Dow Chemical Co. makes a compelling case that it shouldn't be forced to complete its acquisition of Rohm and Haas Co. in an answer the chemical giant filed with the Delaware Court of Chancery last week. Were Chancellor William B. Chandler III to force Dow to close the $15.3 billion deal, he might push the combined company into bankruptcy, Dow claims plausibly in an effort to defeat Rohm and Haas' request for specific performance.
The defendant sets the issue in the broadest possible terms. The issue, it says, isn't whether Chandler should hold Dow to the terms of the contract; it's "whether the forced integration of tens of thousands of jobs and the judicial creation of a new entity is equitable considering all of the legal interests." In a column in The New York Times business section Saturday, Joseph Nocera applauded this logic. "While it may not ultimately be the winning argument," he wrote of Dow's case, "it does have common sense on its side. Too bad that doesn't count for much anymore."
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Common sense may in fact count for a lot if the Dow case goes to trial; the Court of Chancery is a court of equity, and as such its judges have broad leeway in fashioning remedies -- in other words, using common sense. Vice Chancellor Leo E. Strine Jr. did force Tyson Foods Inc. to complete its multibillion purchase of IBP Inc. in 2001, but Tyson Foods CEO John Tyson testified to Strine that he still thought the deal made sense even though his company (read: his imperious father) wanted to kill it. Those Oedipal overtones were critical to the logic of the remedy Strine fashioned, and they don't exist in the Dow-Rohm and Haas case.
But that doesn't mean Dow should be spared the consequences of its actions. Perhaps the company really would land in Chapter 11 if it had to go through with its acquisition of Rohm and Haas. In that event, of course, Dow's shareholders would be wiped out. They should suffer pain if their company is allowed to walk from the deal -- after all, Dow's management agreed to acquire Rohm and Haas as part of a dramatic restructuring that shareholders could have protested or that should have moved the truly skeptical to sell.
And so if Chandler finds that Dow doesn't have the right to walk from the deal, he should penalize the party that failed to monitor Dow's management by forcing the company to issue a significant portion of its equity to Rohm and Haas -- perhaps 20% or 25%, which would amount to around $2 billion. That wouldn't make Rohm and Haas whole for the significant premium it would lose if the deal fell through, but it would show that Delaware is sensitive to the plight of the companies' workers, an important political consideration, and that the Court of Chancery believes that parties should not enter into contracts lightly.
Such a remedy would also make the costs to shareholders of overzealous dealmaking absolutely clear. That might not be such a bad message, either. - David Marcus
