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.