February 11, 2008

A New York (and Bankruptcy) Market MAC Case: Solutia Seeks Specific Performance or $2.25 billion

With our “MAC Clauses: All the Rage” webcast coming up next week, Kevin Miller of Alston & Bird notes a new case:

Recently we have seen a number of cases in which buyers have alleged that they are not obligated to close an M&A transaction because of a MAC or MAE. A complaint filed last week by Solutia in the US Bankruptcy Court for the SDNY (here is the motion to expedite the hearing on the merits) alleges that the lenders for Solutia’s bankruptcy exit financing have breached their financing commitments by refusing to fund as a result of a market MAC. Solutia seeks specific performance or, in the alternative, $2.25 billion in damages.

Please note that the following is based on the complaint and an answer refuting these allegations has not yet been filed. Solutia has been in bankruptcy for over four years, leading up to the fifth amended plan of reorganization that Solutia filed in October 2007 to enable its emergence from chapter 11.

On October 25, 2007, the Citigroup Global Markets Inc., Goldman Sachs Credit Partners L.P., Deutsche Bank Securities Inc., and Deutsche Bank Trust Company Americas (collectively, the “Commitment Parties”) executed a firm commitment to fund a $2 billion long-term exit financing package for Solutia. On November 20, 2007, the Bankruptcy Court approved the exit financing package. Nine days later the Court found the plan to be feasible and confirmed the plan.

The complaint alleges that:

“The Commitment Parties, however, now cite a so-called “market MAC” provision in their commitment letter and assert that there has been a change in the markets that excuses them from funding. Their reliance on this clause, which they downplayed from the outset, is utterly without basis in the midst of a tumultuous market that was not only foreseeable, but had long existed when they signed on to the firm commitment. The banks should be held to the promise that they made, and for which Solutia agreed to pay handsomely, and fund Solutia’s exit from bankruptcy….If the Commitment Parties can invoke the “market MAC” provision as an excuse for not funding, it is clear that they intended from the outset to rely on that “market MAC” clause to evade any funding obligation absent an upturn in the market and a successful syndication. In that event, the Commitment Parties always intended the firm commitment reflected in the commitment letter to be no more than a “best efforts” obligation. Their representations that (a) absent successful syndication, they would take the loans on their own books, and (b) the “market MAC” provision was no more than never-used boilerplate dictated by bank policy, were simply fraudulent statements made by the Commitment Parties to induce Solutia to engage them for the exit financing. The Commitment Parties should then be held to account for that fraudulent conduct – which impacts the company, its employees, its 20,000 retirees, its creditors, and other parties in interest – by paying compensatory and punitive damages to Solutia. . . .The Commitment Parties seek to excuse their failure to fulfill their firm contractual commitment by asserting that there has been an adverse change in the credit and syndication markets since October 25, 2007 that materially impairs their ability to syndicate the exit financing package. The Commitment Parties rely on this assertion even though: (a) there has been no material adverse change to Solutia’s business, operations, properties, prospects, or financial condition; (b) there is no information about Solutia now available that is inconsistent with information known and disclosed at the time the Commitment Parties entered into the Commitment Letter; and (c) there has been no adverse change since the execution of the Commitment Letter in the loan syndication, financial, or capital markets”

The complaint seems clearly aimed at language from In re IBP in which VC Strine of the Delaware Chancery Court, applying New York law, stated that:

“Practical reasons lead me to conclude that a New York court would incline toward the view that a buyer ought to have to make a strong showing to invoke a material Adverse Effect exception to its obligation to close. Merger contracts are heavily negotiated and cover a large number of specific risks explicitly. As a result, even where a material Adverse Effect condition is as broadly written as the one in the Merger Agreement, that provision is best read as a backstop protecting the acquiror from the occurrence of unknown events that substantially threaten the overall earnings potential of the target in a durationally-significant manner.”