After over a year of effort, the expenditure of over $10 million in legal fees, the burden of engaging in bare-knuckles litigation, and the humiliation of being “dressed down” by an outraged Judge Lewis Kaplan (CSX v. TCI, 562 F. Supp. 2d 511 (S.D.N.Y. 2008)), Christopher Hohn won his proxy contest with CSX, seating himself and three others on the CSX board at the shareholders’ meeting held June 25, 2008 (CSX did not sit Hohn until September 2008).
Hohn, whose hedge fund, the Children’s Investment Master Fund, rose like a shooting star among activist hedge funds, carefully examined CSX and the opportunity a change in management at the company might represent, and presented a well researched and effective campaign for shareholder votes. In its “case for change,” TCI stated its belief that:
• CSX could be the best railroad in America; and
• Its earnings power could be double what the management of CSX had targeted to achieve.
The question, TCI asked, “shouldn’t be ‘Where has CSX come from?’ but ‘Where should CSX be?’” Hohn’s nominees would “refresh” the CSX board, and bring more railroad experience and more business experience to CSX than the five directors TCI’s group hoped to supplant, and bring to the CSX board “the perspectives of large and engaged shareholders.”
This was slick stuff. Given TCI’s reputation for shaking things up, which Hohn had done with Deutsche Börse and ABN Amro, the campaign succeeded.
But “engaged” Hohn no longer is: in a brief announcement on February 10, 2009, CSX disclosed that Hohn had notified the Governance Committee of CSX’s Board that he did not wish to be included as a nominee for re-election as a director at the annual meeting scheduled for May 6, 2009. CSX reports that Hohn “informed the Company that this decision resulted from his responsibilities in managing his business interests.”
Hohn’s possible burnout with activist investing was foreshadowed last fall in an article in Alpha (September 19, 2008), entitled “Christopher Hohn Rethinks Activism.” Spending over $10 million going against incumbent management, and losing money, as TCI has done with Deutsche Börse, will do that to you. Given the current economy, TCI has not done too well at CSX either. On June 25, 2008, the date of CSX’s 2008 annual meeting, CSX closed at $63.23. Yesterday, February 18, 2009, CSX closed at $27.83, a 56% decline since the shareholder meeting. And Hohn’s perception of the CSX opportunity — that its monopolistic position would benefit from a combination of global economic growth and higher energy costs, has vaporized in the current downturn.
Hohn, and other activist investors, have undoubtedly grown to appreciate the power of incumbency. As Hohn ruefully observed for the Alpha article:
“Buffett has always said that he looks for good management teams, because they’re easier to work with,” Hohn says. “We’ve often done just the opposite. We’ve frequently looked for excellent companies with underperforming management — Deutsche Börse, Euronext, CSX. Activism has been profitable for us, but it’s getting much harder; the political and regulatory environment is changing.”
In with a big bang, out with a whimper.
And we are still awaiting the decision of the Second Circuit Court of Appeals on Judge Kaplan’s searing decision finding TCI had violated the Exchange Act in its campaign to replace five members of the CSX board (the panel promptly ruled with Judge Kaplan that, even if TCI had violated the Exchange Act, the votes that it obtained for its slate would not be nullified, but its full opinion on this issue and on Judge Kaplan’s judgment on liability has yet to be handed down).
For my prior commentary on this case, see my posts of November 11, September 15, August 23, August 13, August 1, July 30, July 26, July 17, June 24, and June 23, 2008.
Thursday, February 19, 2009
Friday, February 13, 2009
Gantler v. Stephens; Board's Failure to Accept Merger Proposal to Pursue Reclassification of Stock Not Entitled to Presumption of Business Judgment
The Delaware Supreme Court’s en banc decision in Gantler v. Stephens, 2009 WL 188828 (January 27, 2009) illustrates the hazards of pursuing change of control transactions lackadaisically and the risks in alienating a sitting director. As a result, decisions that might normally be protected by the business judgment rule received more exacting entire fairness review. Under the more exacting standard, the Delaware Supreme Court concluded, in an opinion by Justice Jacobs, that the defendants’ motion to dismiss had been improperly granted by Vice Chancellor Parsons. In the course of its decision, the Supreme Court takes the occasion to confirm that officers are subject to the same fiduciary duties as directors under Delaware law, and clarifies the application of the doctrine of shareholder ratification.
A. How Not to Run a Transaction
First Niles Financial, Inc. (“First Niles” or the “Company”) is a Delaware corporation headquartered in Niles, Ohio. It is a holding company formed as the result of the demutualization of a single branch S&L (the “bank”) located in Niles. Its board of directors was insular, consisting of First Niles’ long-time Chairman, President and CEO William L. Stephens, plaintiff Leonard T. Gantler (director from April 2003 through April 26, 2006 and a CPA), James Kramer, president of a local heating and air conditioning company that provided services to the bank and for whom the bank was a major client, Ralph Zuzolo, principal in a Niles law firm that provided legal services to the bank and the sole owner of a real estate title company that provided title services for nearly all of the bank’s real estate transactions, and a fifth director.
