WILMINGTON, Del.—Did Apollo Tyres Ltd. deliberately drag its feet on an agreement with the United Steelworkers (USW) union to try to renege on its $35-per-share merger deal with Cooper Tire & Rubber Co.?
Or did Cooper force India's Apollo to ask for a lower per-share price by misrepresenting the company's earnings outlook and ties with its Chinese subsidiary?
These are the questions before the Delaware courts—and the matter is far from over.
On Nov. 15, the Delaware Supreme Court granted Cooper's motion to expedite proceedings in the tire maker's lawsuit seeking to hold Apollo to the exact terms of firms' merger agreement and set Dec. 19 for oral arguments.
This ruling followed the Delaware Chancery Court action on Nov. 8 when, after a three-day trial, Judge Sam Glasscock III made a partial bench ruling that Apollo had not breached the terms of its merger agreement with Coop-er by asking for a purchase price that would shave at least $2.50 per share from the deal, and perhaps as much as $9.
Cooper said it was pleased with the higher court's ruling. Apollo has not issued a formal statement about the ruling, but made it plain in its brief opposing Cooper's motion that it felt Cooper was wasting time.
“Cooper entered into the agreement with Apollo in a position of strength,” the Findlay, Ohio-based tire maker said in a press release Nov. 9, the day after Judge Glasscock issued his bench ruling.
Cooper generated record profits in 2012 and the first quarter of 2013, and operating profit was up in the first six months of 2013 compared with the same period in 2012, the tire maker said, noting this was what attracted Apollo to make a bid for Cooper.
In its own statement after the Nov. 8 ruling, Apollo said it was pleased with Judge Glasscock's ruling.
“The court found that Apollo had used 'reasonable best efforts' to negotiate with the USW and that, contrary to Cooper's claims, 'nothing in Apollo's conduct indicates buyer's remorse,'” Apollo said.
In its Nov. 12 motion to the high court, Cooper said it not only sought “specific performance” of the June 12 merger agreement—that is, an order compelling Apollo to complete the deal exactly according to the negotiated terms—but also a declaration regarding the parties' rights and obligations under the merger agreement, which the Chancery Court has not yet decided.
“The only way this merger can still be consummated—and the benefits of a completed merger provided to Cooper's shareholders—is if Apollo is precluded from terminating the merger agreement on Dec. 31, 2013, as Apollo is likely to do if the ruling below stands,” Cooper said.
“What is more, this case involves a discrete but critically important legal ruling that threatens not just this $2.5 billion merger and the expectation interests of Cooper's shareholders, but broader settled expectations,” the tire maker said.
“Can a buyer that is required to use reasonable best efforts to remove an impediment to closing refuse to do so, consistent with that obligation, unless the seller agrees to a price reduction?” Cooper asked. “Settled precedent holds, 'No.'”
In its Nov. 14 brief opposing Cooper's motion, Apollo said it had no intention of terminating the agreement Dec. 31.
“Apollo is still seeking to close the merger transaction, and continues to try to reach accord with the USW and to resolve other impediments to closing,” Apollo said.
To maintain the option of specific performance, Apollo said, Cooper had to issue its third-quarter financial results by Nov. 14, as Judge Glasscock stated in a Nov. 9 letter.
Instead, Cooper filed a notice with the U.S. Securities and Exchange Commission (SEC) Nov. 12 saying the third-quarter report would be late.
“Accordingly, neither Cooper nor Apollo is in a position to compel funding of the transaction financing,” Apollo said. “Specific performance is no longer available, and there is no 'good cause' for Cooper to seek expedited review.”
In its SEC filing, Cooper specifically cited continuing problems at Chengshan (Shandong) Tire Co. Ltd. (CCT), Cooper's Chinese joint venture with Chengshan Group Co. Ltd. Without the financial data from CCT, it was impossible for Cooper to issue its third-quarter financial report by Nov. 14, the company said.
Apollo said it doesn't agree with Cooper that the proposed merger caused Cooper's lack of control over CCT.
“Cooper is again attempting to avoid rather than accept its responsibility for the situation at CCT, as it has done throughout this process,” Apollo said.
Cooper filed its lawsuit with the Chancery Court Oct. 4. In the absence of specific performance, Cooper sought financial compensation for all losses it sustained from the merger, along with attorneys' fees and court costs.
Cooper accused Apollo of a “knowing, deliberate and material breach of the merger agreement.”
In reply, Apollo said: “Cooper is seeking prematurely and without claim of right to specifically enforce the merger agreement before it has satisfied the closing conditions and while it itself is in material breach of the merger agreement.”
Among the major points of contention were:
c Whether Apollo deliberately delayed making an agreement with the USW, and sought to get the per-share price of Cooper's stock reduced based on an unrealistic estimate of the cost of such an agreement;
c Whether Cooper misrepresented its long-term financial outlook to Apollo during merger negotiations; and
c Whether Cooper downplayed the likelihood of strife with CCT based on Chengshan's disapproval of the merger.
At the Nov. 5 court hearing, Cooper CEO Roy V. Armes testified about a Sept. 25, 2013, telephone conversation with Neeraj Kanwar, Apollo's vice chairman, whom he said estimated the cost of a deal with the USW at between $75 million and $125 million.
“It was clear he wanted a price reduction,” Mr. Armes told the court. “I could not negotiate an agreement, then turn around and ask my shareholders to pay for it.”
In further questioning, Mr. Armes said he knew Apollo's estimates were high because Cooper had recently settled a dispute with the USW for considerably less.
In his Nov. 5 testimony, Cooper CFO Bradley Hughes acknowledged that Cooper's second-quarter earnings were less than originally projected. The final figures were released shortly after the merger was announced, and Apollo said the earlier projections influenced their decision to agree to the merger.
Mr. Hughes quoted one of his former supervisors at Ford Motor Co.: “The one thing you know is that the forecast is going to be wrong.”
He blamed short-term issues with the startup of Cooper's new Enterprise Resource Policy system for the shortfall, as well as pricing issues, the tire industry's competitive environment and costs associated with the merger. He insisted, however, that Cooper gave Apollo sufficient notice of these problems.
“I'm surprised they were surprised,” he said.
In their questioning of Mr. Hughes, Apollo attorneys quoted Cooper documents telling Apollo that acquiring Cooper was “a low-cost way of Apollo entering the Chinese market.”
Instead, according to court documents, union workers at CCT, encouraged by management, went on strike June 21. Chengshan Group, according to Cooper, wanted to place its own bid on Cooper.
Although Cooper owns 65 percent of CCT, the Chinese company has stopped making Cooper-brand tires, according to Mr. Hughes. Cooper executives also are barred from the CCT plant, he said, except for Chief Technology Officer Kurt Reid and a few others.
Cooper's executive committee has approved a policy of not paying suppliers for future shipments to CCT, according to Mr. Hughes. “We thought that might encourage them to be more cooperative,” he testified.
After Judge Glasscock's decision, Cooper's shares fell 11.5 percent on the New York Stock Exchange. On Nov. 12, Apollo reported a 44-percent increase in its net profit in its second quarter.
The Delaware Supreme Court has scheduled oral argument on Cooper's motion at 10:30 a.m. on Thursday, Dec. 19. Cooper's opening brief is due to the court Nov. 26, Apollo's answering brief Dec. 9, and Cooper's reply to Apollo Dec. 16.
Meanwhile, Apollo officials could not be reached at Tire Business presstime for comment on a news report that Apollo tried but failed to purchase Chengshan's 35-percent share of CCT.
To contact this reporter: mmoore@ crain.com; 202-662-7211.