PRE-HEARING BRIEF OF ALBEMARLE RESPONDENTS

 

TABLE OF CONTENTS

 

TABLE OF AUTHORITIES…………………………………………………………………………………………… iv

KEY PLAYERS LIST………………………………………………………………………………………………….. viii

PRELIMINARY STATEMENT……………………………………………………………………………………….. 1

BACKGROUND…………………………………………………………………………………………………………….. 8

I………. LONG BEFORE ANY TRANSACTION WITH HUNTSMAN, ROCKWOOD INVESTS IN A NEW COLOR PIGMENTS FACILITY BASED ON ITS CONFIDENCE IN THE “PROVEN” BLUEBIRD REACTORS…………………………………………………………………… 8

II…….. ROCKWOOD SELLS ITS COLOR PIGMENTS BUSINESS TO HUNTSMAN AND ACCURATELY REPRESENTS THE BLUEBIRD TECHNOLOGY………………………. 10

  1. Huntsman Approaches Rockwood About Selling its TiO2 Business—the Economic Driver of the Deal—and Rockwood Accurately Describes the State of Development of the Bluebird Reactors……………………………………………………………………………….. 10
  2. Huntsman Is Fully Aware Before Signing That the Then-Unbuilt Augusta Facility’s Production and Financial Results Are Subject to Execution Risk…………………… 13
  3. The Parties Execute the SPA……………………………………………………………………… 13

III……. ROCKWOOD REMAINS CONFIDENT IN THE REACTORS AND AUGUSTA FACILITY BETWEEN SIGNING AND CLOSING……………………………………………………………….. 15

IV……. HUNTSMAN FAILS TO EXECUTE AT AUGUSTA AND SEIZES ON PURPORTED “‘FACTUAL’ DISCOVERIES” TO ASSERT A CLAIM OF FRAUD AND ADD TO ITS WINDFALL GAINS…………………………………………………………………………………………… 20

  1. Huntsman Takes Over Control of the Augusta Facility, Bluebird Reactors, Bluebird Data, and Key Personnel in 2014 and Does Not Claim Any Fraud…………………. 21
  2. Huntsman Determines it “Can Afford for a Few Mistakes in Turin or Augusta” and Fails to Execute on the Augusta Project……………………………………………………… 23
  3. Huntsman Admits It Formed Its Fraud Claim Only After Finding the Now-Discredited Burrell Email in August of 2016………………………………………………………………… 27

ARGUMENT……………………………………………………………………………………………………………….. 29

I………. THERE WAS NO FRAUD………………………………………………………………………………….. 29

  1. Rockwood’s Statements Were True……………………………………………………………. 30
  2. Rockwood Did Not Intend to Deceive Huntsman…………………………………………. 38
  3. Huntsman Cannot Prove Justifiable Reliance………………………………………………. 44
  4. Huntsman Cannot Prove Damages Caused by the Alleged Misrepresentations… 47

II…….. ROCKWOOD DID NOT BREACH THE STOCK PURCHASE AGREEMENT………. 48

  1. Rockwood Did Not Breach Section 4.27(f) of the SPA…………………………………. 48
  2. Rockwood Did Not Breach Sections 2.6(a)(ii) or 4.7(a)(i) of the SPA……………. 50
  3. Rockwood Did Not Breach Any Guarantee that Augusta Would Pass the Performance Test………………………………………………………………………………………………………… 52

