Cooper Tire is facing more legal issues in its snarled deal with Apollo Tyres Ltd. of India.
Last week, Vice Chancellor Sam Glasscock III of the Delaware Chancery Court ruled that Apollo Tyres had not breached its agreement to acquire Cooper Tire.
Cooper had previously accused Apollo of acting in bad faith after Apollo tried to renegotiate the terms of the deal. That came after Cooper Tire had problems at its Chinese joint venture operations and received a surprise arbitrator ruling requiring that Cooper Tire renegotiate its contracts with the United Steelworkers.
The basis of the ruling lies in convoluted provisions of Cooper and Apollo’s acquisition agreement. And it leaves Cooper with few good options.
To understand the crux of the ruling, we need to step back and look at the acquisition agreement provisions that the two tire companies negotiated at the time that the deal was announced in June. The vice chancellor’s ruling focused on two provisions that are required of Apollo.
Section 6.3 of the acquisition agreement requires that Apollo “in the most expeditious manner possible†use its “reasonable best efforts†to obtain all necessary consents “under any applicable laws.†This provision, which is in every acquisition agreement, generally requires Apollo to obtain regulatory clearance for the transaction for things like antitrust approvals. That is what obtaining consents under “applicable laws†refers to.
Section 6.12 of the acquisition agreement requires that Apollo use its “reasonable best efforts†to obtain all third-party consents that “may be required in connection with the consummation of the merger†based on the terms of any contract set forth on an undisclosed schedule to the acquisition agreement.
This provision is meant to deal with consents to outside parties, like provisions in contracts requiring consent for their transfer.
The big difference between the two provisions is that Section 6.3 requires that the party to act “expeditiously†while Section 6.12 does not. In addition, Section 6.12 specifically says that no payment is required to obtain any third-party consents that are listed.
Not surprisingly, Cooper Tire argued that Section 6.3 applied because it wants Apollo to move as fast as possible. Because the United Steelworkers could get an injunction any time to enforce their agreement, Cooper Tire argued that the provision applied. Why elevate form over substance by waiting for the union to sue?
Apollo countered that neither Sections 6.3 nor 6.12 applied. Section 6.3 concerned only legal clearances, it argued, and an arbitrator’s ruling was nothing of the sort. And it argued that Section 6.12 referred only to the contracts that are listed on a schedule to the agreement. Apollo noted that the United Steelworkers contract was not listed on the schedule. In such a case, Apollo was not required to do anything to renegotiate the United Steelworkers contracts.
Apollo’s argument was based on the fact that when the two parties negotiated this agreement, they did not want to acknowledge in any way that the steelworkers’ contracts might be required to be renegotiated in connection with the takeover.
Indeed, Cooper and Apollo thought the contract’s change-of-control provisions applied only to sale of the covered plants directly, not the entire company. Cooper Tire and Apollo didn’t want to give any reason for the United Steelworkers to argue the opposite, and so they didn’t draft a specific provision to show how the parties should conduct themselves if the contracts were required to be renegotiated.
Not only that, but Section 6.12 did not specifically reference the union contracts, meaning its provisions arguably did not require Apollo to negotiate anything with the United Steelworkers.
This delicate provision, which the two companies thought would sidestep labor issues, has now blown up into litigation. The steelworkers won an arbitration ruling that found that their contracts did need to be renegotiated, and Apollo is now asking for a price reduction to compensate the company for any raises it must give under the renegotiated contracts.
Vice Chancellor Glasscock’s ruling addressed the issue that the parties deliberately did not address. He ruled that Section 6.3 did not apply because “applicable law†did not include an arbitration ruling, only governmental orders and the like.
Then he did something curious. He ruled that Section 6.12 also did not apply because the United Steelworkers contracts were not listed on the disclosure schedules. However, once the arbitrator had ruled, the clause sprang back to life and now required Apollo to negotiate a new contract because it was now a contract “required in connection with the consummation of the merger,†even though it was not listed on the schedule.
Judge Glasscock’s ruling is a bit of a tortured reading. Section 6.12 seems to say on its face that it applies only to contracts listed on the schedule, and the United Steelworkers contract is not listed. Even if it were listed, there is a second provision in Section 6.12 that says no payments are required in connection with any efforts undertaken to obtain consents under the contracts listed there. The only way Judge Glassock’s ruling makes sense is to interpret the clause as requiring things beyond the listed contracts, something that does not appear to be the natural reading but may have been supported by the evidence at trial.
Despite applying Section 6.12, Judge Glasscock still found for Apollo. He ruled that Apollo did indeed use reasonable best efforts by meeting with the steelworkers’ union to try to negotiate. This was despite the fact that Apollo had also asked for a price reduction from Cooper because of this issue.
The ruling leaves Cooper Tire in a bind. With Apollo found to be not in breach of this agreement, Apollo’s delay in closing the deal is now judicially approved. As I discussed in a previous column, a delay for Cooper Tire means it needed to provide Apollo third-quarter financials this week, or the banks could arguably refuse to finance the acquisition. Cooper has already said that it can’t do that. If Cooper doesn’t produce these financials, then Apollo can terminate the agreement for Cooper’s breach.
So what happens next?
Cooper has appealed to the Delaware Supreme Court, an appeal the court accepted to hear on Wednesday. But even though the court will take up the case, I don’t think it means much. It will be a steep uphill battle for Cooper.
The judge’s bench ruling is vague in some points and the reading of the agreement is not the natural one. These are the perils of an oral rather than written decision as the judge did here when he ruled at the end of the trial. Nonetheless, it appears clear that the basis of his ruling is a factual one that Apollo used “reasonable best efforts†to negotiate with the United Steelworkers.
The Delaware Supreme Court will defer to Vice Chancellor Glasscock on his finding of the facts. Cooper will try to counter this by arguing that there are legal issues here - namely, if you ask for a price reduction for an already agreed-to deal, it is per se acting in bad faith.
In addition, Cooper will try to argue that the opinion seems to say that that the standard for reasonable best efforts was not set correctly. It appears that the judge found that reasonable best efforts can include asking for a price reduction, something that would upset the takeover world due to its effect on future deals.
Meanwhile, Apollo will just reargue its old points â€" and that if anything, Section 6.12 doesn’t even apply.
Cooper knows it has an uphill battle. Its success on appeal will ultimately depend on how convincing this argument is to the Supreme Court judges and how much a policy impact the judges think this ruling will make if not overturned. After all, the Delaware Supreme Court seems particularly strategic in overruling the lower Chancery Court, appearing to overturn the lower court most often when reputational issues of the Delaware courts are at stake.
As for Apollo, it might not decide to exercise its right to terminate the agreement when Cooper arguably breaches the agreement by failing to deliver the third-quarter financials.
Instead, Apollo could let the acquisition hang until the drop dead date of Dec. 31. Such a stance would give Apollo a public-relations coup by showing it still wants to negotiate. And if this is really true, it makes sense for Apollo to keep the agreement alive as it is easier to renegotiate an agreement than resurrect a dead deal.
All in all, it still remains the case that Cooper Tire still has a lot of hoops to go through for $35 a share, and things just became a little more difficult.
