Amy Kolz has an extensive article at The American Lawyer detailing a merger debacle which settled last winter for $1 billion after "Vice-Chancellor Stephen Lamb [of the Delaware Chancery Court] declared that Wachtell’s client, an Apollo Management, L.P., portfolio company called Hexion Specialty Chemicals, Inc., had ‘knowingly and intentionally breached’ its merger agreement with Huntsman Corporation in a deliberate effort to walk away from their $10.6 billion deal."
If you’re interested in the subject, you should read the article.
I highlight three elements fundamental to their defeat, and the defeat of many business litigation plaintiffs:
Evading The Obvious Spirit of the Agreement:
Huntsman and its lawyers at Shearman & Sterling and Vinson & Elkins were able to negotiate a merger agreement that all but locked Hexion into the acquisition. There was no "financing out," which meant that Hexion would have to pay a $325 million termination fee if it failed-despite using best efforts-to obtain debt financing. The material adverse effect clause, as Lamb would later remark, was also "narrowly tailored." And though one of the parties had to deliver a solvency letter to the banks funding the deal, there was no "solvency out" for Hexion.
The deal also included a provision that later proved harmful to Apollo. Though the agreement capped Hexion’s liability at $325 million if it couldn’t complete the deal despite making "best efforts," it allowed for uncapped damages in the event of a "knowing and intentional breach of any covenant" by Hexion, a provision more often seen in deals with strategic acquirors.
If you want to be able to back out of an agreement, leave in place mechanisms by which you can. Huntsman smartly negotiated an agreement locking Hexion / Apollo into the deal.
I’ve seen plenty of sophisticated individuals and business make or break contracts in a manner charitably described as commercially unreasonable. I can’t fix those mistakes. If you walked away from a good deal because you were afraid, I can’t enforce it. If you consented to an air-tight contract because you desperately wanted the deal, I can’t undo it. There’s a lot I can do, but where the case would revolve around an issue fairly negotiated and clearly incorporated into the contract, that usually ends the story unless you can show fraud or fraudulent misrepresentation.
I don’t know what fee arrangement Apollo had with Wachtell; Wachtell does a fair amount of contingent fee work, particularly in the mergers & acquisitions arena, and it seems like they really believed in their case, as Marty Lipton apparently assured Apollo victory at trial.
But that’s not always the situation. We represent business litigation clients on a contingent fee, most of whom quickly pick up on the idea of a partnership in the litigation. Frankly, if your lawyer isn’t willing to shoulder some of the risk of your lawsuit, you should ask yourself why not.
Making The Facts Fit Your Lawyer’s Strategy:
Apollo arrived at the meeting, according to testimony from Apollo partner Jordan Zaken, focused on the contract’s material adverse effect clause: If Huntsman’s declining numbers constituted an MAE, Hexion could walk away without even paying the deal’s $325 million termination fee. But Wolinsky had to know that was a long shot. Delaware courts have never found a MAE in the context of a merger agreement, and Wolinsky himself helped to litigate the precedent-setting case on the issue, IBP, Inc. v. Tyson Foods, Inc., in 2001.
Instead, Apollo and Wachtell began to consider the combined company’s potential insolvency as a possible way out of the merger. The strategy was certainly intriguing. If the merger would result in an insolvent company, the banks could refuse to finance it, leaving Hexion with no choice but to abandon the deal. And if it were the banks-not Hexion-scuttling the deal, Hexion would be liable for, at most, the breakup fee.
Lawyers are smart, creative and innovative (or should be). They can change their strategies to meet a wide variety of fact patterns.
But facts are stubborn things. Trying to create facts, even in the midst of litigation, create a huge risk that the judge or jury will find your whole case to be a farce constructed for their benefit, which is what happened here: Judge Lamb ruled that insolvency wasn’t even ripe for judgment.
Voiding Your Legal Protections, Like Attorney-Client Privilege:
Wolinsky explained that Wachtell was potentially interested in a formal solvency opinion, but also wanted to hire Duff in a "consultative arrangement to assess the solvency analysis," according to testimony from Duff’s Philip Wisler. The firm would use Duff & Phelps, in other words, for two roles: a litigation consulting team that would provide various financial analyses to assess the possibility of deal litigation, and an opinion team that would be engaged if Hexion decided "to go forward with a particular course of action," namely litigation to end the merger.
From the beginning, Duff’s efforts to separate the consulting and opinion teams were imperfect, at best. Wisler, for instance, attended the May 20 kickoff meeting for the litigation consulting team at Apollo’s New York offices, even though he was to be the author of the insolvency opinion. The same Duff expert performed modeling work for both teams. And litigation team leader Pfeiffer, at Wachtell’s request, e-mailed Wisler various deal models for the opinion analysis; Wisler later testified that he was unaware he was supposed to be walled off from Pfeiffer’s work.
The blurry line between Duff’s consulting and opinion work would later come back to haunt Wachtell in Delaware. Vice-Chancellor Lamb ultimately concluded that Duff’s consulting assignment cast doubt on the objectivity of its solvency opinion. Moreover, the dual role destroyed any potential work-product privilege claim over the Hexion team’s communications with both the Duff litigation consultants and solvency experts. Duff had to provide comprehensive discovery to Huntsman, which was a huge gift to Huntsman’s Vinson & Elkins litigators.
Remember the Watchmen suit where a witness’ testimony was so guarded and unhelpful the Court precluded the witness from testifying on the subject again, thereby warranting summary judgment?
If you misuse or abuse the law’s protections and privileges, you run the risk of having them deemed waived or void by the court, as happened here. It’s the same when clever businesses set up a variety of undercapitalized or alter ego LLCs and S-Corporations to evade liability — odds are good the court will respond by striking the house of cards and seeing what’s left standing, often nothing.