III……. HUNTSMAN’S REMAINING CLAIMS FAIL……………………………………………………… 54

IV……. HUNTSMAN IS NOT ENTITLED TO ANY DAMAGES……………………………………… 56

  1. Even if Huntsman Could Establish Liability, Huntsman is Not Entitled to Damages………………………………………………………………………………………………………………. 56
  2. Even if Huntsman Were Entitled to Damages, the Project Fenice Cost Savings Would Provide the Proper Measure of Economic Damages……………………………………… 57
  3. Even If Huntsman Could Prove Liability, Its Damages Would Be at Most $20-27 Million…………………………………………………………………………………….. 58
  4. Huntsman’s Expectation Damages Rest on Self-Interested and Conclusory Claims………………………………………………………………………………………….. 60
  5. Huntsman’s Claim for Lost Profits Is Barred as a Matter of Law………… 61
  6. There Is No Basis Whatsoever to Award Punitive Damages……………….. 61
  7. Huntsman is Not Entitled to Damages for Post-Closing Cost Overruns………….. 63

CONCLUSION…………………………………………………………………………………………………………….. 65

 

 

TABLE OF AUTHORITIES

Cases

 

Page(s)

 

Abdo v. Fitzsimmons,

2017 WL 6994539 (N.D. Cal. Nov. 3, 2017) ……………………………………………………………….  32

 

Aerolineas Galapagos, S.A. v. Sundowner Alexandria, LLC,

74 A.D.3d 652 (1st Dep’t 2010) …………………………………………………………………………………  55

 

Allen v. Westpoint-Pepperell, Inc.,

11 F. Supp. 2d 277 (S.D.N.Y. 1997) …………………………………………………………………………..  55

 

Ambac Assur. Corp. v. Countrywide Home Loans, Inc.,

31 N.Y.3d 569 (2018) ………………………………………………………………………………………………  44

 

Amorgianos v. Nat’l R.R. Passenger Corp.,

303 F.3d 256 (2d Cir. 2002) ………………………………………………………………………………………  60

 

Amusement Indus., Inc. v. Stern,

786 F. Supp. 2d 758 (S.D.N.Y. 2011) …………………………………………………………………………  55

 

Argento v. Aetna Cas. & Sur. Co.,

184 A.D.2d 487 (2d Dep’t 1992) ……………………………………………………………………………….  63

 

Arista Records LLC v. Usenet.com, Inc.,

608 F. Supp. 2d 409 (S.D.N.Y. 2009) …………………………………………………………………………  60

 

Basis PAC-Rim Opportunity Fund (Master) v. TCW Asset Mgt. Co.,

48 N.Y.S.3d 654 (1st Dep’t 2017) ………………………………………………………………………..  46, 47

 

BMW of N. Am., Inc. v. Gore,

517 U.S. 559 (1996) …………………………………………………………………………………………………  63

 

PRELIMINARY STATEMENT

The case arises out of the sale of certain Rockwood businesses to Claimant Huntsman International, LLC (“Huntsman”) under the terms of a heavily-negotiated, 89-page Stock Purchase Agreement (the “SPA”) in 2013.  That transaction was a phenomenal success for Huntsman.  It spun off the acquired businesses just three years after closing, earning a quick profit of $915 million—a return of over 90% on its investment.  Yet Huntsman now claims the transaction was a “massive fraud,” because it has been unable to achieve the results it expected on one particular iron oxide pigments facility in Augusta, Georgia (the “Augusta Facility”)—a plant that was not yet built at the time of closing in a business segment that was not the focus of the deal for Huntsman.  On that basis, Huntsman seeks damages that exceed the entirety of what it paid for all of Rockwood’s pigments businesses—an investment that it had already nearly doubled within three years.  As Peter Huntsman boasted to the market: “we did Rockwood . . . for the express purpose when we bought it to combine it with our TiO2 business and to spin it off.  And that’s exactly we did, and we created over $1 billion in doing that.”  (Ex. A (RX-3015 (Huntsman Corp. Q1 2018 Earnings Call Tr.)) at 18.)

Huntsman’s claims in this case, seeking to add windfall to windfall, are unsupported by the evidence and will be resoundingly disproven at trial.