In August 2004 the board decided to put the Company up for sale. It retained Keefe, Bruyette & Woods as its financial advisor.
Demonstrating its lack of enthusiasm for the proposal, management, headed by Stephens, advocated abandoning the search at the very next meeting of the board and proposed, instead, that the Company go private. The board took no action on management’s proposal. Three potential purchasers surfaced. Two of them were explicit that they would replace the Company’s board. Keefe Bruyette advised the board that all three bids reasonably valued the Company.
Notwithstanding the board’s direction to management and Keefe Bruyette to conduct due diligence in connection with two of the proposals, management failed to provide due diligence materials to one of the bidders, resulting in its withdrawal of its proposal. The remaining bidder, First Place Financial Corp. (“First Place”), after itself being delayed with its due diligence requests, proposed a stock-for-stock transaction which, as revised, represented an 11% premium over First Niles’ stock price. Keefe Bruyette opined that the offer was within an acceptable range.
Here is the Court’s recitation of the sum and substance of the board’s consideration of First Place’s revised proposal:
“On March 8, First Place increased the exchange ratio of its offer to provide an implied value of $17.37 per First Niles share. At the March 9 special Board meeting, Stephens distributed a memorandum from the Financial Advisor describing First Place’s revised offer in positive terms. Without any discussion or deliberation, however, the Board voted 4 to 1 to reject that offer, with only Gantler voting to accept it. After the vote, Stephens discussed Management’s privatization plan and instructed Legal Counsel to further investigate that plan.”
Slip Opinion at 7.
B. Management’s Reclassification Proposal
After the board rejected First Place’s offer, it thereafter considered management’s privatization proposal which included, among other components, reclassifying the shares of holders of 300 or fewer shares of the Company’s common stock into a new issue of Series A Preferred Stock, which would pay higher dividends but not carry any voting rights (except in the event of the proposed sale of the Company) (the “Reclassification Proposal”). In December 2005, after hearing a presentation from Powell Goldstein LLP, Atlanta, as special counsel retained for the privatization, the board elected to proceed with the Reclassification Proposal by a vote of three to one, with Gantler dissenting.
After Gantler resigned from the board in April 2006, the board elected to proceed with the Reclassification Proposal in June of 2006, which, because it entailed an amendment to the Company’s Certificate of Incorporation, required stockholder approval.
C. The Company’s Proxy Statement
In its proxy statement distributed to its stockholders soliciting their approval of the Reclassification Proposal and the amendment to the Company’s Certificate of Incorporation, the proxy statement acknowledged that the Company’s directors and officers were subject to a conflict of interest with respect to the Reclassification Proposal. In disclosing the alternatives the board had considered to the Reclassification Proposal, the proxy statement stated, with respect to the First Place proposal, that “[a]fter careful deliberations, the board determined in its business judgment the proposal was not in the best interests of the Company or our shareholders and rejected the proposal.” Slip Opinion at 10.
57.3% of the outstanding shares voted in favor of the Reclassification Proposal, although, with respect to shares held by stockholders not affiliated with management, the proposal passed by a bare 50.28% majority vote.
D. Business Judgment Standard Not Available to the Company’s Board
In reviewing Vice Chancellor Parsons’ grant of defendants’ motion to dismiss, the Supreme Court reviewed plaintiffs’ complaint “in the light most favorable to the non-moving party, accepting as true its well-pled allegations and drawing all reasonable inferences that logically flow from those allegations.” Slip Opinion at 12-13 (footnote omitted).
The Supreme Court first agreed with Vice Chancellor Parsons that the Unocal standard of review did not apply (Unocal v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1995)) because the conduct challenged did not involve any “defensive” action by the Company’s board:
“The Court of Chancery properly refused to apply Unocal in this fashion. The premise of Unocal is ‘that the transaction at issue was defensive.’ Count I [alleging breach of fiduciary duty in the conduct of the sales process] sounds in disloyalty, not improper defensive conduct. Count I does not allege any hostile takeover attempt or similar threatened external action from which it could reasonably be inferred that the defendants acted ‘defensively.’”
Slip Opinion at 17 (footnotes omitted).
But the Supreme Court did find that Vice Chancellor Parsons misapplied the business judgment rule. A board is entitled to the protection of the business judgment rule unless the plaintiff pleads facts supporting either a breach of the board’s duty of loyalty or its duty of care. Here plaintiffs alleged that the First Niles board improperly rejected a “value-maximizing” bid from First Place and terminated the sales process to preserve personal benefits and valuable outside business opportunities for management and the interested directors.
