Date Submitted: July 9, 2014
Stephen C. Norman, Kevin R. Shannon, John A. Sensing, and Christopher N. Kelly, of POTTER ANDERSON & CORROON LLP; OF COUNSEL: Robert S. Faxon, Michael A. Platt, Louis A. Chaiten, Kyle T. Cutts, and Marjorie P. Duffy, of JONES DAY, Attorneys for the Plaintiff.
Raymond J. DiCamillo, Susan M. Hannigan, and Christopher H. Lyons, of RICHARDS LAYTON & FINGER, P.A.; OF COUNSEL: John L. Hardiman, Robin D. Fessel, Adam R. Brebner, Laura K. Oswell, Oded Zaluski, Asel Aliyasova, and Christen M. Martosella, of SULLIVAN & CROMWELL LLP, Attorneys for the Defendants.
GLASSCOCK, Vice Chancellor
This matter involves the unraveling of the Agreement and Plan of Merger (the "Merger Agreement") by which a large Indian tire manufacturer—Apollo (Mauritius) Holdings Pvt. Ltd ("Apollo")—was to buy a large American tire company—Cooper Tire & Rubber Company ("Cooper"). Among other reasons, acquisition of Cooper was attractive to Apollo because it would provide Apollo an entrée into the Chinese market; a significant part of Cooper's business was its majority ownership of an affiliate, a Chinese tire manufacturer, Chengshan Cooper Tires ("CCT"). Once the merger was announced, however, Cooper's ownership of the affiliate emerged as a major obstacle to the deal's consummation. The minority partner of CCT—known as Chairman Che—either vehemently opposed the merger or saw it as an opportunity to extort value from the parties beyond what his minority interest would justify. In either case, he used his position of authority over the workers and their union to physically seize the CCT facility, prevent production of Cooper products there, and deny access of the parties to the facility and to CCT's financial records.
Consummation of the deal encountered another obstacle: Cooper faced resistance from its own domestic union, the United Steelworkers ("USW"), which argued that the merger triggered a contractual right to renegotiation in several of its collective bargaining agreements. An arbitrator agreed, and Cooper and Apollo reluctantly entered into an agreement with the USW whereby the merger could not close until a settlement was reached as to the collective bargaining agreements. Initially barred from the negotiating table by Apollo due to its historically poor relations with its labor unions, Cooper became increasingly frustrated by Apollo's lack of progress in negotiating with the USW. As the deadline loomed for Cooper to report its third quarter financials—a condition to closing the merger, which Cooper could not fulfill due to the disruption at CCT—Cooper began to suspect that Apollo had grown cold to the merger and was failing to negotiate with the USW in good faith in order to avoid consummating the transaction.
Once Cooper suspected bad faith, the Merger Agreement came a cropper. Cooper sued, seeking specific performance or damages for breach of contract. Apollo counterclaimed, requesting that I declare that Cooper had failed to meet all conditions to closing, and was therefore not entitled to relief. The matter moved on an expedited schedule to trial, where Cooper asked me to quickly consider the specific performance issue in isolation, citing exigencies of its impending financial reporting obligation. I complied with Cooper's request; in a November 8 bench ruling, supplemented the next day by a letter opinion (together, the "USW Opinions"), I found that the failure to reach an agreement with the USW prevented the transaction from closing at that time, that this failure was not the result of a contractual breach on Apollo's part, and thus that Cooper was not entitled to specific performance. Because Cooper represented that appellate relief would be meaningless if not given immediately, I certified an interlocutory appeal on the narrow grounds of my ruling on specific performance. While that appeal was pending, however, Cooper dropped its request for specific performance, notifying the Supreme Court that it instead intended to terminate the merger and sue for damages under the reverse termination fee provisions of the Merger Agreement (the "Reverse Termination Fee"). The Supreme Court dismissed the interlocutory appeal as improvidently accepted, and shortly thereafter Apollo moved for an order temporarily restraining Cooper from drawing on a letter of credit for the Reverse Termination Fee and, in an effort to permanently prevent Cooper from seeking the Reverse Termination Fee, a judicial declaration on its counterclaim that Cooper had not satisfied all conditions to closing the merger as of the trial date. This Memorandum Opinion addresses the latter issue, and the effect that the rather bizarre events in China had on Cooper's ability to perform as called for in the Merger Agreement. For reasons arising from the takeover at CCT, and independent of the failure to reach an agreement with the USW, I find that Cooper was unable to satisfy all conditions to closing.
