Chancery Court Declines to Order Specific Performance of Apollo’s Buyout of Cooper Tire & Rubber Co. or Find Breach of “Reasonable Best Efforts” to Close Covenant

In Cooper Tire & Rubber Company v. Apollo (Mauritius) Holdings Pvt. Ltd, C.A. No. 8980-VCG (Del. Ch. Nov. 8, 2013) (TRANSCRIPT), the Delaware Court of Chancery rejected claims by plaintiff Cooper Tire & Rubber Company (“Cooper”) that defendant Apollo (Mauritius) Holdings Pvt. Ltd (“Apollo”) breached a “reasonable best efforts” clause in the parties’ merger agreement by, inter alia, trying to renegotiate the deal price after labor unrest at various Cooper manufacturing facilities increased the likely cost of the acquisition to Apollo.  The Court declined to order specific performance of the merger agreement in a subsequent letter decision in the matter, Cooper Tire & Rubber Company v. Apollo (Mauritius) Holdings Pvt. Ltd, C.A.No.8980-VCG (Del. Ch. Nov. 9, 2013), but certified the decision for interlocutory appeal from the bench.

This case arose after labor issues in both the U.S. and China threatened to unravel Apollo’s proposed $2.5 billion buyout of Cooper.  Workers at Cooper’s China venture, Cooper Chengshan (Shandong) Tire Co., seized the company’s largest manufacturing facility in July 2013, to protest the deal and rendered it unlikely that Cooper would be able to deliver timely third-quarter financial statements to Apollo as required by the parties’ agreements.  In addition, as a result of the merger announcement, Cooper’s domestic union, United Steelworkers (“USW”), filed an arbitration matter, alleging that the merger agreement violated the union’s collective bargaining agreements for Cooper’s Tennessee plants.  An arbitrator thereafter issued an order preventing Cooper from consummating the merger absent renegotiation of existing labor contracts between Cooper and the USW.  As a result, 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 arbitrator’s decision].” 

Cooper filed this action on October 4, 2013, seeking a ruling that Apollo breached the parties’ merger agreement by failing to use reasonable best efforts to reach the required agreement with the USW.  Cooper also sought immediate specific performance of the merger agreement—far ahead of the December 31, 2013, “drop dead” date in the merger agreement—so that Cooper would not breach its own obligations to deliver third quarter financing statements to Apollo on November 14, 2013.  Cooper has been unable to retrieve financial data from its Chinese subsidiary which has been physically blocked by its majority joint venture party.
The Court determined that Section 6.12 of the merger agreement governed the parties’ dispute: “[Apollo] and [Cooper] shall each use their reasonable best efforts from and after the date of this Agreement to satisfy and obtain prior to the Effective Time, such third-party consents, waivers and approvals as may be required in connection with the consummation of the merger.”  Cooper advanced a number of arguments to support its claim that Apollo failed to use “reasonable best efforts” to reach an agreement with USW and thereby breached Section 6.12 of the merger agreement.  First, Cooper argued that Apollo breached Section 6.12 by making its negotiations with USW conditional on a reduction in the merger price.  The parties had excluded any union issues relating to the USW contracts from the events that would constitute a material adverse effect and entitle Apollo to walk away from the deal.  Thus, according to Cooper, any attempt by Apollo to condition talks with the USW on a price reduction in the merger agreement was a bad faith attempt to get out of the parties’ bargain in violation of the “reasonable best efforts” provision.  Although the Court found that Apollo did try to use its obligation to negotiate with the USW, the events at Cooper’s China facility, and the disappointing interim financials it received from Cooper, to reduce the merger consideration, the Court found that in doing so Apollo did not breach the “reasonable best efforts” provision.  According to the Court, Apollo’s negotiations over price were premised on a good faith but unavailing position that the provisions of the merger agreement did not carve-out a dispute with Cooper’s unions from the events that would cause a material adverse effect under the merger agreement. 

The Court also rejected Cooper other primary argument—that Apollo had no intention of entering into a new contract with the USW and was using the lack of an agreement with USW to run out the clock.  Although there was plenty of evidence that Apollo’s bankers, had urged Apollo to adopt this approach, the Court did not find evidence that Apollo had followed the advice of its bankers.  Instead, the Court found credible the testimony of Apollo’s vice chairman that Apollo still wanted the deal albeit for less money.  The Court also found persuasive evidence that: (1) Apollo’s representatives, including high-level executives, immediately travelled to Tennessee to meet with Cooper and the USW after learning of the arbitrator’s order; (2) Apollo continued meetings over the next several weeks in an attempt to reach an agreement;, and (3) Apollo hired experts to facilitate an agreement with USW.  The Court also found testimony of one of Apollo’s expert persuasive on the issue whether Apollo had, in fact, used its reasonable best efforts to reach an agreement with the USW.  The Court also did not fault Apollo for choosing to exclude Cooper from its negotiations with USW given the apparent acrimony between the USW and Cooper.

For the reasons set forth above, the Court found that Apollo had not breached its obligation under the merger agreement to use “reasonable best efforts” to negotiate an agreement with USW.  In a subsequent letter opinion, the Court addressed whether Cooper was entitled to specific performance of the merger agreement by the next business day.  The Court found unclear whether Cooper had satisfied all conditions to closing, and declined to order specific performance where the parties still had plenty of time to perform before the “drop dead” date of December 31, 2013.  Thus, the Court refused to effectively relieve Cooper of the obligation to disclose third quarter financials to Apollo and its lenders before November 14, 2013.