Hexion Specialty Chemicals, Inc. v. Huntsman Corp.

OPINION

In July 2007, just before the onset of the ongoing crisis affecting the national and *721 international credit markets, two large chemical companies entered into a merger agreement contemplating a leveraged cash acquisition of one by the other. The buyer is a privately held corporation, 92% owned by a large private equity group.

Because the buyer and its parent were eager to be the winning bidder in a competitive bidding situation, they agreed to pay a substantially higher price than the competition and to commit to stringent deal terms, including no “financing out.” In other words, if the financing the buyer arranged (or equivalent alternative financing) is not available at the closing, the buyer is not excused from performing under the contract. In that event, and in the absence of a material adverse effect relating to Huntsman’s business as a whole, the issue becomes whether the buyer’s liability to the seller for failing to close the transaction is limited to $325 million by contract or, instead, is uncapped.

The answer to that question turns on whether the buyer committed a knowing and intentional breach of any of its covenants found in the merger agreement that caused damages in excess of the contractual limit. Among other things, the buyer covenanted that it would use its reasonable best efforts to take all actions and do all things “necessary, proper or advisable” to consummate the financing on the terms it had negotiated with its banks and further covenanted that it would not take any action “that could be reasonably be expected to materially impair, delay or prevent consummation” of such financing.

While the parties were engaged in obtaining the necessary regulatory approvals, the seller reported several disappointing quarterly results, missing the numbers it projected at the time the deal was signed. After receiving the seller’s first quarter 2008 results, the buyer and its parent, through their counsel, began exploring options for extricating the seller from the transaction. At first, this process focused on whether the seller had suffered a material adverse effect. By early May, however, attention shifted to an exploration of the prospective solvency of the combined entity, leading them to retain the services of a well-known valuation firm to explore the possibility of obtaining an opinion that the combined entity would be insolvent. After making a number of changes to the inputs into the deal model that materially and adversely effected the viability of the transaction, and without consulting with the seller about those changes or about other business initiatives that might improve the prospective financial condition of the resulting entity, the buyer succeeded in obtaining an “insolvency” opinion.

The insolvency opinion was presented to the buyer’s board of directors on June 18, 2008, and later published in a press release claiming that the merger could not be consummated because the financing would not be available due to the prospective insolvency of the combined entity and because the seller had suffered a material adverse effect, as defined in the merger agreement. The buyer and a host of its affiliated entities immediately filed the complaint in this action, alleging a belief that the merger cannot be consummated since the financing will not be available.

The complaint alleges financing will be unavailable because, (1) the amounts available under that financing are no longer sufficient to close the transaction and (2) the combined entity would be insolvent. The complaint seeks a declaration that the buyer is not obligated to consummate the merger if the combined company would be insolvent and a further declaration that its liability (and that of its affiliates) to the seller for nonconsummation of the transaction cannot exceed the $325 million termi *722 nation fee. The complaint also seeks a declaration that the seller suffered a material adverse effect, thus excusing the buyer’s obligation to close. The seller answered and filed counterclaims seeking, among other things, an order directing the buyer to specifically perform its obligations under the merger agreement.

The court conducted six days of trial on certain of the claims for declaratory and injunctive relief raised by the pleadings. In this post-trial opinion, the court finds that the seller has not suffered a material adverse effect, as defined in the merger agreement, and further concludes that the buyer has knowingly and intentionally breached numerous of its covenants under that contract. Thus, the court will grant the seller’s request for an order specifically enforcing the buyer’s contractual obligations to the extent permitted by the merger agreement itself.

The court also determines that it should not now rule on whether the combined entity, however it may ultimately be capitalized, would be solvent or insolvent at closing. In this connection, the court rejects the buyer’s argument that it can be excused from performing its freely undertaken contractual obligations simply because its board of directors concluded that the performance of those contractual obligations risked insolvency. Instead, it was the duty of the buyer’s board of directors to explore the many available options for mitigating the risk of insolvency while causing the buyer to perform its contractual obligations in good faith. If, at closing, and despite the buyer’s best efforts, financing had not been available, the buyer could then have stood on its contract rights and faced no more than the contractually stipulated damages. The buyer and its parent, however, chose a different course.

The court recognizes that there remain substantial obstacles to closing the transaction. Some of those result from the current unsettled credit environment, others result from the difficult macroeconomic conditions facing both the seller and the buyer in running their businesses. Some other of those obstacles appear to result from the course of action the buyer and its parent have pursued in place of the continued good faith performance of the buyer’s contractual obligations. Despite these obstacles, the seller has asked for an order of specific performance and, given the realistic possibility that the buyer and its parent may now regard closing the deal to be a superior outcome to not closing, the court concludes that such an order should issue requiring Hexion to perform all of its covenants and obligations (other than the ultimate obligation to close).