The transaction with Rockwood involved five specialty chemicals business lines.  The entirety of Huntsman’s claims in this case, however, concern only one of those five businesses—color pigments—and, in particular, only one of the 18 color pigments production facilities sold, located in Augusta, Georgia.  (See Demand ¶ 1.)  The Augusta Facility was intended to be a production facility, producing iron oxide pigments using a reactor developed at Rockwood’s facility in Turin, Italy, called the “Bluebird” reactor.  At all times prior to closing, the Augusta Facility was still under construction.

In support of its claim of fraud, Huntsman alleges that Rockwood “did not disclose various risks” associated with the Augusta Facility, “most namely, the fact that the Bluebird technology had not been proven at the 1000 m3 size”—the size that was planned to be used at the Augusta Facility.  (Huntsman Br. at 8.)  That is the principal fact that Huntsman contends was not disclosed.  But Huntsman CEO Peter Huntsman himself disproves this allegation.  He admitted in his deposition that he knew the 1000 m3 Bluebird reactor had not even been built at the time of closing, much less tested.  (Ex. B (Huntsman Tr.) at 43:24–44:5.)  In fact, during diligence, Huntsman employees had toured Rockwood’s facility in Turin, Italy, and seen the foundation for where the very first 1000 m3 Bluebird reactor would, someday, be built.  And, in case there was any lingering doubt, Huntsman was explicitly advised by its due diligence advisor, McKinsey & Co., that the “technology . . . has not been deployed at scale” and the “true full capacity is untested at this [1000 m3] scale.”  (Ex. C (RX-0013 (July 10, 2013 email from S. Anderson to S. Turner)) at C_000072826; Ex. D (RX-0015 (July 22, 2013 email from J. Heskett to S. Monteith, et al.)) at C_001623957.)  The principal risk that Huntsman claims Rockwood concealed was not only disclosed, but discussed and admittedly well understood by Huntsman before closing.  Huntsman also knew that it would be its own responsibility to actually build the 1000 m3 Bluebird reactors at Augusta and ensure could perform at the desired level.  As Peter Huntsman testified, Huntsman “became responsible at closing to complete the construction, . . . commissioning and startup at Augusta.”  (Ex. B (Huntsman Tr.) at 256:23–257:4.)  Huntsman’s head of pigments, Simon Turner, freely admitted the same, noting that among the risks for the Augusta Facility was that “the thing wasn’t built.”  (Ex. E (Turner Tr.) at 61:18–62:10.)

KEY PLAYERS LIST

Syl Bartos

Project Director overseeing construction of the Augusta Facility for Rockwood (before the transaction closed) and for Huntsman (after closing), up through mechanical completion in December of 2015.

Jan Buberl

Vice President of Global Color Pigments for Huntsman.

Peter Burrell

Partner at Willkie Farr & Gallagher, LLP.  Lead partner on accounting, irradiation and Bluebird investigations conducted for Rockwood Parents in 2013 and 2014.

David Crabbe

Vice President, Research & Development for Rockwood Pigments and Rockwood’s senior-most expert in the Bluebird technology.  One of the top iron oxide chemists in the world with more than 40 years of color pigment experience.  Investigated the concerns of Garetto and Villa about the Bluebird technology and determined that the technology was sound.  Hired by Huntsman to work in its Research & Development group because of his expertise in Bluebird technology. 

Francesco Garetto

Quality Control Manager at Turin for Rockwood (before the transaction closed) and for Huntsman (after closing).  Dubbed a “whistleblower” by Huntsman for expressing concern about the Bluebird technology to his colleagues in Turin and to Willkie. 

Seifollah Ghasemi

Chairman and CEO of Rockwood Holdings.

Peter Huntsman

President and CEO of Huntsman.

Thomas Riordan

Senior Vice President, Law & Administration of Rockwood Holdings.

Andrew Ross

President of Rockwood Pigments.

Marino Sergi

Former head of the Turin operation for Rockwood Pigments.  Terminated in October of 2013 for his role in accounting and irradiation improprieties.

