The Hexion matter concerned a claimed breach of the Material Adverse Change (“MAC”) covenant and Specific Performance arising from a leveraged acquisition the buyer sought to abandon after market conditions deteriorated. On July 12, 2007, Hexion—then approximately 92% owned by the private equity firm Apollo—agreed to acquire Huntsman for $28 per share in cash, a transaction valued at approximately $10.6 billion including assumed debt. To prevail in a competitive auction, Hexion accepted unusually seller-favorable terms: the merger agreement contained no financing contingency, required Hexion to use reasonable best efforts to consummate the financing, capped liquidated damages at $325 million for most breaches, and exposed Hexion to uncapped damages for any knowable and intentional breach of covenant.
After signing, Huntsman reported disappointing quarterly results. Beginning in May 2008, Hexion and Apollo developed a strategy to exit the transaction by asserting that Huntsman had suffered a Company Material Adverse Effect and later obtaining an insolvency opinion from Duff & Phelps concluding that the combined company could not be financed. On June 18, 2008, Hexion filed suit seeking declarations that (i) it was not obligated to close if the combined company would be insolvent and that its liability was capped at $325 million; (ii) Huntsman had suffered a MAC; and (iii) Apollo bore no liability. Huntsman counterclaimed for specific performance and for a declaration that Hexion had knowingly and intentionally breached the agreement.
On the central MAC question, Huntsman retained Professor Mark Zmijewski as its expert, supported by Keith Bockus. Professor Zmijewski evaluated the contractual terms consistently with Regulation S-X and the Management’s Discussion and Analysis (“MD&A”) framework governing public-company financial statements. Under that framework, operating performance compares each fiscal period with the prior year’s corresponding period, not with management forecasts. Applying that methodology, Professor Zmijewski a analyzed the extent to which Huntsman’s 2007 EBITDA was below its 2006 level and its projected 2008 EBITDA, and whether those results were consistent with a durationally significant decline in earnings power and sufficient enough to establish an MAC.
Professor Zmijewski’s analysis was instrumental because Hexion’s MAC case rested principally on Huntsman’s failure to meet management forecasts and on a peer-comparison performed by Hexion’s expert, Telly Zachariades. The court rejected the forecast theory on contractual grounds, which expressly disclaimed any representation or warranty as to Huntsman’s projections and thus allocated forecast risk to Hexion. On the peer comparison, Professor Zmijewski evaluated whether Huntsman’s deviations from the industry benchmarks were statistically significant and examined the reliability of the downward bias introduced by defendant’s expert, which were calculated by the opposing expert by comparing EBITDA measures calculated on inconsistent bases.
The Court held that Huntsman had not suffered a Material Adverse Change and that Hexion had knowingly and intentionally breached its covenants. It ordered Hexion to specifically perform all its obligations under the merger agreement, other than the ultimate obligation to close, including its obligations to pursue the financing and antitrust approval, and enjoined Hexion from further action that could reasonably be expected to impair the financing.