Vantico Holdings S.A. v. Apollo Management, LP

Citations: 247 F. Supp. 2d 437; 2003 U.S. Dist. LEXIS 3428; 2003 WL 736295Docket: 03 CIV. 768(JGK)

Court: District Court, S.D. New York; February 28, 2003; Federal District Court

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A preliminary injunction motion was filed by plaintiffs Vantico Holdings S.A., Vantico Group S.A., Vantico International S.A., and Vantico, Inc., all producers of epoxy resin, against defendants Apollo Management, LP and Resolution Performance Products, LLC. Vantico seeks to prevent Apollo from acquiring additional debt or equity in Vantico and from voting its interests in a way that conflicts with other senior debt-holders or Vantico's restructuring plan. Furthermore, Vantico aims to stop Apollo from interfering with its competitive position against Resolution, a direct competitor, and from accessing sensitive non-public information about Vantico's operations and reorganization.

The plaintiffs argue that Apollo's current holdings in Vantico's debt pose a threat to Vantico's financial viability and competition in the epoxy resin market, constituting potential violations of the Sherman Act and the Clayton Act. Initially, Vantico sought a temporary restraining order, which was denied, followed by a hearing for the preliminary injunction on February 12, 2003, where evidence was presented, and witness credibility was assessed.

The findings indicate that Vantico operates as a multi-national corporate entity, with its companies organized under Luxembourg law and a significant Delaware corporation, Vantico Inc., manufacturing various epoxy resin products. The corporate structure involves ownership chains among the Vantico entities, with Morgan Grenfell Private Equity Limited being the majority equity holder. Vantico Inc. is highlighted as a major global player in epoxy resin manufacturing, including a range of resin types.

Epoxy resins are high-performance thermosetting materials widely utilized in protective coatings, electrical laminates, bonding, adhesives, and structural applications due to their excellent adhesion, corrosion resistance, tensile strength, toughness, and dielectric properties. In 2000, BLR (the primary application for epoxy resins) was a major contributor to U.S. sales of epoxy resins from key producers Dow Chemical Co., Resolution Performance Products, LLC, and Vantico, Inc. Resolution and Dow dominated the U.S. market, each holding about 43% of production, while Vantico accounted for 14%. Both Resolution and Dow are the sole U.S. suppliers of epichlorohydrin (ECH), a component used in BLR production.

Apollo Management, L.P., a private equity firm established in 1990, manages several funds with distinct fiduciary duties to their investors, which include pension funds and university endowments. Notably, Apollo Investment Fund IV and V have overlapping board members, including CEO Leon Black and Vice-President John J. Hannan. Apollo engages in distressed debt investments within the chemical sector, specifically holding an investment in Resolution Performance Products, a competitor of Vantico. Fund IV controls about 79% of Resolution Holdings, which owns 91% of RPP Inc., the parent of Resolution. Apollo acknowledges its investment in Resolution, which has disclosed that Apollo's equity interest and its board affiliations give it significant influence over Resolution's governance, despite board members' fiduciary duties to Resolution. Key Apollo partners also serve on the boards of both Resolution and RPP Inc., creating a majority presence in both entities' governance.

Apollo has acquired approximately 35% of Vantico's distressed bank debt, valued at a face amount of CHF 160 million, through Fund V, surpassing its investment in Resolution via Fund IV. Vantico, having acquired a business from CIBA Specialty Chemicals in 2000, carries substantial long-term debt, primarily held by Vantico International, totaling CHF 934 million as of September 30, 2002. A significant portion of this debt includes 12% Senior Subordinated Notes, with nearly 73% held by MatlinPatterson Global Opportunities L.P. and SISU Capital Ltd., valued at €250 million. Vantico's cash flow is heavily impacted by net interest expenses of CHF 117 million in 2001 and CHF 82 million in the first nine months of 2002, leading to deteriorating liquidity.

On December 14, 1999, Vantico International entered a Credit Agreement with Credit Suisse First Boston (CSFB) for CHF 800 million in loans and revolving credit, with CHF 607 million outstanding as of September 30, 2002. This agreement grants senior debt holders significant influence over Vantico's business decisions and prioritizes their claims over the Bonds held by MatlinPatterson and SISU. Vantico has faced significant negative cash flows due to restructuring charges and financial expenses.

