Hexion v. Huntsman; Round Two: Hexion v. Credit Suisse and Deutsche Bank

A. The Banks Refuse to Fund

Hexion announced yesterday, October 28, that it had received notice late the prior day from counsel to affiliates of Credit Suisse and Deutsche Bank stating that the banks do not believe that the solvency opinion delivered to the banks on October 24 from American Appraisal Associates and a solvency certificate from Huntsman’s chief financial officer met the conditions of the banks’ July 11, 2007 commitment letter with Hexion. Accordingly, the banks advised Hexion that they would not fund the closing of the Hexion/Huntsman merger, scheduled for yesterday.

To put it mildly, this puts Hexion in a very difficult position. By his decision of September 29, 2008, discussed in my post of October 7, 2008, Vice Chancellor Lamb of the Delaware Chancery Court, after a six-day trial, found Hexion to have “knowingly and intentionally” breached numerous of its covenants under the July 2007 merger agreement with Huntsman. The effect of that ruling was to blow away the merger agreement’s “termination fee” cap on damages of $325 million payable by Hexion to Huntsman in the event of Hexion’s failure to close the merger (securing financing is not a condition to Hexion’s obligations to close the merger). So if the banks refuse to fund under the commitment letter, then Hexion will be subject to “benefit of the bargain” damages to Huntsman for failure to close the merger. Given that the per-share merger consideration is $28 in cash (plus 8%), that Huntsman has some 234 million (fully diluted) shares outstanding, and Huntsman’s shares closed on October 28 at $12.28, Hexion is facing potential damages to Huntsman of over $4 billion. And Huntsman has a tort action pending in Texas state court against Apollo’s two principals, Leon Black and Joshua Harris, that could tag these two with personal liability for Hexion’s misconduct.

Under the Huntsman merger agreement, Hexion obligates itself to pursue its contractual rights against the banks in the event they refuse to perform under their commitment letter. Give Vice Chancellor Lamb’s September 29th decision, Hexion needs no such incentive. The commitment letter specifies the state courts of New York County, New York, or the Federal District Court in New York, as the exclusive forum for resolving disputes. So Hexion will have to pursue an action against Credit Suisse and Deutche Bank in New York to enforce its rights under the commitment letter.

Neither the American Appraisal Associates’ solvency opinion nor Huntsman CFO’s solvency certificate has been publicly filed by Huntsman or Hexion, nor do we have any specification of the banks’ objections to this documentation, so we are not yet in a position to assess the banks’ rejection of this condition to their commitment to provide $15 billion in funding for the merger. Presumably the banks, represented by Cravath, are confident in their rejection.

The condition that solvency comfort be provided to the banks is almost pro forma, included in an exhibit to the July 11, 2007 commitment letter. The exhibit lists seven conditions to the banks’ commitment to fund, including that the banks —

“… shall have received (i) customary and reasonably satisfactory legal opinions, corporate documents and certificates (including a certificate from the chief financial officer of the Borrower [Hexion Specialty Chemicals, Inc.] or the chief financial officer of [Huntsman] or an opinion from a reputable valuation firm with respect to solvency (on a consolidated basis) of the Borrower and its subsidiaries on the Closing Date after giving effect to the Transactions) (all such opinions, documents and certificates mutually agreed to be in form and substance customary for recent financings of this type with portfolio companies controlled by affiliates of or funds managed by [Apollo]); …”

The reference to “customary” certificates and opinions will just compound the depth of the factual inquiry that will be necessary to resolve the forthcoming battle between Hexion and the banks. It will be a field day for counsel and experts.

It is the banks’ view that their commitment to fund under the commitment letter terminates November 1, 2008. It is highly unlikely that Hexion or Huntsman will be able to convince the banks between now and that date of the solvency of a combined Hexion/Huntsman without their contributing significant additional equity to the combined entity. Both Huntsman and Apollo have already made meaningful strides in this direction, with certain Huntsman stockholders agreeing to contribute $677 million at closing (without receiving anything in return, other than that the merger closes and they receive the $28 per share), and Apollo has committed $750 million to Hexion to close the deal (for a total of $1.427 billion). That’s real money, but apparently not enough to satisfy the banks. Given Hexion’s (and Apollo’s principals’) exposure, don’t be surprised if they come up with additional equity to do the deal. I would be surprised if Huntsman coughs up more equity, given their position after Vice Chancellor Lamb’s decision — unless Huntsman fears a Hexion bankruptcy in the face of a damages judgment in the range of $4 billion.