While a board’s decision not to pursue a merger opportunity is normally reviewed within the traditional business judgment framework, that framework is not available to defendants where plaintiffs plead facts establishing a cognizable claim that a board acted disloyally. Here the plaintiffs did so. The Supreme Court had little difficulty in finding that three of the four directors who rejected the First Place bid acted, on the facts pled, disloyally: Stephens, by his failure to cooperate with the bidders; Kramer because he suffered from a “disqualifying” conflict by reason of his dependence upon the bank as a major client of his service company; and Zuzolo likewise because of his heavy reliance upon the bank for his income.
In the course of its analysis, the Supreme Court takes the occasion to expressly affirm that officers of Delaware corporations owe the same fiduciary duties to stockholders as directors do:
“In the past, we have implied that officers of Delaware corporations, like directors, owe fiduciary duties of care and loyalty, and that the fiduciary duties of officers are the same as those of directors. We now explicitly so hold."
Slip Opinion at 24 (footnotes omitted).
(In so holding, the Court notes that corporate officers, unlike corporate directors, are not expressly included in Section 102(b)(7) of Delaware’s GCL, permitting the certificate of incorporation of a Delaware corporation to include a provision eliminating or limiting the personal liability of a director to the corporation or its stockholders from monetary damages for breach of fiduciary duty, subject to specified exceptions. Expect this omission to become an agenda item for the Delaware Legislature. The Court’s holding also points up the importance of indemnification agreements for officers.)
E. Clarification of the Shareholder Ratification Doctrine
The Supreme Court also takes the occasion of this decision to clarify the application of Delaware’s shareholder ratification doctrine. Vice Chancellor Parsons concluded that the approval by the stockholders of First Niles of the Reclassification Proposal “ratified” the board’s decision to pursue it, thereby entitling it to business judgment protection. The Supreme Court reversed this decision and takes the occasion to clarify that the shareholder ratification doctrine is limited to its “classic” form, meaning that it applies only where shareholders vote to approve director action that is not legally required of the shareholders in order for the action to become legally effective:
“To restore coherence and clarity to this area of our law, we hold that the scope of the shareholder ratification doctrine must be limited to its so-called ‘classic’ form; that is, to circumstances where a fully informed shareholder vote approves director action that does not legally require shareholder approval in order to become legally effective. Moreover, the only director action or conduct that can be ratified is that which the shareholders are specifically asked to approve. . . . the ‘cleansing’ effect of such a ratifying shareholder vote is to subject the challenged director action to business judgment review, as opposed to ‘extinguishing’ the claim altogether (i.e., obviating all judicial review of the challenged action).”
Slip Opinion at 33-34 (footnotes omitted) (emphasis in original).
_____________________________
There are two sets of losers as a result of the Supreme Court’s reversal of Vice Chancellor Parsons’ ruling. First there are the defendants, whose management of the First Niles sales process and consideration and adoption of the Reclassification Proposal comes across as amateurish and transparently self-interested. The second loser is Vice Chancellor Parsons himself, whose rulings and reasoning are treated brusquely by the Supreme Court, almost as if they concluded he had been tone deaf to the self-interested conduct of the First Niles board. Vice Chancellor Parsons took some seven months to prepare his opinion below (the case was submitted to the Vice Chancellor on July 11, 2007 and he decided it on February 14, 2008): his bosses showed little regard for all that work.
A. How Not to Run a Transaction
First Niles Financial, Inc. (“First Niles” or the “Company”) is a Delaware corporation headquartered in Niles, Ohio. It is a holding company formed as the result of the demutualization of a single branch S&L (the “bank”) located in Niles. Its board of directors was insular, consisting of First Niles’ long-time Chairman, President and CEO William L. Stephens, plaintiff Leonard T. Gantler (director from April 2003 through April 26, 2006 and a CPA), James Kramer, president of a local heating and air conditioning company that provided services to the bank and for whom the bank was a major client, Ralph Zuzolo, principal in a Niles law firm that provided legal services to the bank and the sole owner of a real estate title company that provided title services for nearly all of the bank’s real estate transactions, and a fifth director.
In August 2004 the board decided to put the Company up for sale. It retained Keefe, Bruyette & Woods as its financial advisor.
Demonstrating its lack of enthusiasm for the proposal, management, headed by Stephens, advocated abandoning the search at the very next meeting of the board and proposed, instead, that the Company go private. The board took no action on management’s proposal. Three potential purchasers surfaced. Two of them were explicit that they would replace the Company’s board. Keefe Bruyette advised the board that all three bids reasonably valued the Company.
Notwithstanding the board’s direction to management and Keefe Bruyette to conduct due diligence in connection with two of the proposals, management failed to provide due diligence materials to one of the bidders, resulting in its withdrawal of its proposal. The remaining bidder, First Place Financial Corp. (“First Place”), after itself being delayed with its due diligence requests, proposed a stock-for-stock transaction which, as revised, represented an 11% premium over First Niles’ stock price. Keefe Bruyette opined that the offer was within an acceptable range.
