Legal News

Rohm & Haas: Dow Knew About Recession When it Agreed to Buy Us

By Dan Slater

Another sign of the times: A company declining to go ahead with a planned merger due to alleged uncertainties with funding and the “economics of the combined enterprise.”

Rohm & Haas has sued Dow Chemical in an attempt to force Dow to close its $15.3 billion merger agreement, reports the Journal. The suit, filed Monday in Delaware court, alleges Dow is intentionally breaching its obligation to complete the deal — which was agreed to last July — even though it’s received all regulatory approvals and has the money available.

Earlier Monday, Dow confirmed that it doesn’t intend to close the merger by a Tuesday deadline. In a statement, it blamed “unacceptable uncertainties on the funding and economics of the combined enterprise” for the decision to put off the deal. Factors cited by Dow include a slump in chemicals demand that started in the fall, as well as last month’s implosion of Dow’s planned $17.4 billion joint venture with Kuwait.

Interestingly, however, when Dow agreed to the deal, the state of the economy was already looking fairly bleak. In the first paragraph of the factual allegations, Rohm & Haas writes that, by July 2008 — the month the deal was signed — “the credit markets were already in turmoil and the risk that the U.S. and world economies could be entering a deep and prolonged recession was widely acknowledged. Dow nonetheless agreed to pay a very substantial premium for Rohm and Haas because it recognized that the acquisition of Rohm and Haas presented a once in a lifetime opportunity to transform Dow into the world’s premier specialty chemical company. In the words of Dow’s Chairman and CEO, Andrew Liveris, Rohm and Haas ‘is a jewel. . . . There aren’t many jewels out there, this is one of them.’ ”

McCarter & English partner Howard Berkower, a merger lawyer who’s not involved in the deal, agrees that Rohm & Haas might be on firm footing here. This morning, Berkower told the LB: “The merger agreement is drafted in a way that’s favorable to Rohm & Haas, including the definition of what constitutes a material adverse effect. The definition excludes general economic conditions and financial markets in general.”

A court, says Berkower, could order specific performance, in other words, that the deal go through. “There’s a fairly clear provision for specific performance,” continued Berkower, “unlike, for example, the Hexion-Hunstman agreement, which had pretty squirrelly language on specific performance. I can understand why courts are generally loathe to force a company to close a deal, but, as us lawyers say, a contract is a contract. At the end of the day, Dow made its bed, so now it might need to lie in it.”

Full post as published by Law Blog - WSJ.com on January 27, 2009 (boomark / email).