Will Rohm & Haas Beat Dow in Court? Not So Fast

Includes: DOW, ROH
by: Todd Sullivan

I have been trying to make this point for a while. Here is another take on it with regards to the Rohm & Hass (ROH) / Dow Chemical (NYSE:DOW) litigation. It is not the slam dunk some seem to think it is. This is from Peter Friedman, a law professor and former Wall Street attorney. [Link to original post]

Courts are supposed to do justice even if doing so costs individuals a lot of money.

Joe Nocera writes in the New York Times that to even suggest “that maybe, just maybe, deals that stop making sense ought to be called off, or at least rejiggered, especially in the middle of a once-in-a-lifetime financial crisis - invites withering scorn, especially if you say it to someone on Wall Street or in the legal profession.”

I’ve worked in the legal profession on Wall Street, and I like to think that when what the law seems to compel makes no sense the law has the capacity to adjust, to do justice instead of nonsense. My thinking isn’t purely the product of naivete and idealism. There really is a legal (or, rather, for the lawyers among my readers, an equitable) argument to stop the particular deal Nocera is writing about. Moreover, that argument is precisely that the deal makes no sense to an interest — the public — much more important than the individuals who would profit mightily from the deal.

Here’s the deal: “Last summer, the Dow Chemical Company won a heated auction for a well-run, highly valued specialty chemical company called Rohm & Haas. . . . The price it agreed to pay was high: $78 a share in cash, a 74 percent premium, for a total of about $15.3 billion.” The problem is that in light of the global financial crisis and a collapse of the chemical business, if the deal goes through the resulting Dow/Rohm & Haas entity “could be badly damaged, saddled with high-priced debt in a horrible business environment, and a junk bond credit rating.”

What does that mean? It means that if the deal goes through Dow would need to strip itself to the bare bones to survive or would collapse altogether. This while “Dow Chemical employs around 45,000 people; Rohm & Haas employs more than 15,000.” This while “the American chemical industry - which was suffering even before the financial crisis because of the rise of commodity chemical companies in China and elsewhere - is going to be in a bad place for the foreseeable future.” This “[a]t a time when every job matters, and when the economy is holding on for dear life . . .”

In return, the shareholders of Rohm & Haas will get $15.3 billion. According to Answers.com, ‘the Haas family, descendants of one of the company’s two founders, continue to control a substantial ownership interest of nearly 30 percent” of those shares. So the the Haas family and the other Rohm & Haas shareholders are suing for “specific performance” of the contract with Dow; that is, they are asking a Delaware court to order Dow to go through with the deal to buy Rohm & Haas for $15.3 billion.

I’m not sure why there’s “withering scorn” for the suggestion that a court might refuse to enforce a deal that threatens 60,000 jobs and, as Nocera writes, would probably destroy “billions of dollars of value.” It’s no stretch to suggest that at a time of global economic collapse and at a time when President Obama is fighting to inject billions of dollars into the economy, the deal is not in the public interest.

Why am I willing to defy the withering scorn of the Wall Street experts? Because specific performance, the remedy Rohm & Haas is asking the court to grant, is an what is known as an “equitable” remedy. In order to show it is entitled to equitable relief, Rohm & Haas must show that the outcome makes sense even after the court balances “all the equities” involved. In other words, the court must determine whether, considering all of the interests at stake in the lawsuit, ordering the deal to go through would be more fair than unfair. The public interest plainly is one of those interests the court must consider. Because the deal poses such a great threat to the public interest, the equities do not favor the deal; the equities, in fact, weigh heavily against enforcing the contract between Dow and Rohm & Haas.

In legalese, Corporate and Commercial Practice in Delaware confirms that this is the law in Delaware:

[I]f specific performance of a contract would cause significant public harm, then the Court has discretion to deny such relief, even where a breach of contract and substantial harm to plaintiff have been established . . .

1-12 Corp & Commercial Practice in DE Court of Chancery § 12.03 (Matthew Bender 2008), citing Alro Assoc., L.P. v. Hayward, CA 19544 (Del. Ch. Oct. 31, 2003), mem. op. at 22-26 (holding that where plaintiff had established breach of contract by Delaware Department of Transportation and where Court had assumed irreparable harm to plaintiff, specific performance was not appropriate due to a balance of equities weighing strongly in favor of public interest).

Courts really are supposed to do justice notwithstanding the fact Wall Street expresses withering scorn at the thought.

Now, Dow is trading as if it will be forced to complete the transaction after the trial in March. Should that not be the case, shares should surge...

Disclosure: Long DOW