## Facts

- Hexion Specialty Chemicals, Inc., controlled by Apollo funds, agreed to acquire Huntsman Corporation in an all-cash merger at $28 per share (about $10.6 billion).
- The merger agreement had no financing condition, imposed “reasonable best efforts” duties to obtain financing and close, required strong steps to obtain antitrust approval, and contained a narrow MAE definition with risk-allocation carve-outs.
- Debt financing was supported by commitment letters from Credit Suisse and Deutsche Bank.
- After Huntsman reported disappointing 2008 first-quarter results, Hexion and Apollo revised their financial expectations for the deal.
- Apollo retained Duff & Phelps to assess solvency of the combined entity using projections and assumptions that materially reduced EBITDA and otherwise increased perceived liabilities and risks, without Huntsman’s input.
- Duff & Phelps issued an opinion that the combined company would be insolvent under conventional solvency tests.
- Hexion sued for declarations that it need not close if the combined company would be insolvent and that its exposure was capped at the $325 million reverse termination fee.
- Huntsman counterclaimed that Hexion breached its efforts covenants and sought equitable relief (including specific performance) and a declaration that Hexion’s breaches were knowing and intentional, eliminating any damages cap.

## Issues

1. Whether Huntsman suffered a contractual Material Adverse Effect excusing Hexion’s obligation to close.
2. Whether Hexion complied with its “reasonable best efforts” and related covenants to obtain financing, secure approvals, and consummate the merger.
3. Whether Hexion’s conduct constituted a “knowing and intentional” breach, defeating reliance on the reverse termination fee as an exclusive remedy.
4. Whether alleged insolvency of the combined entity created a contractual “solvency out” or otherwise excused closing or funding.
5. What remedies were available, including whether the court could compel actions to obtain financing or compel closing.

## Decision

- The court held Huntsman had not suffered an MAE under the merger agreement.
- The court found Hexion knowingly and intentionally breached multiple efforts-related covenants and the implied covenant of good faith and fair dealing by acting to undermine, rather than secure, financing and closing.
- The court rejected the existence of any contractual financing out or solvency out and declined to declare, on the record presented, that potential insolvency excused performance; insolvency at closing was not ripe for declaratory relief.
- The court denied Hexion’s requested declaratory relief, including any declaration limiting liability to the reverse termination fee.
- The court ruled Huntsman was not contractually entitled to an order compelling Hexion to consummate the merger itself, but granted specific performance requiring Hexion to use reasonable best efforts to satisfy and enforce the financing commitments, including pursuing enforcement against the lenders if needed.
- Because the breaches were knowing and intentional, Huntsman was not limited to the $325 million fee and could pursue uncapped monetary damages if the merger did not close.

## Legal Principles

- An MAE clause in a public-company merger agreement is applied under a demanding standard; short-term earnings weakness typically does not constitute an MAE absent a durationally significant deterioration in long-term earnings power, especially where carve-outs allocate cyclical and industry risks to the buyer.
- Where a merger agreement lacks a financing condition, the buyer bears the risk of financing difficulty and cannot unilaterally create a financing or solvency escape from other provisions and overall deal structure.
- “Reasonable best efforts” covenants impose affirmative obligations to take concrete steps to obtain financing, satisfy conditions, and close; conduct that predictably impairs financing can constitute breach and support a finding of bad faith.
- A reverse termination fee framed as liquidated damages may not cap liability where the agreement excludes “knowing and intentional” breaches from the limitation; such breaches can expose the buyer to uncapped damages.
- Even when specific performance of closing is contractually unavailable, a court may order specific performance of efforts covenants, including requiring the buyer to pursue and enforce financing commitments.

## Conclusion

The court enforced the merger agreement’s allocation of closing risk to the buyer: Huntsman suffered no MAE, Hexion had no contractual solvency or financing out, and Hexion’s actions to derail financing were knowing and intentional breaches that triggered specific performance of financing efforts and removed any damages cap based on the reverse termination fee.


Hexion Specialty Chems., Inc. v. Huntsman Corp., 965 A.2d 715 (Del. Ch. 2008)