In response to its financial struggles, Vantico has explored various options, including a potential merger with Resolution, discussed in meetings attended by Apollo representatives in August 2002. Prior to these discussions, Apollo and MGPE signed a confidentiality agreement on July 30, 2002, binding both parties and their connected entities to strict confidentiality regarding disclosed information.

Information was intended solely for evaluating, negotiating, or advising on a potential merger between Vantico and Resolution. The CEO of Resolution was the only designated recipient of the confidential information. A proposal suggested that Apollo/Resolution would pay a price matching or exceeding Vantico's Senior Bank Debt, achievable through declaring Vantico insolvent and purchasing via a bankruptcy administrator. However, this proposal was rejected by Macintosh, who believed it would only benefit Apollo and senior banks, leaving subordinated creditors with little or no compensation. Concerns regarding antitrust issues were raised by Vantico's management and directors, yet they agreed to share information with Apollo for antitrust evaluation.

Several discussions occurred between MGPE, Vantico, Apollo, and Resolution to facilitate this analysis. Apollo lawfully acquired confidential information from Vantico under confidentiality agreements, and shared some with the Chairman of Resolution, while withholding other information obtained from Vantico's senior debt holders. By late Fall 2002, Vantico determined that a merger with Resolution was unfeasible and sought alternative financial solutions. Despite previously considering the merger, plaintiffs now argue that it would violate federal antitrust laws.

In Fall 2002, MatlinPatterson became the majority holder of Vantico's Bonds. By January 2003, Vantico's Board reached a preliminary agreement with MatlinPatterson and SISU for a debt-for-equity swap, wherein bondholders would exchange their debt for 95% of Vantico's equity. Non-majority holders could opt for cash instead. MatlinPatterson and SISU were also to provide CHF 50 million in Bridge Loans for operational liquidity, with additional funds potentially available in 2004 if needed. The Senior Bank Debt would remain unaffected under this restructuring plan.

Senior Bank Debt holders must unanimously consent to defer two scheduled amortization payments as part of the Voluntary Restructuring, while a two-thirds majority is required to rank Bridge Loans at least pari passu with the Senior Bank Debt. The restructuring requires 66% approval from Senior Bank debt holders. Vantico plans to conduct a CHF 75 million rights issue to help repay the Bridge Loans post-restructuring. MatlinPatterson will become the majority shareholder of Vantico Group, integrating it into the Huntsman Group, which it significantly owns. 

In January 2003, Vantico entered an exclusivity agreement with MatlinPatterson and SISU, preventing it from proposing alternatives to the restructuring plan, a condition for their agreement. Apollo opposes this plan, advocating for an auction of Vantico's operating companies. Should Resolution acquire Vantico in an auction, it would need antitrust approval from U.S. and European regulators. Apollo's repeated requests for Vantico to consider an auction have been rejected, and it opposes the Voluntary Restructuring due to potential dilution of its bank debt and the lack of near-term principal recovery.

By March 2003, Vantico is set to pay approximately CHF 15 million in contingent fees to various advisors, including MatlinPatterson. MatlinPatterson has also loaned money to Vantico for litigation expenses. In December 2002, Apollo acquired a significant position in Vantico's Senior Bank Debt and subsequently opposed the restructuring proposal, urging due diligence for a potential acquisition by Resolution. Despite Apollo's opposition, Vantico secured consent from the majority of senior debt holders for necessary waivers and payment extensions on January 28, 2003.

Other banks did not agree with Apollo's proposal to condition waivers on Resolution's ability to bid for Vantico. Apollo's attempt to gain a 34% share of the bank debt—necessary for veto power over major decisions—was initially unsuccessful, as it had not acquired this share when other debt-holders rejected its proposal. Subsequently, Apollo spent about $140 million to purchase additional debt at prices exceeding 90% of par value, following an initial $20 million purchase at a significant discount. This second round of acquisitions, completed shortly before a restraining order hearing on February 4, 2003, increased Apollo's stake in the Senior Debt to approximately 35%, granting it the required veto power.