I.

A. The Parties

The plaintiffs and counterclaim defendants in this action are Hexion Specialty Chemicals, Inc., Apollo Global Management, LLC, and various entities through which Apollo Global Management conducts its business (Apollo Global Management and its related entities are collectively referred to as “Apollo”). Hexion, a New Jersey corporation, is the world’s largest producer of binder, adhesive, and ink resins for industrial applications. Apollo Global Management, a Delaware limited liability company, is an asset manager focusing on private equity transactions. Through its ownership in Hexion’s holding company, Apollo owns approximately 92% of Hexion.

The defendant and counterclaim plaintiff in this action is Huntsman Corporation, a Delaware corporation. Huntsman, a global manufacturer and marketer chemical products, operates five primary lines of *723 business: Polyurethanes, Advanced Materials, Textile Effects, Performance Products and Pigments.

B.Procedural History

On July 12, 2007, Hexion and Huntsman signed a merger agreement whereby Hex-ion agreed to pay $28 per share in cash for 100% of Huntsman’s stock. 1 The total transaction value of the deal was approximately $10.6 billion, including assumed debt. The plaintiffs filed suit in this court on June 18, 2008 seeking declaratory judgment on three claims: (1) Hexion is not obligated to close if the combined company would be insolvent and its liability to Huntsman for failing to close is limited to no more than $825 million; (2) Huntsman has suffered a Company Material Adverse Effect (“MAE”); and (3) Apollo has no liability to Huntsman in connection with the merger agreement. On July 2, 2008, Huntsman filed its answer and counterclaims requesting declaratory judgment that: (1) Hexion knowingly and intentionally breached the merger agreement; (2) Huntsman has not suffered an MAE; and (3) Hexion has no right to terminate the merger agreement. Also, Huntsman’s counterclaims seek an order that Hexion specifically perform its obligations under various sections of the merger agreement, or, alternatively, and in the event Hexion fails to perform, the award of full contract damages.

Hexion amended its complaint on July 7, 2008 to request declaratory judgment that Huntsman’s decision to extend the termination date from July 4, 2008 to October 2, 2008 was invalid and that Huntsman breached the forum selection clause of the merger agreement by suing Apollo, Leon Black, and Joshua Harris in Texas on June 23, 2008. 2 Hexion also asks the court to enjoin Huntsman from asserting or prosecuting claims related to the merger agreement in other forums, including a specific request to enjoin the Texas lawsuit. On July 9, 2008, the court granted Huntsman’s motion for expedited proceedings on limited issues. Huntsman filed its amended answer on July 14, 2008. On August 5, 2008, the court further refined the issues to be tried during the expedited proceedings.

Beginning on September 8, 2008, a six-day trial was held on Huntsman’s counterclaims and counts I (damages limited to $325 million), II (material adverse effect), and IV (invalid extension of termination date) of Hexion’s amended complaint.

C. Negotiations Between The Parties In 2005 And 2006

In late 2005 and early 2006, Apollo and Hexion entered negotiations with Huntsman concerning a proposed transaction whereby Hexion would merge with Huntsman’s specialty chemical business and Huntsman’s commodity business would be spun out and acquired by Apollo. Hexion and Apollo performed substantial due diligence on Huntsman, but the deal died when Huntsman missed earnings targets and Apollo advised Huntsman that it could no longer justify the $25 per share price then being discussed. 3

D. 2007 Negotiations Leading To July 12, 2007 Merger Agreement

In May 2007, Huntsman, through its financial advisor Merrill Lynch & Co., Inc., *724 began to solicit bids for the company. Apollo (through Hexion) and Basell, the world’s largest polypropylene maker, emerged among the potential buyers. Huntsman signed confidentiality agreements and began to negotiate merger agreements with both Hexion and Basell. On June 25, 2007, Huntsman rejected Hex-ion’s offer of $26 per share and executed a merger agreement with Basell for $25.25 per share. The same day, but after the agreement was signed, Hexion raised its bid to $27 per share. Basell refused to raise its bid, stating that its deal remained superior because it was more certain to close. 4 On June 29, 2007, Huntsman reentered negotiations with Hexion after Hexion further increased its bid to $27.25 per share. On July 12, 2007, Huntsman terminated its deal with Basell and signed an all cash deal at $28 per share with Hexion.