I. SCOPE OF THIS OPINION
I first turn to the appropriate scope of this decision. Due to the convoluted procedural posture of the case, the parties disagree as to what is left for me to decide. This action is before me on Apollo's post-trial Motion for Entry of a Declaratory Judgment on its counterclaim, in which Apollo has asked this Court to declare that "the conditions to closing had not been satisfied prior to the trial of this action, and Cooper [was], thus, not in a position to close the merger." Cooper contends that addressing this Motion in full is inappropriate, given my USW Opinions, in which I determined that Cooper was not entitled, as of that date, to specific performance of the merger agreement, because closing was conditioned on Apollo entering into an agreement with the USW and because Apollo had not (as of that time) breached its obligation to use best efforts in reaching such a resolution. Cooper suggests that "[b]ecause the Court's decision as to the USW is sufficient by itself to grant a declaratory judgment for Apollo, the Court should refrain from reaching any other issue."
I rejected that contention in a letter opinion on January 27, 2014,  for reasons that I repeat briefly here. In the USW Opinions, I addressed a request for equitable relief on a rigorously expedited schedule so that, if appropriate, the merger could close before Cooper was required to produce its third quarter financials, a contractual requirement it knew it could not meet due to the lockout at CCT. The precise issue before me now—whether Cooper had satisfied all conditions to closing the merger—was not before me in the USW Opinions, in which I determined that Cooper was not entitled to specific performance as of the trial date, but also that the parties' obligations under the merger agreement remained outstanding. At any rate, as an appeal of my USW Opinions appears inevitable, I believe it appropriate to resolve the issues arising from the CCT takeover presented at trial, in the interest of judicial efficiency; in doing so, I note that these issues were presented in detail at a three-day expedited trial, have been fully briefed, and may ultimately be dispositive if the case is remanded.
For its part, Apollo contends that, if I am to evaluate the conditions to closing beyond the failure to reach an agreement with the USW, I should make that determination as of November 14, 2013, the date Cooper was required to (and failed to) file its third quarter financials. In contrast, Cooper suggests in briefing that my holding should be limited to the period before October 10, 2013, arguing that "it would be inappropriate for Apollo now to obtain a declaration that covers the period through the date of trial, " given that "Apollo's counterclaim for a declaratory judgment was commenced on October 10, and included allegations only through that date;" "Apollo never filed a supplemental pleading;" "the parties agreed to collect document discovery only through October 10;" and "Apollo successfully prevented Cooper from including at trial any post-October 10 claims by Cooper relating to the tentative agreement with the USW." I find it appropriate that I determine this matter as of the date of trial. In its Motion, Apollo itself requested a determination "prior to trial of this action." Further, at oral argument on the pending Motion, Cooper's counsel indicated that the facts relevant to my analysis, at least with respect to the ongoing lockout at CCT and Cooper's inability to produce financials, had not changed between October 10, 2013 and the date of trial. Accordingly, I do not feel required to expand my decision as Apollo requests or constrain my decision as Cooper requests. Rather, the appropriate scope of the issue before me now is, setting aside the issues surrounding negotiations with the USW, whether Cooper had satisfied the conditions to closing the merger as of the trial date.
A. The Cooper-Apollo Merger
Cooper, a Delaware corporation, is the fourth largest tire manufacturer in North America and the eleventh largest tire company in the world. Cooper employs 13, 000 people globally,  and its revenues in 2012 were more than $4 billion.
Apollo is an Indian tire manufacturer founded in 1975 and organized under the laws of the Republic of Mauritius. In 2005, the business began to expand globally, and by 2010, Apollo had grown into a $2 billion company. By 2013, Apollo viewed an acquisition of Cooper's foothold in China—CCT, a joint venture with Chengshan Group that accounted for roughly 20% of Cooper's business in 2012—as vital to its efforts at global expansion.
According to the testimony elicited at the November 2013 trial, Cooper's business plan in 2012 focused primarily on acquiring smaller companies; Cooper did not originally plan to sell its business. Cooper and Apollo initially met in 2012 to discuss the possibility of a joint venture. A joint venture between the two companies never materialized, and in January 2013, Apollo approached Cooper about a potential acquisition. Over the next several months, Apollo made bids to purchase Cooper for $22.75, $25 to $26, $33, $33.75, and finally $35 per share.
During that negotiation period, Cooper entertained at least one other potential bidder: Chengshan Group, Cooper's 35% Chinese joint venture partner at CCT. The Chairman of Chengshan Group, Chairman Che, organized an investor group and orally proposed an offer of $38 per share, but he ultimately declined to make a formal offer. Although Cooper informed Chengshan Group, as its joint venture partner, that Apollo had approached Cooper about an acquisition, Apollo was never informed that Chengshan Group had expressed an interest in acquiring Cooper.
