Some MAC Thoughts on Hexion v. Huntsman
AdamsDrafting:
Last June, Hexion Specialty Chemicals announced that it was walking from its $10.6 billion acquisition of Huntsman Corp. on the grounds that the capital structure for the combined entity was no longer viable and would render it insolvent. Hexion filed suit in Delaware, and on September 29, 2008, Vice Chancellor Lamb issued his opinion.
One of Hexion’s claims was that the “Material Adverse Effect” clause under the merger agreement had been triggered. I keep an eye on MAC litigation (I recommend using MAC rather than MAE as your defined term; see MSCD 8.57), as I attempted to address the subject somewhat comprehensively in chapter 8 of MSCD. More often than not the litigation is fact-driven and so of limited interest to me, and that’s the case with Hexion v. Hunstman, but the opinion did contain nuggets relevant to the contract drafter.
Heavy Burden
The court noted that any buyer seeking to invoke a MAE bears a “heavy burden” and has to show that the circumstances in question threaten the target business’s earnings potential in a “durationally-significant manner.” No surprise there—the IBP case (see MSCD 8.3) made that clear.
“Taken As a Whole”
In the Hexion–Huntsman agreement, MAE was defined to mean a material adverse effect on Huntsman and its subsidiaries “taken as a whole.” That led the court to reject the weight Hexion had assigned to problems at two Huntsman divisions in arguing that Huntsman had suffered a MAE. This seems straightforward, but it’s of interest if for no other reason than I can’t recall any recent MAC caselaw on taken as a whole.
Operation of Carve-outs
The definition of MAE contained a carve-out for industry-wide effects, unless they have a disproportionate effect on Hunstman. Hexion argued that determining whether an MAE had occurred required comparing Huntsman’s performance against that of the chemical industry in general. The court rejected…