E.The Financing

One day before the signing of the merger agreement, Hexion signed a commitment letter with affiliates of Credit Suisse and Deutsche Bank (the “lending banks”) to secure financing for the deal. In section 3.2(e) of the merger agreement, Hex-ion represented that the “aggregate proceeds contemplated to be provided by the Commitment Letter will be sufficient ... to pay the aggregate Merger Consideration.” The commitment letter required a “customary and reasonably satisfactory” solvency certificate from the Chief Financial Officer of Hexion, the Chief Financial Officer of Huntsman, or a reputable valuation firm as a condition precedent to the lending banks obligation to provide financing. 5

F. July 12, 2007 Merger Agreement

Due to the existence of a signed agreement with Basell and Apollo’s admittedly intense desire for the deal, Huntsman had significant negotiating leverage. As a result, the merger agreement is more than usually favorable to Huntsman. For example, it contains no financing contingency and requires Hexion to use its “reasonable best efforts” to consummate the financing. In addition, the agreement expressly provides for uncapped damages in the case of a “knowing and intentional breach of any covenant” by Hexion and for liquidated damages of $325 million in cases of other enumerated breaches. The narrowly tailored MAE clause is one of the few ways the merger agreement allows Hexion to walk away from the deal without paying Huntsman at least $325 million in liquidated damages.

G. April 22, 2008: Huntsman Reports Poor First Quarter 0/2008

Initially, Hexion and Apollo were extremely excited about the deal with Huntsman. Apollo partner Jordan Zaken testified at trial that Apollo really wanted the deal and that “the industrial logic was very strong.” 6 Indeed, Hexion’s April 2007 presentation materials regarding the potential transaction with Huntsman reflect that the Hexion/Huntsman combination would create the largest specialty chemical *725 company in the world. 7 While Huntsman’s Pigments business had been slowing since shortly after signing, Hexion and Apollo’s view of the deal did not seem to change dramatically until after receipt of Huntsman’s disappointing first quarter numbers on April 22, 2008. Following receipt of these numbers, Apollo revised its deal model and concluded that the transaction would produce returns much lower than expected. 8 At this time, Apollo also questioned whether Huntsman had experienced an MAE as defined in the merger agreement.

H. Apollo’s May 9, 2008 Meeting With Counsel

On May 9, 2008, Apollo met with counsel to discuss, among other things, whether an MAE had occurred. In preparation for the meeting, Apollo created three models: Run Rate, Scenario 1, and Scenario 2. The Run Rate model simply annualizes Huntsman’s poor first quarter results. Scenario 1 assumed that the full $1 billion revolver was available at closing and an equity contribution of $445 million by Apollo. Scenario 2 removed the equity commitment and assumed a $100 million annual increase in the synergies estimate (from $250 million to $350 million) and included some of the over $1 billion in potential opportunities identified by Apollo to improve liquidity. 9 Zaken testified that these models were created because Apollo was looking for a way to close the transaction. However, Zaken later stated that these models were prepared to help evaluate with counsel whether an MAE had occurred. Before Apollo’s May 9, 2008 meeting with counsel, there appears to have been no discussion of the potential insolvency of the combined companies. The May 9 models, while showing unfavorable returns for Apollo and tight liquidity, do not clearly show insolvency. 10

After its May 9, 2008 meeting with counsel, perhaps realizing that the MAE argument was not strong, Apollo and its counsel began focusing on insolvency. However, under the merger agreement, Hexion had no right to terminate the agreement based on potential insolvency of the combined company or due to lack of financing. Aso, Hexion would be subject to full contract damages if it “knowingly and intentionally” breached any of its covenants. Therefore, it appears that after May 9, 2008, Apollo and its counsel began to follow a carefully designed plan to obtain an insolvency opinion, publish that opinion (which it knew, or reasonably should have known, would frustrate the financing), and claim Hexion did not “knowingly and intentionally” breach its contractual obligations to close (due to the *726 impossibility of obtaining financing without a solvency certificate).