On June 12, 2013, Apollo and Cooper entered into the Merger Agreement, whereby Apollo agreed to acquire all outstanding Cooper shares for $35 per share, representing a 40% premium over trading prices and a total transaction value of roughly $2.5 billion. On September 30, approximately 74% of Cooper's outstanding shares voted in support of the merger. Had the deal closed, the resulting entity would have been the seventh largest tire manufacturer in the world.
B. The CCT Strike
As noted above, Cooper and Apollo entered into the Merger Agreement on June 12, 2013. After the transaction was announced, Apollo's stock price dropped by 39%. Research analysts speculated that the acquisition was too highly leveraged and provided few synergies for Apollo. In addition, the labor union at CCT, Cooper's Chinese joint venture, openly criticized the merger as too highly leveraged,  publishing a paid advertisement in the Wall Street Journal denouncing the merger. On June 21, 2013, the CCT labor union went on strike. The union returned to work on June 28, 2013, but resumed the strike again on or around July 12, 2013.
On August 17, the CCT union again resumed work at the plant, but refused to produce Cooper-branded tires. In addition, "the union . . . physically barr[ed] certain Cooper-appointed managers from accessing CCT's facility or from obtaining certain of CCT's financial books and records, and . . . prevented CCT from entering certain operating and financial data into CCT's computer systems." The union's reaction to news of the merger was unprecedented,  and in an effort to hold up production and force an end to the "strike"—in actuality, the physical exclusion of Cooper from its subsidiary—Cooper management adopted a policy of suspending payments to suppliers who continued to ship supplies during the pendency of the strike. Cooper also floated "potential plans . . . to change the security firm at the CCT site"—i.e., to physically replace security guards with their own men—but Apollo rejected this idea due to "concern[s] for personal safety of the people at and near the plant."
Although the parties initially believed that the strike in China was instigated by CCT's labor union, Apollo contends that, upon hiring a private investigator to interview employees at CCT, it uncovered that the true cause of the strike at CCT was Chairman Che, who had instructed middle management to warn workers that "anyone that does not take part in the protest will be fired." This news came as a surprise to both Cooper and Apollo, who anticipated in diligence that Chairman Che might disfavor the merger,  but had met together with Chairman Che prior to signing the Merger Agreement,  and had understood that as the owner of a 35% interest, "[f]rom a technical point of view, [Chengshan Group had] no veto or put rights, so [Cooper did] not need their approval for the deal."
Information that Chairman Che was behind the strike at CCT incited Apollo's "Project Charlie, " a codename Apollo used in reference to its efforts at negotiations and relationship-building with Chairman Che. Although Cooper representatives initially sought to resolve the conflict without Apollo's direct involvement,  on September 2, 2013, Apollo also sent a letter to Chairman Che indicating that, despite disruptions at CCT, Apollo still planned to consummate the merger with Cooper, and explaining that, "[a]s I am sure you are aware, the opposition will not prevent the merger from going ahead as planned, for legal and commercial reasons." Apollo likewise indicated by letter to the Mayor of Rongcheng, China, that both Cooper and Apollo "are legally committed, under United States and international laws, to proceed with the merger."
However, despite Apollo's assurances that it stood behind the merger, Cooper contends that the strike at CCT "soured Apollo on the Merger, " and that Apollo subsequently "began to look for some other pretext for seeking to escape what it now perceive[d] as a bad deal, either by delaying the closing long enough so that the risk relating to CCT shift[ed] to Cooper, or by obtaining leverage to renegotiate the Merger consideration downward."
C. The USW Strike
In addition to the strike at CCT, Cooper's domestic union, the USW, reacted to the merger announcement by filing grievances against Cooper, claiming that the proposed merger violated Cooper's collective bargaining agreements governing its Findlay, Ohio and Texarkana, Arkansas plants; the USW argued that those agreements prevented Cooper from selling its plants prior to a renegotiation of the collective bargaining agreements between a buyer and the union. During the diligence and negotiation process, Cooper and Apollo anticipated what response the merger announcement would likely generate, including the likelihood that the USW would invoke the renegotiation provisions. However, Cooper's management believed—and indicated to Apollo—that the odds of Cooper receiving a favorable outcome at arbitration were quite high. As a result, with Apollo's approval, Cooper submitted the USW's grievances to binding arbitration, with proceedings held on August 28 and 29, 2013. To the surprise of Cooper and Apollo, the arbitrator issued a decision in favor of the USW, determining that the merger could not close prior to a successful negotiation between Apollo and the USW. Rather than permitting the arbitrator's ruling to become a court order enjoining the transaction, on September 25, Apollo, Cooper, and the USW entered into an agreement providing that the merger "shall not close unless an agreement has been entered into in satisfaction of the Opinion and Award issued by [the arbitrator] on terms acceptable to [the USW]."
