October 21, 2008
Huntsman, Apollo, and Contract Theory
Posted by Jeff Lipshaw

I have decided to take a break from my two current obsessive-compulsive tics:  minute-by-minute visits to fivethirtyeight.com and to the Dow ticker.

Others have commented on the dispute between Huntsman and Apollo over the "material adverse change" clause (or "MAC").  In a nutshell, Apollo, a private equity group, had purchased four chemical companies, merging them into a group called Hexion.  After a extended bidding contest involving Basell, Hexion (controlled by Apollo) executed an agreement to purchase Huntsman at $28 per share.  During the post-signing due diligence, however, Apollo's financial advisers came to the conclusion that the addition of Huntsman debt to Hexion would render the latter insolvent, triggering what I think is referred to as a "non-payment default" in Hexion's banking agreements.  Apollo invoked the MAC, and sued in Delaware asking the court for a declaration that it was entitled to walk away.  As Steve Davidoff reported, Vice-Chancellor Lamb ruled in an 89-page opinion that there had been no MAC and ordered Hexion to show up at the closing.

I've had sitting on my desk for over a month now the front page Wall Street Journal story on the dispute.  It preceded Vice-Chancellor Lamb's ruling, but it wasn't the technical contract dispute that got me interested.  It was this from Jon Huntsman in reaction to a "down-bid" from $25 to $24 per share in the pre-contract negotiations. "We deal throughout the world with people whose word means something. . . But with these firms, it's hard to know today what tomorrow's price will be."  Even after the deal was signed, Huntsman had Apollo's two senior executives to his Deer Valley mansion, along with the Huntsman board, a number of Huntsman's friend, and Utah's two senators, Orrin Hatch and Robert Bennett.  According to the Journal:  "Mr. Huntsman says he was suspicious of Apollo's willingness to close the deal at that point. 'It was important to me that I have Black and Harris [the Apollo execs] shake hands with them at our Deer Valley home. . .I wanted them to look [the senators] in the eye and tell them it was a done deal.'"  (Disclaimer:  it is public knowledge that, in his role as ecclesiastical leader, Jon Huntsman interviewed Gordon Smith in 1985 in connection with Gordon's impending marriage.  It's not clear from the record whether Mr. Huntsman had the power to put the kibosh on the proposed union, but we do have that bit of data on his good judgment or lack thereof.)

For contract theorists, this is a tough piece of data to assimilate, particularly if one is trying to come up with a universal justification for the involvement of the state in enforcing private agreements, presumably with close questions of doctrine hanging in the balance between the two views:  is the policy based on a moral imperative about promise-keeping, or is it based on economic efficiency and welfare enhancement?  As Ethan Leib observed, the theoreticians seem to be ships passing in the night, but for reasons that I find ironic.  Over in the Yale Law Journal, Daniel Markovits' Kantian "respect for persons" justification expressly disclaimed application to business entities, and the Schwartz & Scott economic justification of contract formalism expressly only applied to business entities of a certain size.  Over at the Harvard Law Review, in her critique of the immorality (or amorality) of aspects of contract doctrine like efficient breach, Seana Shiffrin admits she doesn't know how corporate officers deal with efficient breach, and, anyway, she may be affected by her "overly blunt anticorporatism."

Indeed, part of the Schwartz & Scott logic supporting contract formalism is that corporate executives go to business school and learn how to make optimizing rather than cognitively erroneous decisions, and to perform complex game-theoretic reasoning (if you don't believe me, see 113 Yale L.J. at 551, n. 17; my complete critique of this article is here at the text accompanying footnotes 101-122). So where does that leave Jon Huntsman in all of this, regardless of his lawyers' success in persuading Vice-Chancellor Lamb that the contract's formal provisions were congruent with the immanent morality of the situation as evidenced not by contract but by given word, handshake, and look-in-the-eye? 

Well, that's merely money.  More importantly, where does it leave the contract theorists?  Forever flummoxed, I think, if they try to create models that fail to recognize we are all moral agents, and all economic opportunists, and all at the same time.  My attempt at the final, unimpeachable, most universal, satisfy everybody but satisfy nobody reconciliation of it all is here.

Now back to the financial crisis.

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