I. Duff & Phelps Is Hired To Support Apollo’s Insolvency Theory

Watchell, Lipton, Rosen & Katz, Apollo’s counsel, hired Duff & Phelps, LLC to support potential litigation, and Duff & Phelps personnel knew they were being hired for that purpose. The May 16, 2008 notes of Allen Pfeiffer of Duff & Phelps read: “get out. (1) Notice that insufficient capital to close (2) [Apollo] hiring D & P to support that notion.” 11 On May 28, 2008, Duff & Phelps, Wachtell Lipton, and Hex-ion signed an engagement letter which envisioned the formation of two teams: (1) a litigation consulting team and (2) an opinion team. Pffeifer led the litigation consulting team and Philip Wisler led the opinion team. While Wisler testified that no one told him the objective of his assignment was to support a lawsuit, he was involved in initial conversations with Wachtell Lipton as early as May 15, 2008 and knew that Duff & Phelps’s litigation consulting team was advising Wachtell Lipton. In addition, the engagement letter stated that the opinion team would only be engaged if “Hexion decides to go forward with a particular course of action,” presumptively if Hexion decided to claim insolvency in the potential litigation. 12

J. Litigation Consulting Team Concludes Insolvency, and Opinion Team Begins Its “Independent” Analysis

After the litigation consulting team concluded that insolvency of the combined companies was likely, Wisler’s opinion team began its work on June 2, 2008. Until then, Wachtell Lipton wanted to make “doubly sure” that Wisler’s team was walled off from the consulting team, so as not to taint the objectivity of the resulting formal opinion. 13 However, Wisler participated in calls with Wachtell Lipton to discuss the engagement, the same individual performed the modeling work for both teams, and Wisler was unaware that he was supposed to be walled off. Even assuming arguendo, that Wisler’s opinion team was completely walled off, they still knew that their client had litigation on its mind and still based their opinion on the same biased numbers as the consulting team. The opinion team was formed on June 3. On June 6, Wisler presented Duff & Phelps’s qualifications for the assignment to the Hexion board of directors and Duff & Phelps was retained the same day. On June 15, Duff & Phelps sent a draft opinion to Wachtell Lipton and, on June 18, Duff & Phelps presented its insolvency opinion to the Hexion board.

K.The Duff & Phelps Insolvency Report

Duff & Phelps’s insolvency opinion showed that the combined company would fail each of the three tests of insolvency: (1) the balance sheet test; (2) the ability to pay debts test; and (3) the capital adequacy test. 14 In its opinion, Duff & Phelps claimed the combined entity was worth $11.35 billion, $4.25 billion less than Apollo concluded when it valued the entity for purposes of an intercompany transfer in March 2008. 15 The Duff & Phelps report *727 also showed a gap between the sources and uses of funds at closing of $858 million.

L. The Duff & Phelps Insolvency Opinion Is Unreliable

Duff & Phelps’s June 18, 2008 insolvency opinion was produced with the knowledge that the opinion would potentially be used in litigation, was based on skewed numbers provided by Apollo, and was produced without any consultation with Huntsman management. These factors, taken together, render the Duff & Phelps opinion unreliable.

1. Pessimistic EBITDA Estimates For Huntsman And Hexion

The May 28, 2008 model which Apollo sent to Duff & Phelps for use in its solvency analysis assumes substantial decreases in the multi-year EBITDA projections for both Hexion and Huntsman, as compared to previous models. The 2009 to 2018 EBITDA projections in the May 23 model represent a 20% decrease from two of the May 9 scenarios and a 31% decrease from the projections that Apollo gave the lending banks in 2007 (which projections were lower than Huntsman management projections at the time). The May 9 EBITDA projections were themselves 2.6% lower than the April 26 model. 16 The April 26 model was a further 4.4% lower than the February model shared with valuation firms for the purposes of a transfer of the interest between Apollo funds. 17 While 2008 has admittedly been a difficult year for Huntsman thus far, Hexion also substantially decreased its EBITDA projections for Huntsman in 2009, 2010, and 2011. 18

In addition, from May 9 to May 23, Hexion decreased its estimated for its own 2008 EBITDA by $80 million and its estimated 2009-2013 EBITDA by $65 million. Leading up to trial, Hexion further reduced its own EBITDA estimates. 19

2. Negative Assumptions Are Used To Create A Funding Gap

The May 23, 2008 model used by Duff & Phelps also reflects a series of pessimistic assumptions about the amount of cash needed to close the transaction. While not directly related to the issue of solvency, these assumpiions did cause Duff & Phelps to reach its conclusion about a so-called “funding gap” of $858 million.

a. The Apollo Fee

Apollo’s May 23 model, which was sent to Duff & Phelps, includes a $102 million *728 Apollo advisory fee that was not included in earlier deal models or discussed at the time of the merger agreement. Apollo and Hexion argue that Apollo is entitled to assess such a fee, if it chooses, by contract, but provide no explanation of why it must be paid at closing. In fact, Apollo’s materials for its May 9 meeting with counsel, show deferral of the Apollo fee as a temporary savings item that could be put off until after closing.

