Will Rohm & Haas Beat Dow in Court? Not So Fast 35 comments
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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 (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
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Taking CSCO as an example, they have an 88B mkt cap with $30B in cash and $5B (now 9) in debt. Compare to DOW with $3B in cash, $7.5B in mkt cap, and almost $12B in debt. CSCO could extinguish all of their debt tomorrow if they wanted to. DOW ... not so much.
I took the side of DOW coming out in the long run until he uttered the magic words "BENEFIT OF THE BARGAIN".
I don't know how to play ROH, but DOW seems to be royally screwed. I thought it was just a short-term perspective regarding a stiff penalty, but inject those magic words into the picture, and DOW can likely be taken over by ROH at any price they wish. That to me will be the more likely outcome. Unfortunately, I still think that will cause ROH's shares to crash, given their extravagant valuation.
If all this goes through with ROH maintaining their $78, I would imagine that Buffett would get involved. Wasn't his financing to DOW also not contingent upon the Kuwaiti deal? It would be interesting to see what comes out of the sage's play-book here.
The story here looks more interesting as it plays out.
I was a Dow shareholder, so it hurts, but failure to close this would be a disaster.
Courts are not here to judge the macroeconomic consequences of mergers, beyond anti-trust.
Dow's only out will be financing. If their financiers renege, that may give them an out.
Finally, DOW and its lawyers just look silly when they try to float the argument that that 'global economic conditions' prevent closing the merger: DOW has the committed bridge financing to close tomorrow and the chance that Chandler will be suckered into looking into the 'crystal ball' of 'global economic conditions' a year or more down the road is zero.
PS - Liveri's legal stunt is designed to save only one job at DOW: his own. After all, if he trashes the share price, the dividend and the credit rating, how can the board keep him around? Liveri's play here is to get a 'hail-mary' equity investor into the mix over the next 30-90 days of legal 'stall' at a cost to DOW shareholders of $3 Million per day PLUS damages.
Liveris is clearly NOT acting in the interest of DOW shareholders and should be removed by the board.
I do not want to sound like a hick here but there are many thousands of us (Dow employee's) living next door throughout north America. We volunteer for and financially support some of your children's sports and school programs. We pay big taxes ! Are you sure you want these jobs (US) to go away ? Many good people served and died for this county. Did they sacrifice themselves so that a few could be extremely wealthy, while the larger population is resolved to be servants to the few surviving self serving kings ? This does not sound like independents to me. Black and white only relates to piano keys. American law must be for Americans !
Mr. Sullivan's article is a nice overview of the equitable relief issues at play here, but I believe Mr. Sullivan, like Joe Nocera of the NYT, is too quick to assume that completing the deal will "jeopardize 60,000 jobs" and destroy "billions of dollars of value."
Dow's problem is that completing the deal will leave it with a huge overhang of debt even as the markets for commodity and specialty chemicals struggle against the global recession. In a prolonged recession, that could make it impossible for Dow to service the deal-related debt, resulting in a bankruptcy filing.
As a general rule, bankruptcy proceedings do not "destroy value" (other than transaction costs and other secondary effects). Bankruptcy proceedings TRANSFER value from equity holders to debt-holders. In fact, in an efficient market, the value transfer generally takes place long before the bankruptcy filing itself as stock and bond prices react to the declining fortunes of the company. All the bankruptcy proceeding does is transfer title, long after the values have settled out.
Nor do bankruptcy proceedings necessarily result in layoffs. In fact, the goal in the U.S. is to preserve value for the benefit of creditors and that means preserving businesses with operating profits. To the extent that operational restructuring occurs simultaneous with bankruptcy proceedings, it is more likely that operating problems led to the bankruptcy, not the other way around. At any rate, if Dow completed the deal with Rohm & Haas on the agreed terms and declared bankruptcy the very same day, it is absurd to think that 60,000 jobs would go away.
As the judge in Delaware considers the equities involved, the primary issue is whether he should enforce a transfer of wealth from DOW shareholders to ROH shareholders that DOW agreed to. If forcing DOW to abide by its agreement increases the likelihood that a subsequent transfer of wealth may occur from DOW's shareholders to its debt-holders, I don't see how that's terribly relevant from a public policy perspective. At most, the judge should consider the direct costs (lawyer's fees, transaction costs, costs of financial distress) that are a concomitant of bankruptcy, but not the potential value transfer between Dow's shareholders and its lenders.
At any rate, if the judge decides on a remedy (other than specific performance) that causes DOW's shares to rise from its current levels, you can be pretty sure that he unilaterally effected a transfer of wealth from ROH to DOW.
Some commentators have suggested a $1-$2 billion payment from DOW to ROH as a "remedy", which would be a win for DOW and a miscarriage of justice for ROH. A truly equitable solution would involve a remedy ($5+ billion) that would make DOW indifferent between 1) paying the damages, 2) closing the deal on the original terms or 3) offering ROH a new deal using cash and DOW stock equal to original terms, or at least satisfactory to the ROH shareholders. The latter option would greatly alleviate the financial pressure DOW would face post-closing, honor the sanctity of contract and satisfy the greatest number of equities. It would also mean that ROH's current shareholders would likely end up with a majority of DOW's shares, as in Mr. Eisenberg's clever suggestion here:
seekingalpha.com/user/...
