Hexion Specialty Chemicals Inc.'s material adverse effect argument was always going to be a bit of a stretch. No buyer has ever convinced a Delaware Court of Chancery judge that a target has suffered one.

But Vice Chancellor Stephen P. Lamb not only rejected Hexion's reason for getting out of its $10.5 billion deal to buy Huntsman Corp. He put the screws to Hexion and its owner, Apollo Management LP. In a 91-page ruling Sept. 29, the clearly aggravated judge found there was no MAE and that Hexion had "knowingly and intentionally breached" the agreement, and he ordered Hexion to make its best efforts to close the deal.

If Hexion doesn't, it could be liable for the full value of the original deal, because the merger agreement's $325 million cap on liquidated damages does not apply to a deliberate breach. Lamb hammered home that point, saying "any damages which were proximately caused by that knowing and intentional breach will be uncapped."

Measured by the difference between the stock's current price and the deal price, those would run to $4 billion or so. Apollo could thus be forced to choose between going forward with the deal, which might entail anteing up more equity, or risking a huge judgment that could put Hexion in bankruptcy. Apollo, which lost retailer Linens 'n Things Inc. to bankruptcy in May and has several other portfolio companies with serious problems, doesn't need the Hexion headache. (An Apollo spokesman declined to comment on the situation.)

While the ruling was a huge victory for Huntsman, its shareholders are unlikely ever to see anything close to the $28 per share Hexion agreed to pay. The stock traded around $12.40 even after the decision.

Fundamentally, the problem is leverage. Under the merger -- announced July 12, 2007, just as the credit markets were cracking -- $6.8 billion of Huntsman equity would be replaced with debt. The combined company would carry $14.4 billion in new secured loans and notes supplied by Credit Suisse Group and Deutsche Bank AG, double the combined debt load of the pre-merger companies.

In July 2007 those numbers might have computed, but The Woodlands, Texas-based Huntsman missed its earnings projections shortly after the deal was signed, and in court Hexion contended that the combined company would be insolvent on formation.

Lamb dismissed the Duff & Phelps LLC insolvency opinion on which Hexion relied, saying it was written with litigation in mind. The real issue, Lamb said, is "the cost of the merger" and "whether the financing structure Apollo and Hexion arranged in July 2007 is adequate to close the deal and fund the operations of the combined enterprise."

In other words: You signed the deal, now live with it.

Columbus, Ohio-based Hexion said it was disappointed by the decision and was "reviewing the decision and our options." But it was not clear what those were, because it isn't clear whether the banks will still back the deal.

Credit Suisse has said in the past that it stands by its commitment, but it commissioned its own analysis in July, according to a Hexion court filing, and concluded that the merged company would be insolvent. The merger agreement requires Hexion to sue the banks if they don't fund the deal, but it's hard to imagine that would break the logjam, since it would pit an unwilling buyer against unwilling lenders. (Spokesmen for the two banks declined to comment last week.)

The most plausible settlement scenario is a new deal with less debt, perhaps a bit more equity from Apollo and a price far below $28 a share. But getting there may be tough, because Huntsman is not only the last of the busted deals from last year to wind its way through the court system; it is probably also the most bitter, even personal.

When Hexion filed suit in Delaware in June to get out of the deal, Huntsman responded with a tortious interference case in Texas state court against Apollo and its founders, Leon Black and Joshua Harris, charging that they had misled Huntsman into canceling a $25.25 per share deal with Basell Holdings NV. Huntsman chairman Jon Huntsman Sr. and his son, CEO Peter Huntsman, charged on TV that they had been misled by the New York financiers, and Jon Huntsman issued a statement saying Black and Harris "should be disgraced."

Lamb's ruling may have satisfied Jon Huntsman's desire for a public shaming. Whether it will get him a deal he can live with remains to be seen.

-- David Marcus and Scott Stuart contributed to this report.