b. United States Pension Fund Liability At Closing

In the deal models leading up to May 2008, the parties did not expect any liability at closing resulting from United States pension funding requirements, yet the model relied on by Duff & Phelps in issuing its opinion contained $195 million in liability at closing. 20 As late as May 30, 2008, the parties’ main contact at the Pension Benefit Guarantee Corporation (“PBGC”) suggested to Hexion’s treasurer, George Knight, four alternatives that would alleviate concerns about the transaction, none of which required funding at closing. 21

Laura Rosenberg, Hexion and Apollo’s litigation expert, told Duff & Phelps that she believed the PBGC would require full funding of the pension fund at closing ($200 million) or initiate a lawsuit to terminate the plans and collect the same amount. However, Rosenberg’s own report admits the “PBGC prefers not to terminate pension plans” and “seeks to enter into consensual settlements negotiated with plan sponsors.” 22 Hexion and Apollo provided no explanation at trial for the difference between Rosenberg’s opinion and the discussions regarding non-cash alternatives that Hexion’s treasurer had discussed with the PBGC on May 30.

Huntsman’s U.S. pension, expert John Spencer, former PBGC director of the Department of Insurance Supervision and Compliance, convincingly testified that he saw no reason to believe that the PBGC would require $200 million in funding at closing and thought it likely that no upfront payment would be required. Spencer stated, that even assuming insolvency of the combined company or assuming the combined company was headed for bankruptcy, he did not think the PBGC would initiate involuntary termination or use the threat of such action to demand $200 million.

c. United Kingdom Pension Fund Liability At Closing

PricewaterhouseCoopers (“PwC”) stated that the maximum United Kingdom pension liability it envisioned at closing was $45 million and the May 9 model estimated expected liability of $30 million at closing. However, the model relied upon by Duff & Phelps in issuing its opinion contained $195 million in U.K. pension liability at closing. The U.K. pension liability num *729 ber was influenced by the expert report of Richard Jones of a United Kingdom consulting firm, Punter Southall.

Originally, Hexion hired PwC to advise it regarding potential U.K. pension liability. In early June 2008, Hexion switched advisors, from PwC to Punter Southall. Hexion’s CFO, William Carter, testified the change was made due to a perceived conflict because PwC also worked for Huntsman and the U.K. trustees. But, as Carter admitted, this conflict was discussed from the beginning of the transaction and was resolved on the basis that U.K. law allows a firm to represent a company and the trustees as long as a Chinese Wall is put in place. It is reasonable to infer that Hexion stopped using PwC because it wanted to maintain confidentiality as it explored the possibility of obtaining an insolvency opinion and because it wanted its own litigation expert with no other responsibilities in the transaction.

Jones, like all of the Apollo experts, knew that he was being hired in connection with potential litigation. In addition, Jones did not speak with PwC, Huntsman management, or the trustees. As it did with Rosenberg, Wachtell Lipton offered comments on Jones’s report. For example, Wachtell Lipton suggested deleting Jones’s sentence “[t]he only way to know for certain what would be acceptable to the Trustees and the Pension Regulator in a clearance application would be to enter negotiations with the Trustees and make a formal clearance application to the Pensions Regulator (noting that the settlement agreement is not always considered sufficient for clearance to be granted.)” 23 Wachtell Lipton also suggested deleting “limited” from the phrase “based on the limited information provided” and suggested deleting “considerably” from “these numbers ... could be considerably refined if more data became available.” 24

d. Timing Of And Amount Of Antitrust Divestitures

The Federal Trade Commission (the “FTC”) requires that the antitrust divestitures planned in connection with this transaction be completed within ten days of closing. Carter testified that the antitrust divestitures are not shown as a source of funds on the Apollo deal model given to Duff & Phelps, but admitted that the divestitures could close at the same time as the merger agreement. Simultaneous closings of the transaction and the antitrust divestitures would, of course, substantially reduce the funding gap — a fact overlooked by Duff & Phelps.

In addition, the amount of the proceeds from divestitures appears to have been materially adversely affected by Hexion’s litigation strategy. On May 27, 2008, in response to a request for bids, Hexion received eight bids for the assets to be divested in connection with obtaining antitrust approval. Three of the bids, each from very large chemical companies, were over $850 million and two were over $400 million. After the filing of the lawsuit on June 18, 2008, the highest bidders dropped out and Hexion entered into negotiations with one of the bidders who expressed interest at $160 million. Two of the three highest bidders expressly cited the lawsuit as a reason for withdrawing. The sale of the assets was to be conditioned on the closing of the merger and certain bidders expressed that they did not want to expend the time and financial resources to *730 pursue a deal that was uncertain to close. 25

