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VANTICO HOLDINGS S.A. v. APOLLO MANAGEMENT

February 28, 2003

VANTICO HOLDINGS S.A., VANTICO GROUP S.A., VANTICO INTERNATIONAL S.A., AND VANTICO, INC., PLAINTIFFS,
v.
APOLLO MANAGEMENT, LP AND RESOLUTION PERFORMANCE PRODUCTS, LLC, DEFENDANTS.



The opinion of the court was delivered by: John G. Koeltl, District Judge

OPINION FINDINGS OF FACT CONCLUSIONS OF LAW

Introduction

This is a motion for a preliminary injunction brought pursuant to the federal antitrust laws by the plaintiffs, Vantico Holdings S.A., Vantico Group S.A., Vantico International S.A., and Vantico, Inc. (collectively "Vantico"), which are direct or indirect producers of epoxy resin. The plaintiffs seek to enjoin a defendant, Apollo Management, LP ("Apollo"), a private equity investment firm that currently owns a substantial interest in Vantico's Senior Debt, through Apollo Investment Fund IV, L.P., from acquiring any more debt or equity of Vantico, and from voting its interest in Vantico's Senior Debt in a manner inconsistent with the vote of other senior debt-holders or in a manner inconsistent with Vantico's voluntary restructuring plan. In addition, because Apollo, through Apollo Investment Fund V, has a significant investment in Resolution Performance Products, LLC ("Resolution"), a direct horizontal competitor of Vantico that also produces epoxy resin products, the plaintiffs also seek to enjoin Apollo from interfering, in any way, with Vantico's attempt to remain a viable competitor of Resolution and from using and obtaining non-public competitively sensitive information concerning Vantico's operations, or its possible reorganization and bankruptcy.

The plaintiffs originally sought a temporary restraining order ("TRO"), and after a hearing held on February 4, 2003, the plaintiffs' motion for a TRO was denied. Subsequently, a hearing was held on February 12, 2003 on the motion for a preliminary injunction, and the parties had the opportunity to examine witnesses and submit relevant documentary evidence. Having reviewed the submissions and assessed the credibility of the witnesses, the Court makes the following Findings of Fact and reaches the following Conclusions of Law pursuant to Fed.R.Civ.P. 52(a) and 65.