Here is the Court’s recitation of the sum and substance of the board’s consideration of First Place’s revised proposal:
“On March 8, First Place increased the exchange ratio of its offer to provide an implied value of $17.37 per First Niles share. At the March 9 special Board meeting, Stephens distributed a memorandum from the Financial Advisor describing First Place’s revised offer in positive terms. Without any discussion or deliberation, however, the Board voted 4 to 1 to reject that offer, with only Gantler voting to accept it. After the vote, Stephens discussed Management’s privatization plan and instructed Legal Counsel to further investigate that plan.”
Slip Opinion at 7.
B. Management’s Reclassification Proposal
After the board rejected First Place’s offer, it thereafter considered management’s privatization proposal which included, among other components, reclassifying the shares of holders of 300 or fewer shares of the Company’s common stock into a new issue of Series A Preferred Stock, which would pay higher dividends but not carry any voting rights (except in the event of the proposed sale of the Company) (the “Reclassification Proposal”). In December 2005, after hearing a presentation from Powell Goldstein LLP, Atlanta, as special counsel retained for the privatization, the board elected to proceed with the Reclassification Proposal by a vote of three to one, with Gantler dissenting.
After Gantler resigned from the board in April 2006, the board elected to proceed with the Reclassification Proposal in June of 2006, which, because it entailed an amendment to the Company’s Certificate of Incorporation, required stockholder approval.
C. The Company’s Proxy Statement
In its proxy statement distributed to its stockholders soliciting their approval of the Reclassification Proposal and the amendment to the Company’s Certificate of Incorporation, the proxy statement acknowledged that the Company’s directors and officers were subject to a conflict of interest with respect to the Reclassification Proposal. In disclosing the alternatives the board had considered to the Reclassification Proposal, the proxy statement stated, with respect to the First Place proposal, that “[a]fter careful deliberations, the board determined in its business judgment the proposal was not in the best interests of the Company or our shareholders and rejected the proposal.” Slip Opinion at 10.
57.3% of the outstanding shares voted in favor of the Reclassification Proposal, although, with respect to shares held by stockholders not affiliated with management, the proposal passed by a bare 50.28% majority vote.
D. Business Judgment Standard Not Available to the Company’s Board
In reviewing Vice Chancellor Parsons’ grant of defendants’ motion to dismiss, the Supreme Court reviewed plaintiffs’ complaint “in the light most favorable to the non-moving party, accepting as true its well-pled allegations and drawing all reasonable inferences that logically flow from those allegations.” Slip Opinion at 12-13 (footnote omitted).
The Supreme Court first agreed with Vice Chancellor Parsons that the Unocal standard of review did not apply (Unocal v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1995)) because the conduct challenged did not involve any “defensive” action by the Company’s board:
“The Court of Chancery properly refused to apply Unocal in this fashion. The premise of Unocal is ‘that the transaction at issue was defensive.’ Count I [alleging breach of fiduciary duty in the conduct of the sales process] sounds in disloyalty, not improper defensive conduct. Count I does not allege any hostile takeover attempt or similar threatened external action from which it could reasonably be inferred that the defendants acted ‘defensively.’”
Slip Opinion at 17 (footnotes omitted).
But the Supreme Court did find that Vice Chancellor Parsons misapplied the business judgment rule. A board is entitled to the protection of the business judgment rule unless the plaintiff pleads facts supporting either a breach of the board’s duty of loyalty or its duty of care. Here plaintiffs alleged that the First Niles board improperly rejected a “value-maximizing” bid from First Place and terminated the sales process to preserve personal benefits and valuable outside business opportunities for management and the interested directors.
While a board’s decision not to pursue a merger opportunity is normally reviewed within the traditional business judgment framework, that framework is not available to defendants where plaintiffs plead facts establishing a cognizable claim that a board acted disloyally. Here the plaintiffs did so. The Supreme Court had little difficulty in finding that three of the four directors who rejected the First Place bid acted, on the facts pled, disloyally: Stephens, by his failure to cooperate with the bidders; Kramer because he suffered from a “disqualifying” conflict by reason of his dependence upon the bank as a major client of his service company; and Zuzolo likewise because of his heavy reliance upon the bank for his income.
In the course of its analysis, the Supreme Court takes the occasion to expressly affirm that officers of Delaware corporations owe the same fiduciary duties to stockholders as directors do:
“In the past, we have implied that officers of Delaware corporations, like directors, owe fiduciary duties of care and loyalty, and that the fiduciary duties of officers are the same as those of directors. We now explicitly so hold."
Slip Opinion at 24 (footnotes omitted).
(In so holding, the Court notes that corporate officers, unlike corporate directors, are not expressly included in Section 102(b)(7) of Delaware’s GCL, permitting the certificate of incorporation of a Delaware corporation to include a provision eliminating or limiting the personal liability of a director to the corporation or its stockholders from monetary damages for breach of fiduciary duty, subject to specified exceptions. Expect this omission to become an agenda item for the Delaware Legislature. The Court’s holding also points up the importance of indemnification agreements for officers.)