3. Apollo Prevents Duff & Phelps From Speaking To Huntsman Management

Duff & Phelps listed the fact that it did not have direct access to Huntsman management as a “qualification” or “limiting condition” to its insolvency opinion. Wis-ler testified that, given the chance, he was unsure whether he would have chosen to talk with Huntsman management. However, Wisler admitted that he could have received more accurate information, in at least some areas, from talking to Huntsman management. 26 Hexion’s CFO tried to de-emphasize the importance of Duff & Phelps meeting with Huntsman management by testifying that, due to Huntsman’s repeated missed projections, he did not think it would be a fruitful exercise. In contrast, the record shows that Apollo prevented Duff & Phelps from access to Huntsman management because allowing such access might compromise the objectives of the Hexion board. These “objectives” appear to include terminating the merger agreement.

M. The June 18, 2008 Lawsuit

After obtaining the Duff & Phelps insolvency opinion, Hexion, without notice to Huntsman, published that opinion as part of this lawsuit, very likely prejudicing the lending banks, the pension boards, and the FTC. Malcolm Price, a managing director at Credit Suisse, testified that, until the filing of the lawsuit, the bank had not questioned the solvency of the combined company or whether an MAE had occurred, although it had recorded large mark-to-market losses. Following publication of the insolvency opinion, Credit Suisse began to study the potential insolvency of the company. On September 5, Credit Suisse finished its own insolvency analysis, largely based on the deal model used by Duff & Phelps, and sharply reduced its expected losses on the financing. The Credit Suisse analysis showed insolvency under all three tests, by an even greater margin than the Duff & Phelps report. Currently, both lending banks have stated that they would be willing to meet their obligations to provide financing if a customary and reasonably satisfactory solvency certificate could be provided. At trial however, Hexion’s CEO, Craig Morrison, agreed that publication of the Duff & Phelps opinion and the filing of the lawsuit “effectively kill[ed] the financing” and “make it virtually impossible for [the lending banks] to go forward with the financing.” 27 Nonetheless, Hexion still made the deliberate decision not to consult with Huntsman regarding the analysis prior to filing the lawsuit. Price admitted that it would be premature to draw a definite conclusion about solvency before closing. However, he also testified that he could not think of anything plausible that would change his view on solvency in the very near future and admitted that it would be financially advantageous to Credit Suisse if it did not have to honor its commitment letter.

*731 N. Merrill Lynch, Huntsman’s Financial Advisor, Analyzes The Situation

Patrick Ramsey, Merrill Lynch’s managing director on the Hexion/Huntsman transaction, testified that from the beginning of the deal he recognized that an MAE was a potential way out for the banks under the deal for Hexion and absence of a reasonably satisfactory solvency certificate was a way out of the commitment letter. Ramsey testified that in May of 2008 he believed that Hexion and the lending banks may try to get out of the deal because the Huntsman stock was trading at a meaningful discount to the deal price. Thus, Ramsey asked a junior banker on his team to look into the solvency issue before Huntsman’s May 8, 2008 board meeting. The junior banker, who Ramsey testified had no experience in performing solvency analyses, reported that the combined company looked insolvent. Ramsey testified that he was not impressed with the analysis, noting that Merrill Lynch is not in the business of providing solvency opinions. Ramsey did not advise the Huntsman board regarding solvency at the May 8, 2008 meeting. 28 Ramsey testified that he requested the solvency analysis due to the dramatic change in the credit markets over the course of the year and the fact that many banks were trying to get out of similar commitments.

On June 26, 2008, eight days after the filing of this lawsuit, the Huntsman board met again. At this meeting, Huntsman and Merrill Lynch had the Duff & Phelps opinion letter but did not have the analysis behind it. Board minutes from the June 26 meeting read: “Mr. Ramsey stated that while leverage was high and liquidity was tight, he believed that a good case could be made that the combined entity would be solvent, in direct contradiction to Hexion’s allegations.” 29 Ramsey, stated that Merrill Lynch did not produce in-depth analysis on the MAE issue for this meeting, but did produce a more detailed report for the July 1, 2008 meeting.

