Dow v. Rohm & Haas, settled

One of the more controversial pieces I have written on this blog was in connection with the lawsuit brought by shareholders of Rohm & Haas to force Dow Chemical to complete its purchase of Rohm & Haas pursuant to a contract entered last summer that pegged the purchase price at $78 per share of Rohm & Haas.  My principal point was in response to an article written by Joe Nocera in the New York Times that to even suggest “that maybe, just maybe, deals that stop making sense ought to be called off, or at least rejiggered, especially in the middle of a once-in-a-lifetime financial crisis – invites withering scorn, especially if you say it to someone on Wall Street or in the legal profession.”

My point was that when something stops making sense, the law, if it is working properly, should not force the nonsensicle result.

Responses varied from the grateful to the withering.

The outcome, however, makes remarkable sense.  Last week, Dow and Rohm & Haas settled their dispute over the $15.3 billion merger.  Pursuant to the settlement agreement, Rohm & Haas’s shareholders will get the $78 per share Dow originally promised.  But hedge fund manager John Paulson and the Haas  family shareholders will in essence re-invest their proceeds from the sale for preferred stock in Dow. Doing so gives Dow “enough room to purchase Rohm without immediately running aground. Dow had earlier refused to close the merger, saying its business would be hurt if it had to draw heavily on risky short-term debt.”

In essence, Paulson and the Rohm & Haas family shareholders are helping Dow finance the purchase, protecting the deal they had negotiated for the rest of the Rohm & Haas shareholders.  In exchange, Paulson and the Haas family get great value in return.  Moreover, if I read the situation correctly, there may be tremendous tax advantages for the Haas family.  If the transaction is treated as an exchange of Rohm & Haas stock for Dow preferred stock, it will not be a taxable event.  Moreover, upon transfer to the Haas family heirs via testamentary disposition, those heirs would be considered to have a tax basis in those shares equal to their value upon that testamentary disposition.  In short, whatever gain the Haas family earned in the Dow transaction and whatever gain is earned in the future in the Dow stock they received in exchange will never be taxed to the Haas family or its heirs.

Everyone comes out ahead, and Dow was not forced to go through with the deal it had originally contracted for and so many thought would have to be enforced.