Case-Study Dows Bid for Rohm and Haas

Dow’s Bid for Rohm and Haas

Question 4: If you were the judge (the honorable William. B. Chandler III) in the Delaware Court of Chancery, how would you resolve this legal dispute?

The CEO of Dow, Andrew Liveris, made a deal with the CEO of Rohm and Haas, Raj Gupta, to acquire Rohm and Haas for $18.8 billion, this deal was announce on July 10, 2008. At that time the deal looked like perfect in line with transformation of Dow to become a producer of high-value specialty chemicals and advanced materials.  Shortly after the announcement of this deal, the global financial crisis hit the market.

This financial crisis also had a huge impact on Dow. Dow’s share price plunged by more than 50%, reported a loss of $1.6 billion in the fourth quarter of 2008, the year-on-year quarterly sales declined with 23% and reported a dramatic reduction in the firm’s operation rate from 87% in 2007 to 44% in 2008. In reaction, Dow announced a restructuring plan in early 2009. This included an elimination of 5,000 jobs, the closure of 20 facilities and divestiture of several non-core businesses. Also Rohm and Haas had to revise their cash flow forecasts.

Based on these developments, Dow announced one day before the scheduled closing day on January 26 to refuse to close the deal. In reaction, Rohm immediately filed a lawsuit in the Delaware Chancery Court. The question now is, how would we resolve this legal dispute if we were the judge?

In order to close the deal, the closing conditions in the merger agreement have to be met. Dow had include limited outs in its agreement with Rohm and Haas, the only out were Dow could rely on appears to be a Material Adverse Effect (MAE) claim (§6.1, 6.2). The question now is whether, based on this claim, Dow is allowed to refuse to close the deal.

The following interpretation of the MAE clause is given in paragraph 3.1 of the merger agreement:

§3.1: A “Material Adverse Effect” means such state of facts, circumstances, event, or change that has had a material adverse effect on the business, operations or financial conditions of Rohm, but shall not include: a) events or changes generally affecting he specialty chemical industry or generally affecting the economy or the financial, debt, credit or securities markets; b) any decline in Rohm’s stock price or any failure to meet internal or published projections.

Dow

Dow wants to refuse to close the deal and argues one day before the scheduled closing that recent material developments have created unacceptable uncertainties on the funding and economics of the combined enterprise. This is due to the crisis in global financial and credit markets together with the failure of Petrochemicals Industries Company of Kuwait (PIC) to fulfill its obligation to complete the formation of the K-Dow joint venture in late December 2008. In this deal Dow was supposed to generate $7 billion of cash.