E. Clarification of the Shareholder Ratification Doctrine
The Supreme Court also takes the occasion of this decision to clarify the application of Delaware’s shareholder ratification doctrine. Vice Chancellor Parsons concluded that the approval by the stockholders of First Niles of the Reclassification Proposal “ratified” the board’s decision to pursue it, thereby entitling it to business judgment protection. The Supreme Court reversed this decision and takes the occasion to clarify that the shareholder ratification doctrine is limited to its “classic” form, meaning that it applies only where shareholders vote to approve director action that is not legally required of the shareholders in order for the action to become legally effective:
“To restore coherence and clarity to this area of our law, we hold that the scope of the shareholder ratification doctrine must be limited to its so-called ‘classic’ form; that is, to circumstances where a fully informed shareholder vote approves director action that does not legally require shareholder approval in order to become legally effective. Moreover, the only director action or conduct that can be ratified is that which the shareholders are specifically asked to approve. . . . the ‘cleansing’ effect of such a ratifying shareholder vote is to subject the challenged director action to business judgment review, as opposed to ‘extinguishing’ the claim altogether (i.e., obviating all judicial review of the challenged action).”
Slip Opinion at 33-34 (footnotes omitted) (emphasis in original).
_____________________________
There are two sets of losers as a result of the Supreme Court’s reversal of Vice Chancellor Parsons’ ruling. First there are the defendants, whose management of the First Niles sales process and consideration and adoption of the Reclassification Proposal comes across as amateurish and transparently self-interested. The second loser is Vice Chancellor Parsons himself, whose rulings and reasoning are treated brusquely by the Supreme Court, almost as if they concluded he had been tone deaf to the self-interested conduct of the First Niles board. Vice Chancellor Parsons took some seven months to prepare his opinion below (the case was submitted to the Vice Chancellor on July 11, 2007 and he decided it on February 14, 2008): his bosses showed little regard for all that work.
Monday, February 9, 2009
Rohm and Haas Company v. The Dow Chemical Company; Rohm and Haas Sues For Specific Performance of Merger Agreement -- Dow Responds: "Let's Do Therapy"
A. Rohm and Haas’ Complaint
Rohm and Haas’ complaint, filed in the Delaware Chancery Court on January 26, 2009, is well-drafted and to the point: Rohm and Haas and Dow (through a wholly-owned subsidiary organized solely for the purpose of facilitating the merger) entered into a merger agreement on July 10, 2008 calling for the combination of the two companies in consideration of the cash payment by Dow of $78 for each share of Rohm and Haas common stock (Rohm and Haas’ common closed today, February 9, at $56.28). All conditions to completion of the merger, including Federal Trade Commission (“FTC”) clearance, were satisfied by January 23, 2009. Notwithstanding that the merger was teed up for closing, Dow has refused to close.
Because the merger was negotiated when the credit markets were already in turmoil, Rohm and Haas negotiated measures designed to provide certainty of closure, including (i) the absence of any financing condition, (ii) securing from Dow a representation that it would have sufficient funds at closing to consummate the merger, (iii) a restrictive MAC definition (thus limiting the circumstances under which Dow could back out of the merger), and (iv) an explicit acknowledgement by Dow that ROH would be entitled to specific performance to enforce the merger agreement:
“The parties agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached and that the parties would not have any adequate remedy at law. It is accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent breaches or threatened breaches of this Agreement and to enforce specifically the terms and provisions of this Agreement . . . The foregoing is in addition to any other remedy to which any party is entitled at law, in equity or otherwise.”
Merger Agreement § 8.5(a); quoted in Complaint ¶ 17.
One of the events precipitating Dow’s cold feet was the failure of “K-Dow,” a planned joint venture between Dow and Petrochemical Industries Company of Kuwait, a wholly-owned subsidiary of Kuwait’s state oil company. That joint venture, announced December 2007 (before the announced merger of Dow and Rohm and Haas) would have provided Dow with $9.5 billion in cash proceeds, which would have been available to Dow to consummate the merger with Rohm and Haas. However, formation of K-Dow was not a condition to close of the Dow/Rohm and Haas merger. Furthermore, Dow secured debt and equity financing commitments totaling $17 billion in connection with the proposed merger with Rohm and Haas, more than enough to fund the $15 billion plus cost of the merger, although, again, the securing of such debt and equity financing was not a condition to Dow’s obligation to close the merger.
