THE WOODLANDS – After U.S. state judges decided that Huntsman could merge with another chemical company, the European bankers behind the deal made their own decision not to fund the merger.

The Huntsman Corporation of The Woodlands had approval to merge into Hexion Specialty Chemicals of Columbus, Ohio. Credit Suisse of Switzerland and Deutsche Bank of Germany, which had agreed to supply $6.5 billion for the Oct. 28 closing of the merger, didn't deliver.

They escaped their commitment by expressing doubts about the solvency of the new Hexion Huntsman.

Now a Texas appellate court ruled there was no basis for the court to address the solvency issue, and found that Hexion appears to have worked with the banks to halt the merger.

According to court documents, judges in Delaware and Texas had ordered the merger to proceed, and the Ninth District appeals court in Beaumont removed the last legal hurdle five days before the closing.

"Huntsman will continue to enforce its rights under the merger agreement and various court orders and will seek to consummate the merger promptly," a company press release stated.

A merger of Huntsman into Hexion would fit the mold of a leveraged buyout, because the smaller company would swallow the bigger one.

According to a Sept. 29 press release, Huntsman employs about 13,000 workers and reported revenue around $10 billion last year.

Hexion, a subsidiary of Apollo Management Limited Partnership, last year counted about 7,000 employees and about $5 billion in revenue.

When Hexion announced the merger, it planned to raise $10.6 billion so it could buy Huntsman shares at $28 and assume Huntsman debts.

"This acquisition will build Hexion into one of the world's largest specialty chemical companies," said Joshua Harris, founding partner of Apollo Management.

But in April of this year, the agreement unraveled.

Huntsman sued Apollo Management in Montgomery County, seeking more than $3 billion in damages.

Hexion sued Huntsman in Delaware to escape the agreement, claiming the new company could not provide a certificate of solvency to bankers at closing.

In Delaware, on Sept. 29, Vice Chancellor Stephen Lamb ordered Hexion to consummate the merger.

Huntsman Corporation President Peter Huntsman said, "Apollo's misguided attempt to use 2008's turbulent energy and financial markets to construct a solvency issue where none existed has now been exposed."

Company founder Jon Huntsman said, "We have claimed all along that Apollo would resort to any means necessary to break a legal and binding contract."

He said, "Apollo was dishonest and untruthful and lost the case."

The next day, Huntsman sued Credit Suisse and Deutsche Bank in Montgomery County.

District Judge Frederick Edwards immediately granted Huntsman a temporary order to restrain the banks from terminating their commitment.

On Oct. 13 he ruled that the banks could not sue Huntsman.

He consolidated Huntsman's claims against the banks with its claims against Hexion, and set a Feb. 9 jury trial.

The banks petitioned the Ninth District in Beaumont to reverse Edwards, arguing that he should let a New York court address the issue of solvency.

On Oct. 23, Ninth District Chief Justice Steve McKeithen and Justices Charles Kreger and Hollis Horton answered that the issue wasn't ripe for any court.

"The courts of New York, like the courts of Texas, do not give advisory opinions," McKeithen wrote.

He wrote that "the commitment letter does not grant the banks a right to obtain a prospective judicial determination of the future solvency of the merged corporation."

In Delaware, Credit Suisse testified that banks can determine solvency by an objective standard in the normal course of business, McKeithen wrote.

He wrote that "therefore, the banks would not need a New York court to determine for them whether a company is solvent."

McKeithen rejected an argument from the banks that Huntsman produced no evidence that the banks conspired with Hexion against Huntsman.

"The merger agreement required Hexion to keep Huntsman informed with respect to all material activity concerning the status of the financing," he wrote. "Yet Huntsman produced evidence that the banks and Apollo had an undisclosed agreement from the outset to vary from the terms of the commitment letter."

After a meeting between Hexion and bankers, McKeithen wrote, Hexion altered its conduct and took steps to avoid fulfilling terms of the merger.

Peter Huntsman welcomed the decision.

"This is the third court to rule in Huntsman's favor," he said.

"It is time for Apollo and the banks that contracted to close on this transaction to fulfill their responsibilities," he said.

On the eve of closing, Hexion told Huntsman the banks wouldn't provide funding.

"Hexion further informed Huntsman that it is working to resolve the banks' concerns and is still seeking to close the merger," a Huntsman press release stated.

If the merger had closed at $28 a share, Huntsman shareholders would have received more than twice the current value of their shares.
On Oct. 27, Huntsman shares traded around $12.

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