As a holder of Senior Debt, Apollo gained extensive access to Vantico's financial and strategic information, including business plans and financial forecasts, as stipulated in the Senior Credit Agreement. Specifically, Vantico is obligated to provide ongoing financial reports, annual operating budgets, and any requested information that can be produced without unreasonable cost or management effort. Apollo utilized this access to obtain Vantico's projected sales, profit margins, and operational improvement plans, among other confidential details.

There is no evidence that Apollo shared any sensitive information with Resolution’s officers or employees. Furthermore, Marvin Schlanger, CEO of Resolution's parent company, was unaware of Apollo's debt acquisitions until they were already in progress.

On February 7, 2003, Apollo proposed a CHF 25 million loan to Vantico to consider auctioning the company instead of pursuing voluntary restructuring, which Vantico rejected. Apollo also sought agreement from Vantico's majority equity holder, MGPE, to support an alternative restructuring proposal, but there has been no evidence of acceptance. Currently, there are no imminent or pending acquisition plans by Apollo or Resolution for Vantico. Vantico has consistently declined to explore alternative restructuring options favored by Apollo.

Apollo holds enough Senior Bank Debt to obstruct any restructuring proposal, necessitating majority approval for modifications. Vantico requires a cash "headroom" of CHF 50 million weekly to meet its obligations, having made a CHF 25 million amortization payment to debt-holders on January 28, 2003. Vantico could mitigate the risk of not meeting this headroom by accepting a Bridge Loan from Apollo, which has been repeatedly declined.

An exclusivity agreement with MatlinPatterson restricts Vantico from considering alternative restructuring proposals. Should the current Voluntary Restructuring Plan fail, defendants would retain a significant portion of a CHF 15 million payment due in March. The Vantico Board has not decided on insolvency proceedings and is exploring options for cash needs in the coming months. Additionally, Vantico plans an asset swap with Air Products, involving a payment of approximately $6 million, which has not yet received Board approval and is not reflected in cash flow projections.

The Credit Agreement with Apollo grants it the authority to block various Vantico business transactions, including asset disposals, fund transfers, corporate restructuring, new loans, and acquisitions.

Vantico's U.S. operation is negotiating with Air Products to exchange non-strategic assets for a competing specialty epoxy resin line, which requires Vantico to pay approximately $6 million due to unequal product values. Vantico is also attempting to sell two unprofitable businesses and plans significant reorganization and cost-saving measures in Europe, which may involve restructuring debt pools, pending approval from Apollo. However, Vantico's CFO has claimed ignorance of the Air Products deal, and no formal letter of intent has been signed or drafted, nor has the Board reviewed any proposal. Currently, the sale of loss-making businesses is only being contemplated without concrete plans that would allow for evaluation of Apollo's potential to block these transactions.

There is no evidence of Apollo disparaging Vantico in the marketplace; supplier concerns about Vantico's financial status stemmed from a debt downgrade by Standard & Poor's rather than Apollo's actions. Buyers' concerns were typical in the epoxy resin market, often aimed at negotiating lower prices, and Vantico has acknowledged its capacity to reassure customers regarding its financial health, which was already precarious before Apollo's involvement.

The court has jurisdiction over the case based on U.S. commerce laws, and venue is proper in the district. The standard for a preliminary injunction varies depending on whether it is mandatory or prohibitory. A prohibitory injunction seeks to maintain the status quo and requires proof of irreparable harm and either a likelihood of success on the merits or serious questions about the merits with a favorable balance of hardships.

A mandatory injunction requires a party to meet a higher standard for relief, necessitating clear evidence that the moving party is entitled to the requested relief or will suffer extreme damage if relief is denied. Vantico's request for a preliminary injunction is classified as mandatory, as it seeks to compel Apollo to vote its shares of Senior Debt in alignment with other debt-holders, thereby altering the current status quo where Apollo has the discretion to vote independently. Vantico argues that this alignment is necessary to restore market power balance; however, this would infringe on Apollo’s contractual rights under the Credit Agreement.

Vantico's motion for a preliminary injunction appears driven by a desire to implement a restructuring proposal from MatlinPatterson, which, if executed, would complicate any future reinstatement of the parties' original positions. To be successful, Vantico must demonstrate a clear showing of entitlement, which it fails to do. 

