Monday, November 17, 2014

Delaware Court Ruling on Deal Conditions in the Apollo-Cooper Merger

A recent Delaware court ruling deals with matters involving the “unraveling of the Agreement and Plan of Merger (the “Merger Agreement”) by which a large Indian tire manunfacturer—[Apollo]—was to buy a large American tire company—Cooper Tire & Rubber Company (“Cooper”).” Billed as among the largest overseas acquisitions by an Indian company, Apollo was to acquire all the shares of Cooper. However, once the deal was announced, the share price of Apollo went into a steep fall. More importantly, the deal received significant opposition from Cooper’s affiliate in China, Chengshan Cooper Tires (“CCT”) and its chairman as well as employees. In parallel, the deal also faced resistance from Cooper’s own workers’ union in the US, United Steelworkers (“USW”).

Although both Apollo and Cooper attempted for several months to address the concerns of CCT as well as USW, they did not succeed, and the Merger Agreement was finally terminated at the end of last year. Cooper’s efforts to seek specific performance from the Delaware courts did not succeed.

In the current round of litigation, Apollo requested the court for a declaration that “the conditions to closing had not been satisfied prior to the trial of this action, and Cooper [was], thus, not in a position to close the merger”. In order to consider whether this declaratory relief can be granted, the Chancery Court in Delaware examined the provisions of the Merger Agreement and specifically whether Cooper had satisfied the conditions precedent to closing the merger. The parties raised a number of issues, including whether a marketing period had taken place (to enable Apollo’s financing banks to make the debt to finance the merger), and whether several conditions precedent has been satisfied, such as the lack of a material adverse effect (MAE), and Cooper’s compliance with representations and warranties as well as covenants.

In its core analysis, the court considered two principal aspects. First, it found that during the period commencing the execution of the Merger Agreement, Cooper had failed “to cause CCT—its largest subsidiary—to conduct business in the ordinary course”. Hence, it had breached an important term of the Merger Agreement. Second, it found that MAE had occurred, due to which Apollo had no obligation to close the transaction. Hence, the court favoured Apollo and found that due to the lack of satisfaction of the conditions precedent, it had not committed a breach of the Merger Agreement, and was therefore entitled to the declaratory relief it sought.

The Chancery Court’s opinion is important as it sheds some light on the manner in which merger documents are to be interpreted. For instance, even though the MAE clause came with certain exceptions (such as the impact of the execution and delivery of the Merger Agreement on employees and labour unions), the court ruled that “it is axiomatic that contractual provisions must be read to make sense of the whole. … In other words, the logical operation of the definition of Material Adverse Effect shifts the risk of any carved-out event onto Apollo, unless that event prevents Cooper from complying with its obligations under the Merger Agreement; the parties agreed not to excuse Cooper for any such breach”.

Given the history of this litigation, it is possible that an appeal may be preferred against this decision. At the same time, the court’s opinion provides some guidance to company that are engaged in negotiating such complex documentation in M&A deals. While parties in India are becoming accustomed to drafting and negotiating such documentation, they have almost never been tested before the Indian courts. More importantly, it provides lessons for Indian companies engaging in overseas acquisitions (particularly in the US) is structuring their legal documentation carefully so as to ensure proper deal conditions and other protective devices that might step in to save them in case of a dispute.

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