B. The Skirmishing in Delaware Over the Termination Date of the Merger Agreement

Credit Suisse’s and Deutsche Bank’s rejection of the solvency support tendered to them came six days after a post-opinion hearing before Vice Chancellor Lamb in which he considered a motion by the banks to intervene for the limited purpose of opposing an order entered by the Vice Chancellor on October 16 declaring that the “Marketing Period” permitted under the merger agreement commenced on September 30, 2008. (Apparently during this 20 business day period Hexion is to solicit additional banks to participate in the financing of the merger.) The order had been sought by Hexion from the Vice Chancellor to allow it additional time to secure a solvency opinion or certificate for the banks. Hexion titled its request for the order as its “unopposed” motion because Huntsman did not oppose it. The significance of the date -- September 30 -- is that it occurred prior to October 2, 2008, the final date for termination of Hexion/Huntsman merger agreement. If the “Marketing Period” commenced prior to that date, then the termination date of the merger agreement is extended for 21 business days which, by the terms of the banks’ commitment letter, would further extend the termination date of the commitment letter an additional 30 days. Getting the September 30 declaration from Vice Chancellor Lamb was therefore important to Hexion.

And, for that reason, Hexion’s filing of its “unopposed” motion enraged the banks. Their counsel, Cravath, vehemently opposed the motion, and asked to intervene before Vice Chancellor Lamb for the sole purpose of requesting him to withdraw the order.

In their brief of October 19 in support of their motion for limited intervention, the banks do not hesitate to remind the Court of Hexion’s distain for good faith negotiations:

“Just as Hexion previously stole a march on Huntsman by filing this litigation without prior notice (and without the prior knowledge of the Banks), Hexion filed the Motion [for the Court’s order declaring that the Marketing Period had begun on September 30] without giving prior notice to the Banks, providing any indication that it intended to seek relief, or explaining how such an application could be consistent with the Commitment Letter’s requirement that such issues be resolved by a New York court.”

Banks’ Opposition Brief at 7.

Hexion, in its opposition to the banks’ brief, argued that the banks could not have it both ways, namely, seeking the Delaware Chancery Court’s interpretation of the commencement of the Marketing Period without submitting itself fully to the jurisdiction of the Court.

Vice Chancellor Lamb showed his irritation at being put in this position at the hearing on the banks’ motion held October 21. Richard Clary of Cravath argued for the banks. The Vice Chancellor quickly got to the question that interested him with respect to the issue of the commencement of the Marketing Period:

“My question to you was if an issue arose between the parties to the merger agreement, and that was submitted with your knowledge, although without your presence, to a court of competent jurisdiction to decide, and the Court reached a decision on that question, would you then feel that the banks were free to relitigate that question because the merger agreement is incorporated by reference to the commitment letter?”

Transcript at 11-12.

Clary was, of course, reluctant to go down that line, so he confirmed that, yes, that would be the banks’ position. That clearly bothered the Vice Chancellor:

“Well, that’s a very difficult position for you to maintain, I think, Mr. Clary. I’m not sure at all it’s completely relevant this morning, but that’s a very tough position for you to maintain since the merger agreement itself contains a clause that requires that issues concerning its interpretation be decided in this court.”

Transcript at 13.

Robert Bodian, of the Mintz Levin firm (arguing for Hexion due to conflicts Wachtell apparently has with the banks), did not fare much better. The Vice Chancellor pressed him on the fact that the entire question of the commencement of the Marketing Period was not addressed at all in the trial. Bodian argued that the “unopposed” order was sought simply to clarify the Vice Chancellor’s order and final partial judgment, which refers to the Marketing Period (the form of the order had been submitted to the Court by Huntsman’s counsel). That clearly irritated the Vice Chancellor:

"Really, Mr. Bodian, I don’t even know what the right word is, but to suggest that you’re in this position because you complied with my order is over the top. You’re not here because you complied with my order. You’re here because you didn’t get FTC approval when you might have, in July or August or the beginning of September, and you waited until even after the end of trial you didn’t get FTC approval. You waited until I issued my opinion to begin that process.

I made it quite plain during the course of the trial that I had trouble understanding why you were waiting. So, really, don’t put it on my opinion. That’s really quite a remarkable argument.”

Transcript at 26.

At the end of the hearing, Vice Chancellor Lamb denied the banks’ request to intervene (commenting, along the way, that he did not think that a “partial” intervention was permissible), but also vacating his October 16 order, without prejudice to its renewal.

All in all, I am sure the October 21 hearing was not the most pleasant of appearances for either counsel, but, at the end of the day, the banks got what they wanted, namely, a retraction of the court’s order that established the predicate for an extension of the termination date of the Hexion/Huntsman merger agreement. The clear effect of the hearing was that the locus of the dispute between Hexion and the banks will now shift to the New York courts.