FINDINGS OF FACT

Parties

1. The plaintiffs (collectively "Vantico") are the constituent companies of a highly-leveraged, multi-national corporate entity. (Declaration of Justin Court ("Court Decl.") dated Feb. 3, 2003 at ¶¶ 2-5; Tr. dated Feb. 12, 2003 at 153 (Court).) Plaintiffs Vantico Holding S.A., Vantico Group S.A., and Vantico International S.A. are corporations organized under the laws of Luxembourg. Morgan Grenfell Private Equity Limited ("MGPE") owns the majority of the equity of Vantico Holding S.A., which in turn owns all of the equity of Vantico Group S.A., which in turn owns all of the equity of Vantico International S.A. Vantico International S.A. owns all of the Vantico operating companies. (Court Decl. ¶ 2; Am. Compl. ¶ 4.)
2. The plaintiff Vantico Inc. ("Vantico Inc."), a corporation organized under the laws of the State of Delaware, manufactures and sells epoxy resin products, including structural composites, specialty polymers, coating systems and electrical insulation materials. (Am. Compl. ¶ 5.)
3. Vantico, Inc. is a major worldwide manufacturer of epoxy resins, including Basic Liquid Resin ("BLR"), Basic Solid Resin ("BSR"), and specialty resins. (Declaration of Peter Farmakis ("Farmakis Decl.") dated Jan. 31, 2003 ¶¶ 14-20.)
4. Epoxy resins are high-performance thermosetting resins used primarily for protective coatings, electrical laminates and encapsulations, bonding and adhesives, glass fiber-reinforced vessels, pipes and structural materials. (Farmakis Decl. ¶ 2.) In their cured form, epoxy resins possess a number of desirable properties, including outstanding adhesion, excellent resistance to corrosion and chemicals, high tensile strength, good toughness and excellent dielectric properties. (Id.; Tr. at 77-78 (Farmakis).) Surface coatings have traditionally been the largest application for BLR. (Farmakis Decl. ¶ 10.) The major coating applications for BLR include industrial maintenance and marine finishes, OEM automotive primers, beer and beverage can interiors, food can interiors, machinery and equipment and appliances. (Id.) BLR is manufactured from a combination of bisphenol A and epichlorohydrin ("ECH"). (Farmakis Decl. ¶ 8.)
6. Resolution and Dow are the major worldwide producers of BLR with each having approximately 43% of the United States production and 30% and 26% respectively of the worldwide production in 2000. (Farmakis Decl. ¶ 20.) In 2000 Vantico had 14% of the United States production and 12% of the worldwide production of BLR. (Id.)
7. Resolution and Dow are the only two U.S. suppliers of ECH. (Farmakis Decl. ¶ 3.)
8. The defendant Apollo Management, L.P. ("Apollo") is a private equity investment firm that was founded in 1990. (Declaration of Scott Kleinman ("Kleinman Decl.") dated Feb. 7, 2003 at ¶ 2.)
9. Apollo manages several distinct funds, which are administered separately, and distinct fiduciary duties are owed to each of those fund's investors. (Kleinman Decl. ¶ 3.) Two of those funds are Apollo Investment Fund IV, L.P. ("Fund IV") and Apollo Investment Fund V, L.P. ("Fund V"). (Id.) The Apollo investors are primarily state and corporate pension funds, university endowments, and other institutional investors. (Id.)
10. Although the funds are administered separately, there is overlap between individuals who sit on the board of directors of Fund IV and Fund V. Leon Black, the CEO and principal of Apollo, is the President and Director of both Fund IV and Fund V. (See Pls.' Exh. 1 (Chart).) John J. Hannan, a principal of Apollo, is the Vice-President and Director of both Fund IV and Fund V. (See id.)
11. As part of its investment activities, Apollo purchases the distressed debt of various companies. (Kleinman Decl. ¶ 3.) Part of these activities involve investments in the chemical sector. (Kleinman Decl. ¶ 2.)
12. One of Apollo's investments in the chemical sector is Resolution Performance Products LLC ("Resolution"), which manufactures and sells epoxy resin product in direct competition with Vantico. (Kleinman Decl. ¶ 3.)
13. Fund IV owns approximately 79% of Resolution Holdings LLC. ("Resolution Holdings") (Defts.' Exh. 4.). In turn, Resolution Holdings owns approximately 91% of RPP Inc. (Id.) RPP Inc. is the parent company and owns all of Resolution. (Id.) Apollo admits that it has invested in Resolution. (Kleinman Decl. ¶ 3.) Resolution discloses in its annual securities filing that through Apollo's equity interest and the fact that a majority of Resolution's Board of Managers is affiliated with Apollo, Apollo has the power to approve and set the terms of Apollo's engagement, although members of the Board of Managers affiliated with Apollo are aware that their fiduciary duties as Board Members are to Resolution. (See Form 10-K dated Dec. 31, 2002 attached as Exh. 4 to Farmakis Decl. at 52.)
14. Joshua Harris, Laurence Berg and Peter Copses, are partners in Apollo, and also sit on the Board of Managers of Resolution. (Pls' Exh. 1.) Scott Kleinman is a principal of Apollo and also sits on the Board of Managers of Resolution. (Id.) The members of the Board of Managers of Resolution also serve as the members of the Board of Directors of RPP Inc. (Form 10-K dated Dec. 31, 2002 at 32.) Therefore, Apollo's principals and partners make up a majority of both Resolution's seven-member Board of Managers and RPP Inc.'s seven-member Board of Directors. (See id.)
15. Apollo has invested in Vantico by purchasing, through Fund V, approximately 35% of Vantico's distressed bank debt, which has a face value of $160 million. (Kleinman Decl. ¶ 10.)
16. The total dollar amount Fund V has invested in Vantico is greater than the amount Apollo has invested through Fund IV in Resolution. (Id.)

