Hexion Specialty Chemicals, Inc. v. Huntsman Corp.
965 A.2d 715 (2008)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
A buyer in a merger agreement commits a knowing and intentional breach of its covenant to use reasonable best efforts to secure financing when it deliberately takes actions it knows will impair or prevent the financing. A Material Adverse Effect (MAE) requires a durationally significant adverse change to a company's long-term earnings potential, not merely a short-term decline in performance or failure to meet projections.
Facts:
- In July 2007, Hexion Specialty Chemicals, Inc. ('Hexion'), controlled by Apollo Global Management, entered into a merger agreement to acquire Huntsman Corporation ('Huntsman') for approximately $10.6 billion.
- The merger agreement contained no financing contingency and required Hexion to use its 'reasonable best efforts' to secure financing and not to take any action that could 'materially impair, delay or prevent consummation' of the financing.
- After the agreement was signed, Huntsman reported several disappointing quarterly results, missing its earlier financial projections.
- Following Huntsman's poor first-quarter 2008 results, Hexion and Apollo began exploring ways to exit the transaction.
- Hexion retained the valuation firm Duff & Phelps to explore the possibility of obtaining an opinion that the combined entity would be insolvent post-merger.
- To facilitate this, Hexion provided Duff & Phelps with revised, pessimistic financial models and assumptions that adversely affected the transaction's viability.
- Hexion also prevented Duff & Phelps from speaking with Huntsman's management to discuss or verify the pessimistic projections.
- On June 18, 2008, Duff & Phelps delivered an opinion to Hexion's board stating that the combined company would be insolvent.
Procedural Posture:
- On June 18, 2008, Hexion Specialty Chemicals, Inc. filed a complaint in the Delaware Court of Chancery against Huntsman Corporation.
- Hexion sought a declaratory judgment that it was not obligated to consummate the merger, that any liability was capped at the $325 million termination fee, and that Huntsman had suffered a Material Adverse Effect (MAE).
- Huntsman filed an answer and counterclaims seeking a declaratory judgment that Hexion had knowingly and intentionally breached the merger agreement and that no MAE had occurred.
- Huntsman's counterclaim also sought an order for Hexion to specifically perform its obligations under the merger agreement.
- The court conducted an expedited six-day trial on certain counts of Hexion's complaint and Huntsman's counterclaims.
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Does a buyer in a merger agreement commit a knowing and intentional breach of its covenants to use 'reasonable best efforts' to secure financing and not to impair that financing, when it, upon discovering the deal is less profitable than expected, deliberately manipulates financial projections to obtain an insolvency opinion and then publicizes that opinion with the knowledge that it will prevent the financing from closing?
Opinions:
Majority - Lamb, Vice Chancellor
Yes. A buyer commits a knowing and intentional breach of contract by taking a deliberate act that in and of itself constitutes a breach, even if breaching was not the conscious object of the act. Hexion knowingly and intentionally breached its covenants to use reasonable best efforts to consummate financing and not to impair it. The court found that after Hexion developed 'buyer's remorse' due to Huntsman's poor performance, it orchestrated a plan to escape the deal. Hexion deliberately provided skewed, pessimistic projections to Duff & Phelps to procure an insolvency opinion and then knowingly publicized that opinion and filed a lawsuit, fully aware that these actions would 'effectively kill' the financing. These actions were a direct violation of Hexion's contractual duty to support the financing, not avoid it. Furthermore, the court held that Huntsman had not suffered a Material Adverse Effect (MAE), as Delaware law sets a high bar for such a finding, requiring a threat to the company's long-term earnings power, not just a short-term 'hiccup in earnings' or missed projections, especially when projections were explicitly not warranted in the contract.
Analysis:
This decision significantly reinforces the high threshold required to prove a Material Adverse Effect (MAE) under Delaware law, solidifying the precedent set in In re IBP, Inc. S'holders Litig. It clarifies that short-term performance dips and missed forecasts, especially when disclaimed, are insufficient to excuse a buyer's obligation to close. Crucially, the case provides a clear definition of a 'knowing and intentional breach' in the M&A context, establishing that a party's deliberate actions that foreseeably and directly sabotage a deal's closing conditions (like financing) will lead to uncapped liability. This ruling serves as a powerful deterrent against strategic uses of 'buyer's remorse' and attempts to manufacture an exit from a binding merger agreement.