B. Dow’s Response
Dow’s response, filed with the Chancery Court on February 3rd, is one of the strangest pleadings this reader has ever reviewed. It reads more like a John McPhee essay intended for William Shawn’s New Yorker than a legal pleading. It essentially asks Chancellor Chandler (to whom the case has been assigned) to adopt a “holistic” approach to the dispute, taking into account, so urges Dow, not only the interests of Rohm and Haas’ stockholders but also the other constituencies that might be affected by a Dow/Rohm and Hass merger — the companies’ employees, creditors, suppliers, and the communities in which the companies operate. A few selections from the 62-page answer illustrate Dow’s pitch:
“. . . Rohm and Haas turns a blind eye to the very difficult issue that the Court now confronts — whether the forced integration of tens of thousands of jobs and the judicial creation of a new entity is equitable considering all of the relevant legal interests. [Emphasis in original.] Contrary to the Complaint’s suggestion, the interests of Rohm and Haas shareholders who control the company today would have no contractual rights whatsoever to consummation of the merger — and no stake in its future prospects — are not dispositive.
This is a case with strongly competing interests that have to be weighed. There are no black and white hats or simple answers, only intimidating and evolving uncertainties that must be thoroughly understood before any irreversible action is taken. . . . .
. . . .
Dow has charted a path forward, urged Rohm and Haas . . . to walk with it down that path, and is prepared to work in like fashion with the Court as well, so that this case enhances rather than impedes progress towards a business solution. Forcing a merger under the present circumstances will cause irreparable harm to both Dow and Rohm and Haas. Prudence dictates that the welfare of all legitimate stakeholders be considered and that a fair and a workable solution be found.”
Answer at pages 1-2.
“It [the merger between Dow and Rohm and Haas] was to be a merger made in heaven and for one very important reason — ‘synergy’ — that is easy to articulate but hugely difficult to execute successfully in practice. What’s required is the seamless combination of two very large and complex organizations into a community of people who work as one and will then build on their complementary strengths and resources to achieve a level of cooperation and performance that, if achieved, will produce huge new value.”
Answer ¶ 6.
“The Complaint misses the essence of Dow’s approach to the problems both Dow and Rohm and Haas face. Dow’s approach to this transaction is totally grounded in necessity. It is necessary first of all to get control of the basic building blocks of any future course by stabilizing credit ratings, obtaining workable financing and maintaining liquidity. Turning then to future action, the first order of business is to account and plan for uncertainties affecting Dow’s market, Rohm and Haas’s business, and the market for the merged entities. The overwhelming problem here is uncertainty. And it is unknown when and how those uncertainties will be resolved.”
Answer ¶ 38.
“Any forced merger at any time is an extreme, external intervention in a business process that can actually work only if it makes sense internally. It must be driven by the desires and goals of the people who go to work every day rather than by artificially (and hastily) imposed mandates. These basic human facts are all the more dominant where, as here, the merger depends upon the creation of new value through synergies.”
Answer ¶ 42 (emphasis in original).
By its answer Dow details the disasters that have been experienced by both Dow and Rohm and Haas with the crumbling economy, including the loss of business and substantial employee layoffs. Dow makes a reasonably convincing case that were it forced to merge with Rohm and Haas, it could quickly breach one or more covenants in the short-term debt financing it has secured to facilitate the merger, thus triggering cross-defaults in its other funded debt.
All of this triggers sympathy, but the obvious question is: so what? Dow does not claim a MAC permitting it to back out of the deal, nor does it assert that it could not secure the financing necessary to close (as Hexion asserted in its battle with Huntsman, that it decisively lost in Vice Chancellor Lamb’s court— see my prior posts on the Hexion v. Huntsman case).
The closest Dow comes to founding its answer (and refusal to close) on the July 10, 2008 merger agreement is the FTC’s antitrust clearance. Dow’s position is that the FTC order clearing the merger (which order requires certain divestitures by Dow) is not final and will not become so until after a 30-day comment period, and therefore this condition to the merger has not been satisfied. Answer at pages 24-26. This position seems contrary to the Commission order itself, which, in the FTC’s press release announcing it (also quoted in Rohm and Haas’ complaint) states that under the consent order the “transaction may proceed.” Moreover, the merger agreement itself does not require that any antitrust order be final, in the sense claimed by Dow, only that “[a]ny applicable waiting period under the HSR Act shall have expired or been earlier terminated, . . .” Merger Agreement § 6.1(c)(i). So even this defense appears to be a stretch. And even if it is valid, the order could very well become final by the end of February 2009, thus mooting this defense by the time the action is tried (scheduled for March 9, 2009).
Essentially Dow’s defense is that the merger won’t work and therefore the Chancery Court should not force its consummation. This position is expressed throughout Dow’s answer, often in language (including that cited above) that is jarring to the reader of legal prose:
“At bottom, these unforeseen and unforeseeable events have—for the time being—eradicated the essential purpose of this transaction: creating a viable merged organization, one that will combine tens of thousands of employees who must work together to create the synergies that made this acquisition make sense. Forcing them together in an over-leveraged, hobbled deal would do no equity to Dow, to Rohm and Haas, or to their employees, communities, customers and suppliers.”