Vantico's Financial Condition

17. On May 31, 2000, Vantico acquired the performance polymers business of CIBA Specialty Chemicals Holding Inc. and, as a consequence, incurred substantial long-term debt that still burdens Vantico. (Court Decl. ¶ 3.) This debt was incurred principally by Vantico International. (Court Decl. ¶ 10.)
18. As of September 30, 2002, Vantico had total long-term debt totaling CHF 934 million ($682.5 million). (Court Decl. ¶ 3.)
19. The Vantico Group has significant long-term debt including 12% Senior Subordinated Notes (the "Bonds"). (Id.) A significant portion of the Bonds, nearly 73%, are held by MatlinPatterson Global Opportunities L.P. ("MatlinPatterson"), and SISU Capital Ltd. ("SISU") (Court Decl. ¶ 10.) MatlinPatterson is a New York based investment firm specializing in distressed securities. (Kleinman Decl. ¶ 7.) The total value of the Bonds is € 250 million. (Court Decl. ¶ 3.)
20. Payments on the debt currently consume a large portion of Vantico's cash flow: for the twelve months ending December 31, 2001, its net interest expenses were CHF 117 million ($85.5 million) and for the first nine months of 2002 those expenses amounted to CHF 82 million ($59.9 million). (Court Decl. ¶ 4.) Vantico has been experiencing a deterioration in its liquidity situation over the past year and a half. (Tr. at 153 (Court).)
21. On December 14, 1999, Vantico International entered into a debt-refinancing agreement (the "Credit Agreement") with Credit Suisse First Boston ("CSFB"). (Court Decl. ¶ 6.) CSFB, under the Agreement, is to act as Facility Agent, Security Trustee, Issuing Bank, and Lead Arranger. (Id.) The agreement, which has been amended on several occasions (most recently on April 19, 2002), provides for a total of CHF 800 million in loans and revolving credit commitments (the "Senior Debt"). (Id.) As of September 30, 2002, this Senior Credit Facility had an outstanding principal balance due of CHF 607 million. (Court Decl. ¶ 3.)
22. The Senior Credit Agreement contains a number of provisions that allow holders of the Senior Debt to impact Vantico's business decisions. (Court Decl. ¶ 7.) (Tr. at 163-64 (Court).)
23. The debt obligations of Vantico owed to CSFB and other banks (collectively "the Senior Banks"), are senior to and have priority over the obligations due under the Bonds previously issued by Vantico and held by MatlinPatterson and SISU. (Court Decl. ¶ 2.)
24. Vantico's substantial cash restructuring charges and financial expenses have led to significant negative cash flows in 2001 and 2002. (Court Decl. ¶ 5.)
25. Vantico has pursued a wide range of options to improve the company's financial situation, beginning in the summer of 2002 and, more recently, in mid-to-late January. (Court Decl. ¶ 10; Supplemental Declaration of Justin Court ("Court Suppl. Decl.") dated Feb. 13, 2003 at ¶ 2.)
26. One such option that Vantico explored with Apollo was the possibility merger of Vantico and Resolution, whereby Resolution would acquire Vantico. (Declaration of Jon MacIntosh ("Macintosh Decl.") dated Feb. 2, 2003 at ¶ 3.) Scott Kleinman and Joshua Harris attended discussions in August 2002 along with Jon Macintosh, a Vantico director and a consultant to MGPE, regarding a possible acquisition by Apollo of Vantico. (Kleinman Decl. ¶ 4; MacIntosh Decl. ¶ 3.)
27. Harris and MacIntosh had previously had a number of other conversations regarding Apollo's desire to merge Resolution and Vantico. (MacIntosh Decl. ¶ 2; Kleinman Decl. ¶ 4.)
28. Before proceeding with discussions, Apollo and MGPE executed a confidentiality agreement dated July 30, 2002. (Confidentiality letter attached as Exh. A to Kleinman Decl.) The agreement also bound Resolution and Vantico, as "connected persons" of the two signatories, respectively. (Id.) The confidentiality agreement required that the parties would hold disclosed information in strict confidence and would not disclose, copy, reproduce or distribute any such information to anyone other than authorized recipients. (Id.) The information was to be used solely to evaluate, negotiate or advise in connection with the possible merger of Vantico and Resolution. (Id.) The Chief Executive Officer of Resolution was the only Resolution employee designated to be authorized recipient of such confidential information. (Confidential letter dated Aug. 8, 2002 attached as Exh. B to Kleinman Decl.)
29. Harris suggested that Apollo/Resolution would be willing to pay a price equivalent to or slightly in excess of Vantico's outstanding Senior Bank Debt. (MacIntosh Decl. ¶ 3.) Such a price could be achieved by a declaration of Vantico's insolvency followed by a purchase by Resolution/Apollo from the bankruptcy administrator. (Id.)
30. MacIntosh rejected the August proposal, based on the belief that Apollo's plan would have benefited only Apollo and the other Senior Banks, and would have provided little or no compensation for Vantico's bond holders or other subordinated creditors. (MacIntosh Decl. ¶ 3.)
31. At the time of this proposal, MGPE and Vantico's management and directors expressed concern that any merger between Vantico and Resolution would be blocked because of various antitrust issues. (MacIntosh Decl. ¶ 2.) Despite these concerns, however, in response to the August proposal, the plaintiffs agreed to share information with Apollo to allow Apollo's antitrust counsel to evaluate the proposed merger. (Id. at ¶ 4.)
32. MGPE, Vantico, Apollo, and Resolution held several discussions over the next few months in an attempt to "advance Apollo's antitrust analysis". (MacIntosh Decl. ¶ 5.)
33. Apollo lawfully obtained confidential information regarding Vantico pursuant to the confidentiality agreements entered into in connection with the discussions that took place between Vantico, Apollo, and Resolution regarding a potential combination of Vantico and Resolution. (Kleinman Decl. ¶¶ 5, 30.)
34. The information provided by Vantico to the defendants pursuant to the confidentiality agreement was shared with the Chairman of Resolution, as authorized by the confidentiality agreement. Apollo has not shared other confidential information about Vantico with Resolution, including any information Apollo received by a holder of Vantico's senior debt. (Declaration of Marvin Schlanger ("Schlanger Decl.) dated Feb. 6, 2003 at ¶ 3.)
35. By late Fall 2002, Vantico had concluded that a merger with Resolution was not feasible and sought other solutions to its financial problems. (MacIntosh Decl. ¶ 5.)
36. Despite the fact that the plaintiffs considered a merger and combination between Vantico and Resolution, and pursued those negotiations over a period of several months, the plaintiffs now allege that such a combination would clearly violate fundamental principles and prohibitions of the federal antitrust laws.

The Voluntary Restructuring Proposal

37. MatlinPatterson became a majority holder of Vantico's Bonds in or about Fall, 2002. (Court Decl. ΒΆ ...

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