February 4, 2009
Dow's Busted Deal for Rohm and Haas
Dow Chemical agreed to buy Rohm and Haas and signed a very, very seller biased contract. Now Dow wants out and seeks court sanction to do so. Is there room in the contract language? The Material Adverse Change Clause is very tight, excluding market conditions, even if they have a disproportionate effect on Dow. The remedy clause purports to give Rohm and Hass a contractual right to specific performance. Dow's only nugget in the language is an anti-third party beneficiary rule that may stop Rohm from claiming damages to shareholders from the loss of a purchase premium and that may stop Rohm shareholders from suing under the contract for damages. Dow has three arguments: 1) There was no breach; 2) The specific performance clause is not binding on a court; and 3) Rohm and Haas cannot argue for damages to its shareholders. 3) looks to be a winner; 1) and 2) depend on an appeal to the inherent power of a court to look beyond contract language, an uphill struggle. 2) appeals to a court's "equity powers" to order or not order specific performance that, arguably cannot be limited by contract. 1) will appeal to fringe contract doctrine cases (sometimes from the House of Lords or the King's Bench) that one may find in a first year contracts case book -- frustration of purpose and impossibility defenses (add, perhaps a void as a matter of public policy based on irreparable harm). At issue is an intriguing question for a judge. When is a contract "too tight" to be enforced? Is there some limit to using judges to enforce contracts that, due to events, rip the soul out of one party and put the other party in paradise?
February 4, 2009 | Permalink
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Its easy to see what the market expects to happen: 45% difference between Rohm and Hass trading price of $53.70 and the $78 that Dow agreed to pay for the company. Only the the biggest of speculators (or those with better inside knowledge) are betting this deal will close, at least at the original contract terms.
Posted by: Mike Rosemeyer | Feb 5, 2009 6:42:35 AM
Since Dow's position in the deal would be to gain marketshare due to buying the specialized chemical company, Rohm and Hass, I do not think the frustration of purpose arguement holds up. Dow would still gain marketshare, but ouch what a price to have to pay. The signs may have been there but no one (neither party) saw the economic downspiral on the near horizon. Dow entered into a really bad contract, to bad for them and us as it will be another blow to the economy in the dollars and sense aspect of things. Dow mistakenly thought they had the upper hand in this contract agreement, the Kuwaities withdrew thier financial backing which was another blow to Dow.
Posted by: Ed M. | Feb 27, 2009 9:50:16 AM