Answer ¶ 49.
It is hard to believe that Chancellor Chandler will take Dow’s answer seriously. Dow’s plea for cosmic equity should fall on deaf ears. Chancellor Chandler is more likely to take the position that his role is to enforce a contract in a dispute brought by a party to that contract (Rohm and Haas), which party clearly has standing to allege a breach of the contract. While equitable considerations might be appropriate in the normal course, given the fact that the parties to this contract explicitly negotiated the provision (Section 8.5(a) of the merger agreement, quoted above) calling for specific performance in the event of breach, it is also hard to believe that the Chancellor will tarry long over the equities of enforcing the contract, should he find a breach.
Chancellor Chandler has scheduled trial in the case for March 9, 2009, rejecting Dow’s request for delay. Moreover, there are now press reports that Dow is shopping assets to provide funding to consummate the merger without tripping debt covenants, including the possible sale of one of its crown jewels, Dow AgroSciences. See the Deal Pipeline, February 6, 2009 (“Dow Considers Sale of Crown Jewel”).
So, in the unlikely event this case actually goes to trial, it will be of great interest to see how the Chancellor handles Dow’s plea for mercy.
Rohm and Haas’ complaint, filed in the Delaware Chancery Court on January 26, 2009, is well-drafted and to the point: Rohm and Haas and Dow (through a wholly-owned subsidiary organized solely for the purpose of facilitating the merger) entered into a merger agreement on July 10, 2008 calling for the combination of the two companies in consideration of the cash payment by Dow of $78 for each share of Rohm and Haas common stock (Rohm and Haas’ common closed today, February 9, at $56.28). All conditions to completion of the merger, including Federal Trade Commission (“FTC”) clearance, were satisfied by January 23, 2009. Notwithstanding that the merger was teed up for closing, Dow has refused to close.
Because the merger was negotiated when the credit markets were already in turmoil, Rohm and Haas negotiated measures designed to provide certainty of closure, including (i) the absence of any financing condition, (ii) securing from Dow a representation that it would have sufficient funds at closing to consummate the merger, (iii) a restrictive MAC definition (thus limiting the circumstances under which Dow could back out of the merger), and (iv) an explicit acknowledgement by Dow that ROH would be entitled to specific performance to enforce the merger agreement:
“The parties agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached and that the parties would not have any adequate remedy at law. It is accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent breaches or threatened breaches of this Agreement and to enforce specifically the terms and provisions of this Agreement . . . The foregoing is in addition to any other remedy to which any party is entitled at law, in equity or otherwise.”
Merger Agreement § 8.5(a); quoted in Complaint ¶ 17.
One of the events precipitating Dow’s cold feet was the failure of “K-Dow,” a planned joint venture between Dow and Petrochemical Industries Company of Kuwait, a wholly-owned subsidiary of Kuwait’s state oil company. That joint venture, announced December 2007 (before the announced merger of Dow and Rohm and Haas) would have provided Dow with $9.5 billion in cash proceeds, which would have been available to Dow to consummate the merger with Rohm and Haas. However, formation of K-Dow was not a condition to close of the Dow/Rohm and Haas merger. Furthermore, Dow secured debt and equity financing commitments totaling $17 billion in connection with the proposed merger with Rohm and Haas, more than enough to fund the $15 billion plus cost of the merger, although, again, the securing of such debt and equity financing was not a condition to Dow’s obligation to close the merger.
B. Dow’s Response
Dow’s response, filed with the Chancery Court on February 3rd, is one of the strangest pleadings this reader has ever reviewed. It reads more like a John McPhee essay intended for William Shawn’s New Yorker than a legal pleading. It essentially asks Chancellor Chandler (to whom the case has been assigned) to adopt a “holistic” approach to the dispute, taking into account, so urges Dow, not only the interests of Rohm and Haas’ stockholders but also the other constituencies that might be affected by a Dow/Rohm and Hass merger — the companies’ employees, creditors, suppliers, and the communities in which the companies operate. A few selections from the 62-page answer illustrate Dow’s pitch:
“. . . Rohm and Haas turns a blind eye to the very difficult issue that the Court now confronts — whether the forced integration of tens of thousands of jobs and the judicial creation of a new entity is equitable considering all of the relevant legal interests. [Emphasis in original.] Contrary to the Complaint’s suggestion, the interests of Rohm and Haas shareholders who control the company today would have no contractual rights whatsoever to consummation of the merger — and no stake in its future prospects — are not dispositive.
This is a case with strongly competing interests that have to be weighed. There are no black and white hats or simple answers, only intimidating and evolving uncertainties that must be thoroughly understood before any irreversible action is taken. . . . .
. . . .
Dow has charted a path forward, urged Rohm and Haas . . . to walk with it down that path, and is prepared to work in like fashion with the Court as well, so that this case enhances rather than impedes progress towards a business solution. Forcing a merger under the present circumstances will cause irreparable harm to both Dow and Rohm and Haas. Prudence dictates that the welfare of all legitimate stakeholders be considered and that a fair and a workable solution be found.”
