Cooper Tire & Rubber Company v. Apollo (Mauritius) Holdings Pvt. Ltd.: Court of Chancery Interprets “Ordinary Course” Covenant and Holds that Business Disruption Prevents Merger Target from Complying with Merger Covenants
February 17, 2015
In Cooper Tire & Rubber Company v. Apollo (Mauritius) Holdings Pvt. Ltd, 2014 WL 5654305 (Del. Ch. Oct. 31, 2014), the Delaware Court of Chancery found that Cooper Tire & Rubber Company (“Cooper”) had not satisfied all of the conditions to closing its merger with Apollo (Mauritius) Holdings Pvt. Ltd (“Apollo”) as of the trial date, and thus was likely barred from seeking a $112 million reverse termination fee under the merger agreement.
Cooper and Apollo entered into a merger agreement pursuant to which Apollo would acquire Cooper. Shortly thereafter, a series of events occurred that precipitated the deal’s demise. First, a labor union at Chengshan Cooper Tires (“CCT”), a Chinese facility that was majority owned by Cooper, publicly stated its opposition to the merger and commenced an employee strike in protest. The union also physically barred Cooper-appointed managers from entering the facility or obtaining access to CCT’s financial data entry systems. It was alleged that the parties later determined that the CCT strike had been initiated by Cooper’s minority partner at CCT, who opposed the merger. At the same time, Cooper encountered resistance from its domestic union, the United Steel Workers (“USW”), which claimed that the merger triggered Cooper’s obligations to renegotiate its collective bargaining agreements. Apollo attempted to negotiate with the USW, but was unsuccessful in resolving the dispute.
Once it became clear that the deal was in danger of failing, Cooper sued Apollo in the Court of Chancery seeking specific performance or damages for breach of contract based on Apollo’s alleged failure to negotiate with the USW in good faith. The Court of Chancery, in an earlier opinion, Cooper Tire & Rubber Company v. Apollo (Mauritius) Holdings Pvt. Ltd, 2013 WL 5977140 (Del. Ch. Nov. 9, 2013), ruled against Cooper, which then sought interlocutory appeal of the Court’s decision to the Delaware Supreme Court. While the appeal was pending, Cooper notified the Delaware Supreme Court that it intended to terminate the merger agreement and seek a reverse termination fee under the merger agreement rather than pursue its appeal. Apollo then sought to prevent Cooper from collecting the reverse termination fee by seeking a declaratory judgment from the Court that Cooper had not satisfied all conditions to closing the merger. Specifically, Apollo alleged that Cooper was, at the time of trial, in breach of its obligation under the merger agreement to cause each of its subsidiaries to operate in the ordinary course of business. Cooper argued that the interim covenant only applied to actions within Cooper’s complete control and that the alleged breaches involved third parties, such as CCT’s employees and the USW, that were outside the scope of the interim covenant.
The Court rejected Cooper’s interpretation of the interim covenant and held that the events that had occurred at the CCT facility prevented Cooper from complying with its contractual obligations necessary to close the merger. The Court stated that “ordinary course” means “the normal and ordinary routine of conducting business,” and that the cessation of CCT’s production of Cooper-branded tires, the physical exclusion of Cooper employees from CCT’s facilities, and limitation of Cooper’s access to CCT’s financials did not comply with that standard. While stating that its opinion only addressed whether Cooper had satisfied its obligations under the merger agreement and the conditions to closing, the Court noted that the effect of the opinion likely would be dispositive of Cooper’s ability to collect a reverse termination fee.