Hexion Specialty Chemicals Inc. CEO Craig Morrison pulled no punches when he testified as the first witness in the case Huntsman Corp. brought against his company saying Hexion and Huntsman would have "a capital structure that's insolvent, that doesn't work."
Huntsman filed suit against rival Columbus, Ohio-based Hexion, which is seeking to walk from its $10.3 billion agreement to acquire rival specialty chemical maker Huntsman. The trial is scheduled to run for six days before Vice Chancellor Stephen Lamb of the Delaware Court of Chancery.
Continue reading below
Morrison focussed on the issue of insolvency under questioning from Marc Wolinsky, one of Hexion's lawyers and a partner at Wachtell, Lipton, Rosen & Katz in New York. Morrison said that Huntsman has $1 billion more in debt than it did when the deal was signed July 2007. That increase and Huntsman's 38% decline in profits in the first quarter of 2008 made Josh Harris, a founding partner of Apollo Management LP, the investment fund that owns Hexion, "increasingly concerned about the solvency of the combined entity," a requirement for the parties to close the deal.
That concern led Apollo to hire Wachtell as litigation counsel and Duff & Phelps to provide a solvency -- or, in this case, insolvency -- opinion. After the financial adviser provided that opinion, Hexion and Apollo sued in Delaware in June for a judgment allowing them to walk from the deal. Huntsman claims the insolvency opinion is a mere smokescreen for Apollo's remorse at signing the deal.
But Morrison said that he and his management team had strong incentive to close the deal. Not only would they and Huntsman's managers run one of the world's largest chemical companies, Hexion senior management stood to pocket $35 million if the deal closed and to make even more money thereafter depending on the performance of the combined company. Nevertheless, Morrison said in concluding his direct testimony, "When you're $1 billion higher in debt and off by 35% in your projections, the deal is not going to withstand that kind of downturn."
David Harvin, one of Huntsman's lawyers and a partner at Vinson & Elkins LLP in Houston, sought to puncture that assertion in cross-examining Morrison. Harvin suggested in his questioning that Apollo had decided to walk from the deal because it believed the rate of return on the transaction would be unacceptably low. Harvin asked Morrison if Duff & Phelps's "charge was to help Apollo get out of this transaction" by rendering the insolvency opinion, a contention that Morrison denied. Harvin also noted that Hexion and Apollo didn't tell Huntsman about their concerns until the buyers announced that they were walking from the deal.
Neither Morrison nor the lawyers who examined him focused on Hexion's other major argument in the case, the contention that Huntsman had suffered a material adverse effect that would allow Hexion to walk. Morrison stepped down from the witness stand just a few minutes after noon, with Hexion CFO William Carter following him. - David Marcus