Full disclosure: I own a small position in ROH, whose total value and risk/reward characteristics approximate a lottery ticket. So while I'm rooting for ROH economically, this post is motivated by what I think is the right answer from the perspective of public policy and fairness (equity).
If DOW were smart, which it used to be before the ROH deal, it should argue in court that the bankruptcy of DOW would hurt national security.
Politicians would take your argument and run with it, but this site is about capitalism, not politics. Everything you wrote is worthy of mention, especially when constructing social policy, but that is not what this site is about.
Regarding your arguments about Dow employees, I'm sure the judge will take your plight into account. More than likely, his ruling will not disrupt your job situation more than what is called for in this dreadful economic environment. Let me parse that - the judge's ruling will probably not result in your job loss, but after that ruling passes, you'll be subject to the economy, and it is not at all your friend right now.
On Feb 23 07:35 AM Employee MI wrote:
> Hey y'all,
>
> I do not want to sound like a hick here but there are many thousands
> of us (Dow employee's) living next door throughout north America.
> We volunteer for and financially support some of your children's
> sports and school programs. We pay big taxes ! Are you sure you
> want these jobs (seekingalpha.com/symbo...) to go away ?
> Many good people served and died for this county. Did they sacrifice
> themselves so that a few could be extremely wealthy, while the larger
> population is resolved to be servants to the few surviving self serving
> kings ? This does not sound like independents to me. Black and
> white only relates to piano keys. American law must be for Americans
> !
In other words, no real risk of bankruptcy at all.
IMO, The Deleware Chancery Court will quickly reject any argument of a 'prospective' Chapter 11 because the only possible support for such an argument would require Chandler to SPECULATE on the state of the DOW/ROH business (and the economy) two or three years down the road.
PS - Paulson correctly pointed out that the elimination of the DOW dividend alone would provide the bulk of debt service on the merger financing and many other comments have correctly stated that the corporate debt market is ready, willing and able to refinance the bridge loan.
So perhaps the only 'reasonable' response to DOW's attempt to spark a media discussion of Chapter 11 is : LOL, LOL, LOL.
On Feb 24 06:00 PM Robert H. Heath wrote:
> Not surprisingly, the heat-to-light ratio on this topic is pretty
> high.
>
> Mr. Sullivan's article is a nice overview of the equitable relief
> issues at play here, but I believe Mr. Sullivan, like Joe Nocera
> of the NYT, is too quick to assume that completing the deal will
> "jeopardize 60,000 jobs" and destroy "billions of dollars of value."
>
>
> Dow's problem is that completing the deal will leave it with a huge
> overhang of debt even as the markets for commodity and specialty
> chemicals struggle against the global recession. In a prolonged recession,
> that could make it impossible for Dow to service the deal-related
> debt, resulting in a bankruptcy filing.
>
> As a general rule, bankruptcy proceedings do not "destroy value"
> (other than transaction costs and other secondary effects). Bankruptcy
> proceedings TRANSFER value from equity holders to debt-holders. In
> fact, in an efficient market, the value transfer generally takes
> place long before the bankruptcy filing itself as stock and bond
> prices react to the declining fortunes of the company. All the bankruptcy
> proceeding does is transfer title, long after the values have settled
> out.
>
> Nor do bankruptcy proceedings necessarily result in layoffs. In fact,
> the goal in the U.S. is to preserve value for the benefit of creditors
> and that means preserving businesses with operating profits. To the
> extent that operational restructuring occurs simultaneous with bankruptcy
> proceedings, it is more likely that operating problems led to the
> bankruptcy, not the other way around. At any rate, if Dow completed
> the deal with Rohm & Haas on the agreed terms and declared bankruptcy
> the very same day, it is absurd to think that 60,000 jobs would go
> away.
>
> As the judge in Delaware considers the equities involved, the primary
> issue is whether he should enforce a transfer of wealth from DOW
> shareholders to ROH shareholders that DOW agreed to. If forcing DOW
> to abide by its agreement increases the likelihood that a subsequent
> transfer of wealth may occur from DOW's shareholders to its debt-holders,
> I don't see how that's terribly relevant from a public policy perspective.
> At most, the judge should consider the direct costs (lawyer's fees,
> transaction costs, costs of financial distress) that are a concomitant
> of bankruptcy, but not the potential value transfer between Dow's
> shareholders and its lenders.
>
> At any rate, if the judge decides on a remedy (other than specific
> performance) that causes DOW's shares to rise from its current levels,
> you can be pretty sure that he unilaterally effected a transfer of
> wealth from ROH to DOW.