O. The July 1, 2008 Board Meeting: Huntsman Extends The Termination Date Of The Merger Agreement

At the July 1, 2008 meeting, the Huntsman board voted to extend the termination date from July 4, 2008 to October 2, 2008. Hexion argues that, by extending the termination date, Huntsman violated section 7.1(b)(ii) of the merger agreement which requires that “the Board of Directors of [Huntsman] determine[ ] in good faith (after consultation with [Hexion]), that there exists at such time an objectively reasonable probability” that antitrust approval and consummation of the transaction will occur within the subsequent 90-day period. 30 Hexion argues that Huntsman’s CFO, Kimo Esplín, brought a solvency analysis with him to the board meeting that showed a clearly insolvent combined company. The model, prepared by Merrill Lynch, showed a $53 million funding gap at closing and only $10 million in liquidity at the end of the first quarter of 2009. Hexion points out that Esplín did not inform the board of the funding gap and merely said the liquidity would be tight without discussing the extent of that condition. Esplin, however, explained that Huntsman received the analysis behind the Duff & Phelps insolvency opinion in the “wee hours” of the morning of July 1 and that Huntsman and Merrill Lynch had *732 only six or seven hours to create the model he brought with him to the board meeting. Huntsman asked Merrill Lynch to quickly build a model that looked like the Duff & Phelps model and Huntsman filled in the numbers with what it thought were more reasonable estimates. Esplín testified that he did not share the exact numbers with the Huntsman board because “we hadn’t spent a lot of time with our own numbers ... .we just called around and got our numbers from our folks.” 31 He further testified that, “we knew within those numbers there were lots of discretionary items that we could elect to delay, or not do at all, that would increase liquidity. And so that’s why I told the board I had done the analysis and I felt like it was probable that this combined business would be solvent, but we needed to do some more work.” 32

P. The Huntsman Projections

Huntsman’s EBITDA projections for 2008 have gone from $1.289 billion as of June 2007 to $868 billion at the time of trial. Both Peter Huntsman, Huntsman’s CEO, and Esplín testified in detail about the negative effect of increased oil prices, increased natural gas prices, a slowdown in the housing market, capital expenditures, uncollected insurance proceeds, and the strengthening of foreign currencies against the U.S. dollar has had on their business over the past year.

After reviewing the numbers behind the Duff & Phelps insolvency opinion, Huntsman determined that Hexion’s revised projections for Huntsman’s EBITDA relied on by Duff & Phelps were unreasonably low. In response, Huntsman began to update its own projections by having each of its divisions prepare new EBITDA estimates for the rest of 2008 and for 2009 through 2013. On July 25, 2008, Huntsman compiled the results from the divisions and produced its revised EBITDA estimates. At trial, Huntsman’s division heads responsible for the Polyurethanes, Pigments and Textile Effects businesses testified regarding the rationale underlying their projections. Tony Hankins testified that the Polyurethane forecasts were realistic for three main reasons: (1) the recent installation of new technology in a Geismar, Louisiana MDI plant; (2) the China MDI plant which is now operating at full capacity; and (3) multiple world-wide growth projects Huntsman is in the process of employing. Simon Turner testified that the projections for Pigments were reasonable because Pigments has already met its third quarter 2008 forecasts, the projections assume conservative growth assumptions such as 4% growth in Asia, and the projects assume lower than historical growth margins. Paul Hulme testified that the Textile Effects projections were achievable because the projections forecast revenue growth at about the rate of worldwide GDP growth. Hulme further testified that much of the projected EBITDA growth will come from cutting indirect costs and selling, general and administrative expenses. 33

Just as Apollo’s estimates for Huntsman’s July 25, 2008 projections for EBITDA appear artificially depressed, Huntsman’s EBITDA projections appear *733 somewhat optimistic. Both sets of projections have been influenced by the potential or the reality of litigation. Huntsman projects a 31% increase in EBITDA from 2008 to 2009. 34 Apollo points out that Huntsman’s 2009 EBITDA and 2010 EBITDA projections are 24% more optimistic and 48% more optimistic, respectively, than the expectations of Wall Street analysts. However, the Duff & Phelps report and Hexion’s projections of Huntsman EBITDA surely have affected the expectations of the analysts. Moreover, Esplín testified that the three leading analysts covering Huntsman are conflicted out of publishing research. 35 Esplín also testified that he generally talked to every analyst covering Huntsman a couple times a quarter to update them on the business, but that the analysts are no longer interested in the fundamentals of the business, just the transaction. Esplín said he has not talked to an analyst in nine months and therefore believes the Wall Street estimates are not informed.

Q. Huntsman’s Solvency Analysis

Huntsman hired David Resnick, an expert on valuation and solvency, to review the Duff & Phelps report for errors. Res-nick is the head of global restructuring and the co-head of investment banking in North America for Rothschild, Inc. Duff & Phelps in its June 18 report found a funding deficit of $858 million. Resnick’s report finds a surplus of $124 million. The majority of the difference is made up of U.S. and U.K. pension liability, costs related to refinancing the Huntsman debt, the Apollo fee, and timing of divestiture proceeds.