Answer at pages 1-2.
“It [the merger between Dow and Rohm and Haas] was to be a merger made in heaven and for one very important reason — ‘synergy’ — that is easy to articulate but hugely difficult to execute successfully in practice. What’s required is the seamless combination of two very large and complex organizations into a community of people who work as one and will then build on their complementary strengths and resources to achieve a level of cooperation and performance that, if achieved, will produce huge new value.”
Answer ¶ 6.
“The Complaint misses the essence of Dow’s approach to the problems both Dow and Rohm and Haas face. Dow’s approach to this transaction is totally grounded in necessity. It is necessary first of all to get control of the basic building blocks of any future course by stabilizing credit ratings, obtaining workable financing and maintaining liquidity. Turning then to future action, the first order of business is to account and plan for uncertainties affecting Dow’s market, Rohm and Haas’s business, and the market for the merged entities. The overwhelming problem here is uncertainty. And it is unknown when and how those uncertainties will be resolved.”
Answer ¶ 38.
“Any forced merger at any time is an extreme, external intervention in a business process that can actually work only if it makes sense internally. It must be driven by the desires and goals of the people who go to work every day rather than by artificially (and hastily) imposed mandates. These basic human facts are all the more dominant where, as here, the merger depends upon the creation of new value through synergies.”
Answer ¶ 42 (emphasis in original).
By its answer Dow details the disasters that have been experienced by both Dow and Rohm and Haas with the crumbling economy, including the loss of business and substantial employee layoffs. Dow makes a reasonably convincing case that were it forced to merge with Rohm and Haas, it could quickly breach one or more covenants in the short-term debt financing it has secured to facilitate the merger, thus triggering cross-defaults in its other funded debt.
All of this triggers sympathy, but the obvious question is: so what? Dow does not claim a MAC permitting it to back out of the deal, nor does it assert that it could not secure the financing necessary to close (as Hexion asserted in its battle with Huntsman, that it decisively lost in Vice Chancellor Lamb’s court— see my prior posts on the Hexion v. Huntsman case).
The closest Dow comes to founding its answer (and refusal to close) on the July 10, 2008 merger agreement is the FTC’s antitrust clearance. Dow’s position is that the FTC order clearing the merger (which order requires certain divestitures by Dow) is not final and will not become so until after a 30-day comment period, and therefore this condition to the merger has not been satisfied. Answer at pages 24-26. This position seems contrary to the Commission order itself, which, in the FTC’s press release announcing it (also quoted in Rohm and Haas’ complaint) states that under the consent order the “transaction may proceed.” Moreover, the merger agreement itself does not require that any antitrust order be final, in the sense claimed by Dow, only that “[a]ny applicable waiting period under the HSR Act shall have expired or been earlier terminated, . . .” Merger Agreement § 6.1(c)(i). So even this defense appears to be a stretch. And even if it is valid, the order could very well become final by the end of February 2009, thus mooting this defense by the time the action is tried (scheduled for March 9, 2009).
Essentially Dow’s defense is that the merger won’t work and therefore the Chancery Court should not force its consummation. This position is expressed throughout Dow’s answer, often in language (including that cited above) that is jarring to the reader of legal prose:
“At bottom, these unforeseen and unforeseeable events have—for the time being—eradicated the essential purpose of this transaction: creating a viable merged organization, one that will combine tens of thousands of employees who must work together to create the synergies that made this acquisition make sense. Forcing them together in an over-leveraged, hobbled deal would do no equity to Dow, to Rohm and Haas, or to their employees, communities, customers and suppliers.”
Answer ¶ 49.
It is hard to believe that Chancellor Chandler will take Dow’s answer seriously. Dow’s plea for cosmic equity should fall on deaf ears. Chancellor Chandler is more likely to take the position that his role is to enforce a contract in a dispute brought by a party to that contract (Rohm and Haas), which party clearly has standing to allege a breach of the contract. While equitable considerations might be appropriate in the normal course, given the fact that the parties to this contract explicitly negotiated the provision (Section 8.5(a) of the merger agreement, quoted above) calling for specific performance in the event of breach, it is also hard to believe that the Chancellor will tarry long over the equities of enforcing the contract, should he find a breach.
Chancellor Chandler has scheduled trial in the case for March 9, 2009, rejecting Dow’s request for delay. Moreover, there are now press reports that Dow is shopping assets to provide funding to consummate the merger without tripping debt covenants, including the possible sale of one of its crown jewels, Dow AgroSciences. See the Deal Pipeline, February 6, 2009 (“Dow Considers Sale of Crown Jewel”).
So, in the unlikely event this case actually goes to trial, it will be of great interest to see how the Chancellor handles Dow’s plea for mercy.
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