Moreover, Vantico has not established that a lack of preliminary injunction would result in irreparable harm; mere potential harm is inadequate. They have not proven that Apollo's access to competitive information will cause irreparable damage. The information in question was obtained during prior merger negotiations under a confidentiality agreement, which has not been shown to be breached. Additionally, there is no evidence that any sensitive information has been misused against Vantico’s interests.

Lastly, Vantico has not convincingly demonstrated that Apollo's acquisition of its debt or the ability to obstruct the Voluntary Restructuring Plan would harm Vantico’s competitive standing in the market.

Proposed asset swaps and transactions by Vantico are deemed contingent and hypothetical, making it impossible to ascertain potential actions by Apollo or other senior lenders regarding these transactions. The only specific transaction presented by the plaintiffs involves a proposed asset swap with Air Products, which lacks critical components such as a signed letter of intent, board approval, and a defined timeline in Vantico's cash flow analysis. Consequently, any hindrance to this transaction would not result in immediate irreparable injury, thus failing to justify a preliminary injunction to protect Vantico's competitive position against Resolution in the epoxy resin markets.

There is no evidence that Apollo has manipulated Vantico's consumers or suppliers for competitive advantage; issues regarding Vantico's financial condition predate Apollo's debt acquisition. The concerns expressed by suppliers stemmed from a downgrade of Vantico's debt rating by Standard & Poor's in November 2002, not from Apollo's actions. Apollo, having invested in Vantico through Fund V, has a vested interest in its competitive viability and would not jeopardize this investment.

Vantico's rejection of an auction process indicates that no imminent or pending acquisition by Apollo or Resolution exists. Any potential acquisition would invoke obligations under the Hart-Scott-Rodino Antitrust Improvements Act, and while plaintiffs speculate on possible transactions avoiding regulatory review, no concrete proposals have been presented to the Court. Moreover, the plaintiffs retain the option to return to Court if any such proposals arise.

Apollo does not intend to liquidate Vantico, as such an action would be detrimental to its interests. A liquidation might benefit Fund IV investors linked to Resolution but would jeopardize Fund V investors holding $160 million in Vantico's senior debt. Evidence suggests that maintaining Vantico as a viable business aligns with Apollo's best interests, maximizing recovery of its debt.

Vantico requires CHF 50 million weekly in cash and revolving credit to meet expenses, but evidence indicates its cash balances are not at immediate risk of falling below this threshold due to actions by Apollo or Resolution 17. Any potential insolvency risks linked to the Voluntary Restructuring Plan arise from Vantico's own decisions, particularly its exclusivity agreement with MatlinPatterson, which limits other proposals and incurs significant payments, including nearly $15 million in success fees. Vantico has consistently rejected bridge loans from Apollo and currently has no plans to declare bankruptcy if the preliminary injunction is denied.

Claims of imminent insolvency lack credibility; Vantico did not experience insolvency after the denial of a temporary restraining order (TRO). Vantico's counsel argued that Apollo's consent was essential for the restructuring plan's progress, but Apollo's waiver was not communicated in time, yet no insolvency proceedings were initiated, and the restructuring continues. The situation indicates that claims of impending insolvency are unreliable. Given the absence of a clear insolvency process, availability of cash alternatives, and challenges stemming from Vantico's past decisions, there is no immediate risk of insolvency attributed to Apollo's acquisition of Vantico debt. Furthermore, Vantico has not established a likelihood of success on the merits regarding its federal antitrust claims under Section 7 of the Clayton Act.

Section 7 of the Clayton Act prohibits any person engaged in commerce from acquiring stocks or assets of another entity if such acquisition may significantly lessen competition or create a monopoly. The Act aims to preemptively address anticompetitive acquisitions. Importantly, a violation does not require complete control over the acquired entity; rather, it suffices if there is a reasonable probability of resulting anticompetitive effects.

In this context, Vantico contends that Apollo's acquisition of approximately 35% of Vantico's senior debt falls under Section 7, potentially allowing Apollo to undermine competition between Vantico and Resolution. However, the mere acquisition of debt by a competitor does not automatically constitute a Section 7 violation; such creditor-debtor relationships are not inherently prohibited by antitrust laws. Nonetheless, under specific circumstances, these relationships could lead to anti-competitive effects, warranting scrutiny under Section 7.