>
> Some commentators have suggested a $1-$2 billion payment from DOW
> to ROH as a "remedy", which would be a win for DOW and a miscarriage
> of justice for ROH. A truly equitable solution would involve a remedy
> ($5+ billion) that would make DOW indifferent between 1) paying the
> damages, 2) closing the deal on the original terms or 3) offering
> ROH a new deal using cash and DOW stock equal to original terms,
> or at least satisfactory to the ROH shareholders. The latter option
> would greatly alleviate the financial pressure DOW would face post-closing,
> honor the sanctity of contract and satisfy the greatest number of
> equities. It would also mean that ROH's current shareholders would
> likely end up with a majority of DOW's shares, as in Mr. Eisenberg's
> clever suggestion here:
>
> seekingalpha.com/user/...
>
> Full disclosure: I own a small position in ROH, whose total value
> and risk/reward characteristics approximate a lottery ticket. So
> while I'm rooting for ROH economically, this post is motivated by
> what I think is the right answer from the perspective of public policy
> and fairness (equity).
>
>
>
>
Scenario1
> DOW are forced to complete the deal at full price $78/sh
Scenario2
> Dow wriggle out but with a hefty fine for breach likely to be in the 25-30% range = $4-5B [$20-25/sh].
> BASF or DuPont step-in and snap ROH up for $50-55/sh – I am quite sure they are poised to do so if DOW crumble.
> Total to ROH holders = $70-80/sh
End Game
DOW - either way, they end up $4-5BN worse off - either they overpay for ROH and cannot extract the value in line with their original valuation model; OR they pay the fine for breach
ROH – either way, ROH end up with similar payment for their stock – either all from DOW if the deal goes ahead, or part DOW [fine] and part BASF/DuPONT if DOW break original deal.
On Feb 27 07:12 AM the surfer wrote:
> I am bemused by the behavior of both the DOW and ROH stock prices.
> The road is long, and the view is foggy but the end game is the same
> either way :
>
> Scenario1
We are indeed in agreement and thanks for the additional observations, amplifying the point.
On Feb 26 10:48 AM HIGHWATER 888 wrote:
> We are, I think, on the same page with respect to the inane 'spin'
> that completing the merger of DOW/ROH would risk a Chapter 11 bankruptcy
> of the merged entity and the loss of "60,000 Jobs". But before we
> go too far down the road of 'sweet reasonableness' -- by dignifying
> the boogy-man invocations by DOW of the specter of Chapter 11-- perhaps
> we should take note of the fact that the "Z SCORE" of the merged
> entity would probably be in a range of 2.4 to 2.8.
>
> In other words, no real risk of bankruptcy at all.
>
> IMO, The Deleware Chancery Court will quickly reject any argument
> of a 'prospective' Chapter 11 because the only possible support for
> such an argument would require Chandler to SPECULATE on the state
> of the DOW/ROH business (and the economy) two or three years down
> the road.
>
> PS - Paulson correctly pointed out that the elimination of the DOW
> dividend alone would provide the bulk of debt service on the merger
> financing and many other comments have correctly stated that the
> corporate debt market is ready, willing and able to refinance the
> bridge loan.
>
> So perhaps the only 'reasonable' response to DOW's attempt to spark
> a media discussion of Chapter 11 is : LOL, LOL, LOL.
>
> On Feb 24 06:00 PM Robert H. Heath wrote:
Since FEB. 2 --the date on which I first called-out your 'long and wrong' hype on DOW-- you have graced your investors with an additional 46% loss (DOW 02/03/09 High of $13.15).
Those 50% losses are hard to recoup Todd, and --although this market is forcing us all to swim in the 'deep end of the pool'-- my bet is that your 'investors' will find it hard to ignore your water-wings in the future.
So 'man-up' Todd and give your 'investors' some real help -- in this market, I'm sure only a handful can make use of the quick tax losses that you seem so adept at creating.
Tell us Todd, what are your credulous 'investors' to do now?
My target for DOW (stated in my post of Feb. 2) remains $5.
"This company[DOW] is being driven into the ground by its leadership. They have presided over a market capitalization drop of over $30 billion. They have exposed the company and its shareholders to an $18 billion [acquisition] with uncommitted and unaffordable financing. The rating agencies have lowered the company's debt rating to effectively junk. This company's leadership has presided over a cut in the quarterly dividend ... the first time such an abomination has EVER [occurred]. And within the next month they'll waltz into Delaware's Chancery Court and try to convince a judge that they don't need to honor an air-tight agreement to acquire Rohm & Haas for $ 78 per share ... just because bad things happened that they didn't foresee. And while they're waiting for the court date to come around, they're running up a bill of about $3 Million per Day to Rohm & Haas shareholders for not having consummated the acquisition when previously agreed."
Prepostorous. I have no position at all in ROH.
DOW has caved and will be forced to close at $78.
It also seems likely that the Paulson/Haas Trust 'Preferred' will put additional downside pressure on the DOW common. DOW closed at $6.33 and my target for DOW remains $5.
Tell us Todd, are your hapless investors still waiting for DOW to "surge"?
Or is a crowd starting to form outside your office carrying pitchforks and torches?
LOL.