On September 7, 2013, immediately after the arbitration decision was issued, representatives from Cooper and Apollo met in New York to develop a negotiating strategy. On September 19 and 20, Apollo met with USW representatives in Nashville, Tennessee. On September 23, Apollo requested supplemental information from Cooper in order to learn more about the concessions Cooper had encouraged Apollo to make with the USW. Apollo's Vice Chairman and Cooper's CEO spoke on September 27, and Apollo again met with the USW on September 25 and 26, and on October 1 and 2, in Pittsburgh, Pennsylvania. Throughout these meetings, Apollo prevented Cooper from participating because, according to Apollo, Cooper had historically maintained strained relationships with its labor unions and Apollo wished to rebuild relationships with Cooper's unions.At the same time, Apollo requested that Cooper agree to a price reduction, as concessions to the USW would be costly. Cooper rejected Apollo's request for a price adjustment, and in an effort to speed up negotiations between Apollo and the USW, in November 2013, Cooper independently negotiated a conditional agreement with the USW, which guaranteed the union certain benefits in the event the merger did not close.
The merger, by its terms, had to close no later than December 31, 2013.Notwithstanding that "Outside Date, " Cooper needed to close the transaction by mid-November 2013 because it would otherwise be required to provide its third quarter financial information as a condition to financing, which it could not do in light of its exclusion from the CCT facility and documents therein.
D. Procedural History
Cooper filed its Complaint in this action on October 4, 2013, seeking (1) a positive injunction requiring Apollo to (a) use its reasonable best efforts to resolve any disagreements with the USW by permitting Cooper to negotiate in Apollo's stead, and subsequently approving a commercially reasonable agreement negotiated by Cooper, and (b) consummate the Merger; (2) a declaration that, apart from Apollo's obligation to use best efforts to reach an agreement with the USW, all conditions to closing had been satisfied; and, in the alternative, (3) unspecified money damages to compensate Cooper for losses it incurred due to Apollo's alleged breach of the Merger Agreement. In response, Apollo brought a counterclaim seeking a declaration that conditions precedent to closing had not been satisfied. The matter was expedited because Cooper, as described above, knew it would not be able to satisfy a contractual condition after mid-November.
I held a three-day trial from November 5–7, 2013, in which the parties presented evidence on whether Apollo was in material breach of the Merger Agreement by failing to use its reasonable best efforts to negotiate with the USW, and whether all conditions precedent to closing had otherwise been satisfied. At that time, Cooper sought specific performance of the Merger Agreement, and represented that, because it was vanishingly unlikely due to the strike at CCT that Cooper would be able to deliver third quarter financials to Apollo's financing sources by November 14, 2013, as required by the Merger Agreement, any injunctive relief, to be meaningful, would have to be granted by that date. As a result, on November 8, I delivered a bench decision, supplemented on November 9 by a letter opinion, on a single dispositive issue—whether Cooper was entitled to injunctive relief, and ultimately specific performance of the Merger Agreement, because Apollo had materially breached the Agreement by failing to use its reasonable best efforts to negotiate a resolution with the USW. In those USW Opinions, I found that Apollo was not in breach and that Cooper was not entitled to the relief it sought.
At Cooper's request, I then certified an interlocutory appeal, with the understanding that Monday, November 11 was a holiday, and that Cooper would be denied meaningful access to an appeal if it could not receive a decision on its appeal by November 14, while specific performance of the Merger Agreement— that is, while delivery of Cooper's current financial information—was still possible. Instead, after I certified the interlocutory appeal, Cooper represented in its application to the Supreme Court that it sought recovery of the Reverse Termination Fee under the Merger Agreement rather than injunctive relief, and therefore the timeline under which this Court had accommodated the parties was no longer applicable. The Supreme Court dismissed Cooper's appeal on December 16, 2013 as "improvidently accepted."
That same day, in an effort to prevent Cooper from pursuing the Reverse Termination Fee it now sought, Apollo moved for a temporary restraining order preventing Cooper from drawing on the letter of credit for the Reverse Termination Fee, and a judicial declaration that Cooper had not satisfied all conditions to closing prior to trial. On January 24, 2014, the parties submitted written argument regarding how this case should move forward. Despite Cooper's request that I convert my November 8 bench ruling into a final judgment on Apollo's counterclaim, I determined on January 27, 2014 that Apollo's ...