October 1, 2008 10:23 AM

The Am Law Litigation Daily: October 1, 2008

Posted by Ed Shanahan

Edited by Andrew Longstreth

M&A
Delaware Judge Rules Against Hexion in Huntsman Merger Case: Let the Analysis Begin
In the middle of Monday's historic market swoon, Vice Chancellor Stephen Lamb of the Delaware Chancery Court offered a coda to the long-lost era of enormous private equity deals. In one of the most highly anticipated M&A rulings of the year, Lamb found that Apollo's portfolio company, Hexion Specialty Chemicals, must perform the covenants of its July 2007 merger agreement with Huntsman.

There's a lot to digest in Lamb's 89-page opinion. But one of the vice-chancellor's most important conclusions was that Huntsman had not suffered a material adverse effect that voided the deal, contrary to what Hexion's lawyers at Wachtell, Lipton, Rosen & Katz had argued. (The Delaware Corporate and Commercial Litigation Blog helpfully points out that Lamb's discussion of the material adverse effect clause runs from page 39 to 56.) "Many commentators have noted that Delaware courts have never found a material adverse affect to have occurred in the context of a merger agreement," Lamb wrote. "This is not a coincidence." So all you Delaware law watchers will have to continue your lookout for a real MAE.

Lamb also ruled that Hexion knowingly and intentionally violated the merger agreement, which is exactly what Huntsman's counsel at Vinson & Elkins had been arguing throughout the trial. (V&E even intimated that Wachtell litigators helped Hexion formulate a justification for getting out of the deal.)

V&E partner David Harvin, who led Huntsman's trial team, told us that Lamb's finding exposes Hexion to damages above and beyond the $325 million break-up fee if the deal isn't consummated. "It tells them they have to perform or face the liability of very large damages," said Harvin.

Large indeed. Harvin told us that Lamb could find damages to be the difference between the $28 a share that Hexion offered for Huntsman and Huntsman's current share price, which amounts to "several billions of dollars." Harvin also said that Lamb left open the question of whether Hexion's investors at Apollo could be held liable for damages. If the deal does not close, that issue will be addressed at another trial in Delaware.

Being the fair-minded folk we are, we also called Hexion's lead trial lawyer, Wachtell's Marc Wolinsky, for comment. He referred us to Hexion's statement, which says the company is "disappointed" by the decision and that it is reviewing its options.

WHITE-COLLAR
Backdating Options Case Against Former McAfee General Counsel Goes to Jury
As The Recorder noted a couple weeks ago, Cooley Godward Kronish partner Stephen Neal took a dim view of Howrey's explanation for why McAfee failed to turn over two relevant e-mails critical to the defense of its former general counsel, Kent Roberts, until the eve of Roberts's trial. Howrey, which performed an internal investigation into backdating at the company, blamed it on contract lawyers. Neal, who represents Roberts in the government's case, said it was part of the company's strategy to blame the scandal on his client. He called it one of the "most irresponsible searches in history."

Neal made sure the jury knew about McAfee's late production of documents. The Recorder reports that instead of calling any witnesses in Roberts's defense, Neal simply read aloud a statement informing jurors of the discovery screw-up, which was the first time the jury had heard the story. Neal reminded them again of it during his closing argument yesterday, pleading with the jury to guard against "a system that hasn't worked the way it was supposed to work."

In her closing and rebuttal, prosecutor Laurel Beeler said that Roberts should have known the rules at the company. She argued that Roberts changed the dates of options without the board's approval.
Jury deliberations are expected to start today.

LABOR & EMPLOYMENT
GE Sues Former In-House Attorney for Disclosing Privileged Documents
In June, Tax Notes International ran a story that raised questions about possible tax evasion at a General Electric subsidiary in Brazil. The writer, former New York Times tax ace David Cay Johnston, reported that his information was based in part on internal GE documents that were given to him by "a lawyer for a participant in some of the events."

As Sue Reisinger explains in the October issue of Corporate Counsel, that in-house lawyer is almost certainly Adriana Koeck, who was responsible for regions outside the U.S., including Brazil. On June 6, GE filed a complaint against Koeck, claiming that she provided an unnamed reporter and two unidentified government agencies with confidential e-mails, memos, and legal opinions. The complaint also states that Koeck was fired as commercial counsel in January 2007 for "performance reasons." GE, represented by Barbara Van Gelder of Morgan, Lewis & Bockius and Charles Wayne of DLA Piper, is seeking the return of the materials Koeck allegedly stole, as well as more than $100,000 in compensatory damages. Koeck's lawyer, David Sanford of Sanford Wittels & Heisler, declined to comment on the case to Reisinger.

Reisigner reports that Sanford also happens to be representing former in-house GE lawyer Lorene Schaefer who filed a class action against her old employer for "systemic discriminatory treatment" of more than 1,000 female attorneys and female executives, which was allowed to move forward earlier this year. Hmmmm. What would Ben Heineman do?

IP
Marc Toberoff Is Hollywood's Least Favorite Lawyer
Marc Toberoff is a well-known Hollywood attorney, but we suspect he doesn't get invited to a lot of fancy studio-sponsored Oscar parties. The reason? Termination rights. As the October cover story of IP Law & Business explains, Toberoff has made a handsome living by representing creators or their heirs in their fight to take back control of copyrights from studios and publishers. His legal weapons of choice are passages in copyright law known as termination rights, which, as IP Law & Business writer Eriq Gardner explains, "give creators or their heirs the right to terminate copyright assignments after a given number of years have passed in a work's life."

Toberoff's success in cases involving Lassie and Superman has now gotten the attention of Hollywood, which loves the easy money of established works that offer the potential for sequels. "The termination rights issues is a real problem...that is going to affect the ability to produce additional programming," Jared Jussim, executive vice president of IP at Sony Pictures Entertainment, told Gardner.

Hollywood may love an underdog, but only in the movies. Studio lawyers scoff at Toberoff's claim that he's a champion for the little guy, likening him instead to an ambulance chaser. "He has this database where he keeps track of heirs and termination windows and he goes out and contacts them and tries to get their business," one lawyer told Gardner. "I had one widow calling me saying that Marc wouldn't leave her alone."

Toberoff says his clients come to him because of his success in other caes. And although that stuff about the database is true, he says, it's not used for his legal business. Toberoff also happens to be an aspiring producer. "I keep track of who I think owns properties that I think would make good movies," Toberoff told Gardner. "I call them up and say, 'I believe you have certain rights.' I don't call them up to [urge them to] make claims."

IP
RealNetworks Seeks Declaratory Judgment Clearing its DVD Software
In addition to Toberoff, Hollywood, of course, also has a big problem with consumers who view movies without paying for them. No wonder it's not a big fan of technology that it sees as enabling consumers to share movies--like RealNetworks' newly released RealDVD software, which allows computer users to store and play all their DVDs.

In response to threats made by major studios, RealNetworks announced yesterday that it plans to seek a declaratory judgment that its new software complies with the DVD Copy Control Association's license agreement. We tried to reach James DiBoise of Wilson Sonsini Goodrich & Rosati, who is representing RealNetworks, but we didn't hear back.

By the end of Tuesday, the studios had made good on their threats. The AP reported that they filed a suit in Los Angeles federal district court against RealNetworks to prevent it from distributing its new DVD software, which they said would allow consumers to "rip, rent and return" movies.

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