In arriving at his numbers, Resnick and his team used Duff & Phelps’s work as a template and “adjusted it for what [they] saw as errors or inconsistencies.” 36 Duff & Phelps’s enterprise value calculation was approximately $11.35 billion and Resnick’s enterprise value calculation was approximately $15.42 billion. Duff & Phelps reached its total enterprise value number by weighting the results of its discounted cash flow analysis 50% and the average of its public company analysis and transaction analysis 50%. 37 Resnick took issue with Duff & Phelps’s public company analysis because it looked at trading multiples of comparable companies during a trough period for chemical companies. 38 In contrast, Resnick looked at those same companies over the past five years, which produced a multiple of 8.9 times EBITDA, as compared to a little over 7 times EBITDA in the Duff & Phelps analysis. Resnick also criticized Duff & Phelps’s transaction analysis and its use of a number of commodity chemical companies, which traditionally sell for much lower multiples than specialty chemical companies like Hunts *734 man. 39 Hexion took issue with Resnick’s discounted cash flow (“DCF”) analysis which led to an enterprise value of $18.4 billion. 40 Hexion pointed out the over $6 billion gap between Resnick’s DCF analysis and his own public company/transaction analysis, which yielded an enterprise value of $12.37 billion. 41

On the balance sheet test, the Duff & Phelps report from June 18 shows negative net asset value of $1.9 billion and Resnick’s report shows a positive net asset value of $8.7 billion. The primary differences between the two numbers are the calculation of total enterprise value, discussed above, and the differences in synergies. Huntsman’s synergy estimates appear somewhat suspect. Huntsman argues that Hexion underestimates synergies at $250 million and points to a Hexion presentation that states $450 to $600 million in synergies “could be achieved.” 42 Resnick uses annual synergies in his analysis that reach $423 million by 2013. While Huntsman points to some evidence that $250 million in synergies was meant as a floor, the court notes that the $250 million number was widely used before litigation became likely and that Hexion gave the $250 million number to the lending banks in 2007.

Resnick also concluded that the combined company would pass the ability to pay debts and capital adequacy tests. He notes that, under his analysis, there would be $584 million in available revolver at closing, which, coupled with the $416 million in cash, would result in the availability of the full $1 billion revolver at closing.

R. Antitrust Approval

Section 5.4 of the merger agreement requires Hexion to “take any and all action necessary” to obtain antitrust approval for the transaction, and prohibits Hexion from taking “any action with the intent to or that could reasonably be expected to hinder or delay the obtaining of’ such approval. 43 Hexion made its initial Hart-Scott-Rodino filing with the FTC in August 2007 and received a second request from the FTC in October 2007. On January 25, 2008, Hexion and Huntsman entered into a timing agreement whereby they agreed to give the FTC no fewer than 60-days notice before closing the transaction and that they would not give such notice before March 3, 2008. The parties could, however, certify compliance with the second request prior to March 3, 2008. Huntsman certified compliance with the FTC’s second request on February 7, 2008.

In April 2008, Hexion proposed an agreement to the FTC, which included divesting certain assets. The FTC told Hex-ion to find a buyer of the assets for FTC approval and commented positively on the *735 suggested settlement. As already discussed above, Hexion received bids on those assets on May 27, 2008. However, that marketing process was disrupted by the filing of this lawsuit.

On August 1, 2008, Huntsman, through counsel, requested in writing that Hexion provide the FTC with notice, pursuant to the timing agreement, of the parties’ intention to close the transaction in 60 days. Hexion refused, stating that giving the FTC a deadline would only be giving them a deadline to sue to block the transaction. 44 The timing agreement permitted closing without giving the 60-day notice only if the parties reached a negotiated settlement with the FTC.

On September 5, 2008, Jonathan Rich, an antitrust partner at Morgan, Lewis & Bockius, who represents Hexion, sent a letter to the FTC which he testified explains the importance of reaching a settlement by October 2, 2008. But Rich’s letter only makes reference to the possibility of Hexion losing the $825 million break-up fee and does not mention the massive losses Huntsman could incur if the transaction was not approved by October 2. 45 As of September 16, 2008, the last day of trial and only 16 days before the termination date of the merger agreement, Hexion has negotiated a consent letter with the FTC staff, has a buyer for the assets to be divested, and has negotiated purchase agreements. However, Rich testified that Hexion has still not certified compliance with the FTC’s second request, does not have signed agreements with the proposed buyer of the assets to be divested, and does not have approval from the FTC staff or the Bureau of Competition. 46 Nonetheless, Rich testified that he was confident that Hexion would receive antitrust approval by October 2, 2008