Insolvency case turns on reasonableness of management projections

BVWireIssue #180-3
September 27, 2017

Management projections have attracted extra scrutiny in a number of recent court opinions, particularly in the appraisal context. But recently questions as to the reasonableness and reliability of management projections were at the heart of a complex bankruptcy case in which the trustee argued constructive fraud related to a merger that led to a company that filed for Chapter 11 bankruptcy just one year after its formation.

Refreshed projections: In 2007, Basell, a Europe-based petrochemicals company worth billions of dollars, moved to acquire an American refining company, Lyondell, to create a global petrochemical and refining company. Lyondell was the largest U.S. producer of ethylene and recently had acquired full ownership of a large oil refinery in Houston. Lyondell typically prepared a bottoms-up long-range plan, but, during the merger discussion, its CEO ordered “refreshed” projections that included an additional $1.6 billion in terminal EBITDA for the company’s refining business. Ostensibly, the promising performance of the Houston refinery prompted the change. Lyondell provided the refreshed projections and other nonpublic due diligence material to the buyer entities, their advisors, and a group of major-league banks for analysis and financing. The banks, performing a series of valuations, committed to financing the merger.

Although it became clear in fall 2007 that Lyondell would miss its third- and fourth-quarter earnings projections by a wide margin, the merger closed on the original terms in December 2007. Throughout 2008, unplanned events confronted LBI, including volatility in the price of oil, a huge crane collapse at the Houston refinery that caused fatalities and prolonged outages, and two hurricanes. Also, in fall 2008, the national and global economies began to crumple. In January 2008, LBI filed for Chapter 11 bankruptcy.

The litigation trustee sought to claw back about $12 billion paid as merger consideration by advancing a host of legal theories. He “threw the kitchen sink at the Defendants,” the court said. The crux of the trustee’s argument was that the refreshed projections were manufactured to extract a higher sales price for Lyondell. On key dates, the merged entity was insolvent under the applicable financial condition tests.

The court rejected the trustee’s argument in an 80-page decision. It found the projections aligned with the relevant entities’ historical performance, contemporary industry studies, as well as extensive financial analyses by the banks that funded the merger. The latter institutions were “sophisticated investors with the most intimate knowledge of [LBI’s] business plan and capitalization” and their support showed they “had confidence in the company’s future.” Further, defense expert testimony confirmed that the company was viable on the merger date. LBI’s “titanic collapse” was the result of unforeseen events, the court concluded.

A digest of Weisfelner v. Blavatnik (In re Lyondell Chem. Co.), 2017 Bankr. LEXIS 1097, and the court’s opinion will be available soon at BVLaw

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