Corporate Securities Law Blog

In Hexion Specialty Chemicals, Inc. v. Huntsman Corp., 2008 WL 4457544 (Del. Ch. Sept. 29, 2008), the Delaware Chancery Court, after an expedited six day trial, ruled that Hexion Specialty Chemicals, Inc. had breached various provisions of a July 2007 merger agreement.  By that agreement, Hexion, which is controlled by a private equity group, had agreed to acquire Huntsman Corp. in a leveraged cash transaction at a steep price following a bidding contest.  The terms of the merger agreement left Hexion with no “financing out” if it could not close due to a lack of funding.  Hexion’s efforts to extricate itself from the transaction arose in connection with the continuing crisis affecting the world-wide credit markets.  Hexion had sought to excuse any failure to close on its part by claiming that Huntsman’s operations had suffered a Material Adverse Effect (MAE) under the terms of the merger agreement and that the combined entity would be insolvent.  Issuing its decision before the merger agreement’s October 2, 2008 termination date, the court rejected these claims in a manner that suggested it found them pretextual and ordered Hexion to specifically perform all obligations necessary to close the deal (save the obligation to actually close, which the merger agreement exempted from a specific performance remedy).  This case is significant for its illustration of the approach that Delaware courts take in interpreting and applying a MAE clause when invoked to excuse performance under a merger agreement.  Also notable is the finding that Hexion had breached its covenant to use its reasonable best efforts to consummate the deal, a determination that required the court to reconcile a party’s contractual duty to use reasonable best efforts to consummate a transaction with that party’s alleged perceived need to avoid insolvency.  The case also demonstrates that Delaware courts will not hesitate to impose a specific performance remedy when a contract so provides, even when the consequences to one party may be ruinous.

In In re Heritage Bond Litigation, 2008 WL 4415172 (9th Cir. Oct. 1, 2008), the United States Court of Appeals for the Ninth Circuit held that a class action settlement bar limits only contribution, indemnity or other comparative fault claims against settling defendants where damages are calculated based on the amount of the non-settler’s liability to the class.  The appeal arose from a partial settlement in a securities fraud class action.  The district court’s broad bar order precluded non-settlers from bringing any future claims against settlers “arising out of or related to . . . any of the transactions or occurrences alleged.”  A non-settling defendant later brought breach of fiduciary duty, negligence, labor law and other claims against several settling defendants, including his former employer, and sought “both economic and reputational” damages.  The district court determined that its bar order precluded such claims.  The Ninth Circuit disagreed, vacating the order and remanded the matter to the district court.  The decision offers greater clarity on the scope of settlement bar orders, important mechanisms designed to encourage partial settlements but, at the same time, protect non-settlers’ rights.

In Millowitz v. Citigroup Global Markets, Inc., 2008 WL 4426412 (2d Cir. Sept. 30, 2008), the United States Court of Appeals for the Second Circuit held that the fraud-on-the-market doctrine established in Basic Inc. v. Levinson, 485 U.S. 224 (1988), applies in Rule 10b-5 suits challenging alleged misstatements contained in research analyst reports.  The fraud-on-the-market doctrine creates a presumption of reliance in 10b-5 securities fraud cases, and eliminates the need for plaintiffs to show individual reliance on the alleged fraudulent act.  In Millowitz, the Second Circuit concluded that the district court in the case had properly invoked the doctrine to decide whether common questions of law and fact predominated over individualized ones for purposes of certifying a class under Fed. R. Civ. P. 23(b)(3).  The Second Circuit also ruled that no showing of the analyst’s reports’ actual affect on the securities’ market price is required to trigger the presumption, something defendants had urged.  The decision is important because it may impose a risk of class action liability on public misstatements of fact even when the speaker is neither the issuer nor an agent of the issuer, provided the misstatement is material.

On September 27, 2008, Governor Schwarzenegger approved California Assembly Bill 2794, which will become effective January 1, 2009.  AB 2794 adds Section 655.8 to the California Business and Professions Code (the "B&P Code").

Recent changes to Chinese tax law has dramatic tax implications for foreign investors in the People's Republic of China.  Despite the changing tax landscape, there are still opportunities to take advantage of current tax law.