any event and therefore that it was free to terminate the transaction without liability either for damages or the $325 million termination fee The Court granted expedition on limited issues, and held a six-day trial beginning on September 8, 2008.
In its decision, the Court first addressed Hexion’s argument that Huntsman had suffered an MAE. After noting that no Delaware court had yet found an MAE to have occurred in the context of a merger agreement, the Court looked to Huntsman’s EBITDA to determine whether its business in the long-term – years, rather than months – had adversely changed in a durationally significant fashion. After analyzing Huntsman’s EBITDA and comparing its quarterly results in 2006 to the corresponding quarters in 2007, the Court rejected Hexion’s reliance on the assertion that Huntsman had missed its forecasts, because a provision of the merger agreement allocated that risk to Hexion, and pointed to evidence indicating that Hexion had not relied on Huntsman’s forecasts in any event, thus proving that those forecasts never formed the basis of the parties’ contractual expectations concerning Huntsman’s performance.
The Court next concluded that Hexion had knowingly and intentionally breached the merger agreement and that pursuant to the merger agreement, Hexion’s liability for a failure to close was not exclusively limited to the reverse termination fee. The Court observed that Hexion was required under the merger agreement to use its reasonable best efforts to consummate financing and to inform Huntsman within 2 business days if it no longer believed in good faith that it would be able to draw upon the commitment letter financing. After receiving the insolvency opinion from Duff & Phelps, Hexion failed to apprise Huntsman of its concerns or to attempt to resolve them before filing suit. Moreover, the merger agreement prohibited Hexion from taking any action that could reasonably be expected to harm the prospects for securing financing under the commitment letter. The Court found that Hexion breached this obligation by (1) taking its concerns about solvency public by filing its complaint, and (2) sending Credit Suisse and Deutsche Bank copies of the Duff & Phelps opinion. The Court concluded that these breaches were knowing and intentional and that, to the extent it should become necessary to calculate damages by reason of Hexion’s failure to close despite satisfaction of all contractual conditions (including the solvency of the combined entity on which the banks’ funding obligation is conditioned), such a damage award would not be limited to the amount of the termination fee.
The Court declined to consider the issue of the solvency of the combined entity, an issue to which much of the evidence at trial had been addressed, finding that this question would become relevant only after Hexion had specifically performed its obligations under the merger agreement, and the banks were presented with a solvency certificate or opinion pursuant to the condition in their debt commitment letter, but nonetheless declined to accept it as reliable.
Finally, the Court took up Huntsman’s claim that Hexion was obligated to close the merger and that the Court should order specific performance of that obligation. Interpreting the language of the merger agreement on this point, the Court concluded that it could not require Hexion to consummate the merger, but that the merger agreement did obligate Hexion to specifically perform all of its other covenants under the merger agreement, including the obligation to pursue the banks to provide financing in the event that they should refuse to do so.
The full opinion is available here.