In an unusual oral bench opinion, supplemented the following day with a Saturday letter to affected counsel, Vice Chancellor Sam Glasscock III of the Delaware Chancery court has found that Apollo Tyre Limited, a US$39 billion behemoth in India, continued to be under contract to acquire Cooper Tire & Rubber Company (NYSE: CTB), the second largest US tire manufacturer, for US$35 per share or US$2.5 billion, despite Cooper’s claims that Apollo was in breach of the agreement.
Cooper sought an immediate appeal, which as of the date of this alert remains pending in Delaware.
On its surface, the case seems a test of the limits of a requirement that Apollo use “reasonable best efforts,” which is a relatively opaque standard – an intermediate stop between “commercially reasonable efforts” and “best efforts” – the standard by which Apollo is bound to negotiate labor contracts with the United Steel Workers (USW). On November 8, Vice Chancellor Glasscock found that Apollo was using “reasonable best efforts” – even if the negotiations were not being conducted in the manner preferred by Cooper and even further if Apollo’s proposals to the USW were explicitly predicated on a deal price reduction by Cooper. He further found that the parties have “ample” time before a merger agreement drop-dead date of December 31 for Apollo to reach an accord with the USW, as a binding arbitrator found is required under Cooper’s labor agreements with the USW before the acquisition may close.
However, the deeper story lies in the tale of Cooper, and it is heavy reliance for approximately 25 percent of its revenue on a joint venture in the People’s Republic of China with the Chengshan Group. While the Apollo bid was under consideration, Chengshan was exploring its own bid to acquire its US joint venture partner. After the Apollo deal was announced, according to court testimony, Chengshan’s chairman complained of not receiving anything from the acquisition and further accused Cooper of divorcing its “son” and replacing it with Apollo as a “stepfather.” Apollo offered US$150-200 million to buy out Chengshan after the closing; Chengsan in return demanded US$400 million. Given that one would think the value could likely be bridged one way or another, it would seem reasonable to think that a non-compete in Cooper’s favor was lacking in these terms. Chengsan then promptly threw out Cooper managers from the Chinese plants after posting guards at the doors; its workers halted production of any Cooper branded tires; and the joint venture has since refused to supply to any financial information to its US parent.
This last piece of the puzzle is critical. The joint venture quagmire is apparently foremost in the minds of Apollo’s banks, at least according to e-mails produced in court. To no one’s surprise, those banks appear eager find a way to avoid moving forward with the proposed debt facilities.
Although Apollo’s bid is not subject to a financing condition (or “out”), the merger agreement does require Cooper to provide quarterly financial statements, in this case by Thursday, November 14. Cooper, by its own assessment, will almost certainly be unable to do so by this deadline, given its Chinese stalemate. Assuming Cooper breaches the information requirements, the acquisition financing evaporates and Cooper can find no other legal grounds on which to object, then Apollo would be relieved of having to rely solely on claiming a “material adverse effect” (MAE) to either terminate the acquisition or insist on a price renegotiation. Such a dance on MAE is not clear cut for Apollo, since Cooper claims Apollo was put on clear notice prior to entering into the acquisition contract that the Chinese joint venture could become problematic.
In sum, the Apollo/Cooper case has not become a seminal case on the limits of “reasonable best efforts.” Vice Chancellor Glasscock was acutely aware that Cooper could be accused of trying to avoid the specter of breaching the November 14 financial statement requirements by asserting the violation of Apollo’s “reasonable best efforts” requirements. Rather, this case instead has shone a bright spotlight on the perils and pitfalls of joint ventures. Although 25 percent is a healthy portion of an enterprise’s revenue, it remains a minority – a minority which in this case has thrown an otherwise viable company into legal chaos. Cooper’s board had not gone looking for a deal with Apollo – there was no auction process or even entreaties to put the company in play. However, if the Apollo deal at its current US$35 per share now disappears, it will be clear to all sorts of acquirers that Cooper is in play, and Cooper will in all likelihood be left in a less than optimal defensive state.