Dow Chemical

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throwing itself on the mercy of the court in a bid to delay its merger with

Rohm & Haas



In its defense against a breach of contract suit filed by its potential partner, Dow took the unusual tack of making a heartfelt plea about the company's financial troubles rather than a legal argument against the Rohm & Haas suit or against the deal points in the original merger contract.

An independent credit-research firm said in a note to clients late last week that Dow's underlying argument for its defense won't hold up in court and that Rohm & Haas will win its case. The result of a Rohm & Haas victory would be that Dow Chemical would have to close the merger of the two firms according to the deal's original terms.

The opinion was issued by the New York City-based firm Covenant Review, a niche player in the credit research business that is devoted entirely to measuring the legal merit of contracts, warrants, deeds, and other legal agreements. Its analysis is performed by attorneys and paralegals instead of financial analysts or accountants. Hedge funds and financial institutions make up most of its client base.

Wall Street is more than a little curious about how the lawsuit will play out. Dow Chemical will need to incur a large amount of new debt in order to close its merger. This new debt could affect Dow Chemical's credit rating and it may also force Dow Chemical to suspend its dividend.

The prediction by Covenant Review was by no means extraordinary relative to predictions made by most other analysts and interested parties who have watched the case develop. Credit Suisse Analyst John P. McNulty said in a research note last December that his firm believes "that the DOW/ROH merger agreement leaves little room for DOW to walk away from the deal."

Covenant Review's note was unique because of the nature of its analysis. The company is staffed by attorneys rather than financial analysts; its specialty is to weigh the validity of legal language in contracts and agreements rather than financial models.

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Here's how Covenant Review sees the outcomes:

  • "Dow Chemical has no contractual justification to avoid closing its acquisition of Rohm & Haas."
  • "The contract is clear. The July 10, 2008 Agreement and Plan of Merger was signed with the economy already getting rocky. Dow could have negotiated for a market out or financing out, or an out for the failure of the K-Dow joint venture, but they simply did not."
  • Dow Chemical did not have to resort to its current defense argument. "There is a Rohm-specific material adverse effect out, but it does not seem like Dow is even looking to argue the point."
  • Rohm & Haas' decision to sue "at equity" for specific performance rather than suing "at law" for money was a smart move, because any attempt to receive a cash reward "would involve a long process" and would have likely netted Rohm "something less than $78 per share," the price Dow must pay Rohm's shareholders in its contract.
  • The logic that underlies Dow Chemical's defending position is a "bizarre argument for equity relief." By pursuing this particular line of thinking, Dow Chemical is effectively "throwing itself at the mercy of the court."
  • "We think the most likely outcome is a settlement, where the acquisition could close with some modifications to the financing loan. That would be bad news for bondholders, because the lenders may ask for guarantees and collateral."

Dow Chemical's plea largely relies on the court to hear its plea within the context of the foundering U.S. economy.

Adam Cohen, president of Covenant Review, said that a decision in favor of Dow Chemical in this case could set a dangerous precedent that would be worse for the economy over the long term.

"Deciding for Dow would suggest that, no matter how solid you write a contract, you can still get out of it if things don't go the way you want them to", said Cohen. "That would be dangerous in the U.S. free enterprise system."

In an earlier interview, Michael Foradas, partner at law firm Kirland & Ellis, which is representing Dow Chemical in the suit, said that Dow Chemical faced "unprecedented pressures" that needed to be presented to the court "as plainly as we can put it."

Foradas added that the case is not a situation in which "Dow is trying to sneak out of a deal it doesn't like," but rather involves a deal in jeopardy because of economic factors that other major companies area facing as well.

"We understand the basis for their suit and why they filed it," Foradas said. Furthermore, "we recognize we are accountable, and that if we can't get

the deal closed there may be legal consequences."

"We believe that the suit represents the narrow interest of current shareholders who won't have any concern with the company after it is merged," Foradas said.

Meanwhile, Dow pressed on with its motion to disqualify the law firm representing Rohm & Haas in the case. Dow says that the firm Wachtell, Lipton, Rosen and Katz has an ethical conflict because it has advised Dow Chemical on legal issues in the past.

Presiding Judge William Chandler III of Chancery Court in Delaware said he would rule on the motion to disqualify Rohm & Haas' attorneys by the close of business Wednesday. However, the March 9 trial date remains in effect.