Factors to consider include the purpose of the debt relationship, the debtor's financial status, the terms and size of the loan, its proportion to the debtor's overall debt and capital structure, and any other relevant contracts or relationships. The case of Metro-Goldwyn-Mayer illustrates that a creditor's status does not imply anti-competitive risk unless evidence shows that the creditor could exert influence over the debtor's business decisions or gain competitive insights.

In summary, while creditor-debtor relationships can raise anti-competitive concerns under the Clayton Act, proving a violation requires careful analysis of the specific circumstances surrounding those relationships.

The Court denied MGM's motion to stop Transamerica and Tracy from executing a tender offer that established a debtor-creditor relationship. However, it imposed restrictions preventing Tracy from pledging or delivering any MGM shares acquired to Transamerica or its affiliates, as well as prohibiting the exchange of sensitive information between the parties. The Court evaluated Apollo's 35% interest in Vantico's senior debt and concluded there was no evidence of anti-competitive effects or misuse of confidential information against Vantico. The absence of significant pending asset acquisitions or transactions blocked by Apollo was noted, along with a lack of intent by Apollo to pressure Vantico competitively. Apollo's involvement is primarily to protect its creditor interest, with minimal incentive to drive Vantico into insolvency. Concerns regarding Vantico's financial stability stem from its own strategic decisions rather than from Apollo's recent debt acquisition. The Court emphasized that its assessment was based on a limited record and prior to discovery, indicating that Vantico had not demonstrated that Apollo's debt acquisition was likely to result in anticompetitive behavior or violate antitrust laws, specifically the Clayton Act and Sherman Act. To prove attempted monopolization, a plaintiff must show predatory conduct, intent to monopolize, and a dangerous probability of achieving monopoly power.

Vantico failed to prove that Apollo's acquisition of its distressed debt constitutes a violation of the Sherman Act. The claims against Apollo include attempts to harm Vantico's customer relationships, obstruct its Voluntary Restructuring Plan, and misuse confidential business information. However, the Court found these allegations either meritless or based on unlikely hypothetical scenarios. There was no evidence to suggest that Apollo intended to monopolize, as the deterioration of relationships with Vantico's customers preceded Apollo's debt acquisition, and no predatory conduct was identified. The confidentiality agreement and Credit Agreement did not provide grounds for misuse of information. Apollo's actions regarding the Voluntary Restructuring Plan were deemed legitimate efforts to recover its debt, not predatory behavior. Additionally, ongoing merger negotiations between Vantico and Resolution undermined Vantico's claims about potential antitrust violations. Under Section 1 of the Sherman Act, any contract restraining trade is illegal, but the plaintiffs did not show that Apollo's actions amounted to such a violation. Their allegations of misuse of confidential information related to a Clayton Act claim were unsubstantiated, leading to the conclusion that they did not demonstrate a likelihood of success in their claims. Furthermore, the plaintiffs did not establish that the balance of hardships favored them.

A denial of the mandatory preliminary injunction allows Vantico stakeholders to consider alternative options, including an auction for Vantico's operations versus the MatlinPatterson debt-for-equity restructuring plan. The absence of a preliminary injunction will not harm the public, as there is no immediate threat to Vantico's operations or a merger with Resolution that bypasses antitrust review. The litigation is characterized as an attempt by plaintiffs, backed by MatlinPatterson Group, to manipulate antitrust laws to influence Apollo's voting on the restructuring plan, despite Apollo's objections. MatlinPatterson stands to gain a substantial success fee if the plan is enacted, indicating a conflict of interest with Vantico. Furthermore, Vantico had previously sought a merger with Apollo and Resolution, which contradicts claims of anticompetitive intent. No evidence supports allegations of monopolistic behavior or predatory conduct; instead, the motion appears to favor certain financial transactions over others. The court concludes that the plaintiffs have not demonstrated a risk of irreparable harm, likelihood of success, or favorable balance of equities, leading to the denial of their motion for a preliminary injunction. Additionally, a sealing order on the findings and conclusions from February 26, 2003, has been lifted, as no confidential information warrants continued secrecy.