30 September 2008 23:11 [Source: ICIS news]
By Al Greenwood
HOUSTON (ICIS news)--Hexion Specialty Chemicals could pay millions if it walks away from its $10.6bn (€7.3bn) merger with Huntsman – as a Delaware court found that Hexion breached several covenants of the merger agreement, according to court documents released on Tuesday.
Under the merger agreement, Hexion could abandon the deal by paying a $325m termination fee. However, Hexion would face uncapped liabilities if it had intentionally violated any of the covenants of the agreement, according to a ruling made by Stephen Lamb, vice chancellor of the Delaware Chancery Court.
Lamb listed several violations in his ruling.
Under the agreement, Hexion had two days to approach Huntsman about any doubts concerning the financing of the merger, Lamb said.
Hexion had received an opinion from Duff and Phelps, which found that the combined companies would be insolvent.
Hexion did not approach Huntsman about Duff opinion within the two days, Lamb said. Instead, Hexion sued the company.
The agreement also required Hexion to do nothing that would threaten the financing of the merger, Lamb said.
Again, instead of discussing the Duff opinion with Huntsman, Hexion sued the company, alleging that it was entitled to abandon the deal, Lamb said.
After filing the suit, Hexion sent a copy of the opinion to one of the lenders financing the merger, "all but killing any possibility that the banks would be willing to fund", Lamb said.
The judge found another violation. Hexion dragged its feet to receive regulatory approval from anti-monopoly agencies, Lamb said.
Hexion filed the lawsuit earlier this year, alleging that Huntsman's business had deteriorated to the point that a so-called material-adverse effect had occurred.
In such an event, Hexion said it could abandon the merger without paying a $325m termination fee.
However, Hexion faced a heavy burden in proving that a material-adverse effect took place, Lamb said.
Hexion had to show that Huntsman's business had deteriorated to such a large extent, it would create long-term consequences to the merged companies' earnings, Lamb said. A short-term hiccup in earnings would not do.
"Many commentators have noted that Delaware courts have never found a material-adverse effect to have occurred in the context of a merger agreement," Lamb said. "This is not a coincidence."
The Hexion/Huntsman deal did not become an exception. Lamb found no material-adverse effect.
Lamb based his assessment on Huntsman's earnings before interest, taxes, depreciation and amortisation (EBITDA), which had not catastrophically deteriorated.
Likewise, the Duff insolvency opinion failed to prove that such an effect took place.
The opinion relied on skewed numbers provided by Hexion, and the firm never consulted with Huntsman, Lamb said. The Duff opinion was unreliable.
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