Ian Smith

Research & Development employee at Huntsman.  Performed analysis of Bluebird data at the instruction of counsel for use in developing this litigation.

David Stryker

Vice President and General Counsel of Huntsman.

Simon Turner

Former Division President of Huntsman Pigments.  Current President and CEO of Venator.

Michael Valente

Vice President and General Counsel of Rockwood Specialties.

Andrea Villa

Production Manager at Turin for Rockwood (before the transaction closed) and for Huntsman (after closing).  Began working in Turin after high school in a number of operations positions. 

 

 

Respondents Rockwood Specialties Group, Inc. (“Specialties”), Rockwood Holdings, Inc. (“Holdings,” together with Specialties, the “Rockwood Parents”), and Albemarle Corporation (“Albemarle,” and together with the Rockwood Parents, “Respondents”) respectfully submit this pre-hearing brief and in response to Huntsman’s pre-hearing brief (“Huntsman Br.”).

PRELIMINARY STATEMENT

The case arises out of the sale of certain Rockwood businesses to Claimant Huntsman International, LLC (“Huntsman”) under the terms of a heavily-negotiated, 89-page Stock Purchase Agreement (the “SPA”) in 2013.  That transaction was a phenomenal success for Huntsman.  It spun off the acquired businesses just three years after closing, earning a quick profit of $915 million—a return of over 90% on its investment.  Yet Huntsman now claims the transaction was a “massive fraud,” because it has been unable to achieve the results it expected on one particular iron oxide pigments facility in Augusta, Georgia (the “Augusta Facility”)—a plant that was not yet built at the time of closing in a business segment that was not the focus of the deal for Huntsman.  On that basis, Huntsman seeks damages that exceed the entirety of what it paid for all of Rockwood’s pigments businesses—an investment that it had already nearly doubled within three years.  As Peter Huntsman boasted to the market: “we did Rockwood . . . for the express purpose when we bought it to combine it with our TiO2 business and to spin it off.  And that’s exactly we did, and we created over $1 billion in doing that.”  (Ex. A (RX-3015 (Huntsman Corp. Q1 2018 Earnings Call Tr.)) at 18.)

  Huntsman’s claims in this case, seeking to add windfall to windfall, are unsupported by the evidence and will be resoundingly disproven at trial.

The transaction with Rockwood involved five specialty chemicals business lines.  The entirety of Huntsman’s claims in this case, however, concern only one of those five businesses—color pigments—and, in particular, only one of the 18 color pigments production facilities sold, located in Augusta, Georgia.  (See Demand ¶ 1.)  The Augusta Facility was intended to be a production facility, producing iron oxide pigments using a reactor developed at Rockwood’s facility in Turin, Italy, called the “Bluebird” reactor.  At all times prior to closing, the Augusta Facility was still under construction. 

In support of its claim of fraud, Huntsman alleges that Rockwood “did not disclose various risks” associated with the Augusta Facility, “most namely, the fact that the Bluebird technology had not been proven at the 1000 m3 size”—the size that was planned to be used at the Augusta Facility.  (Huntsman Br. at 8.)  That is the principal fact that Huntsman contends was not disclosed.  But Huntsman CEO Peter Huntsman himself disproves this allegation.  He admitted in his deposition that he knew the 1000 m3 Bluebird reactor had not even been built at the time of closing, much less tested.  (Ex. B (Huntsman Tr.) at 43:24–44:5.)  In fact, during diligence, Huntsman employees had toured Rockwood’s facility in Turin, Italy, and seen the foundation for where the very first 1000 m3 Bluebird reactor would, someday, be built.  And, in case there was any lingering doubt, Huntsman was explicitly advised by its due diligence advisor, McKinsey & Co., that the “technology . . . has not been deployed at scale” and the “true full capacity is untested at this [1000 m3] scale.”  (Ex. C (RX-0013 (July 10, 2013 email from S. Anderson to S. Turner)) at C_000072826; Ex. D (RX-0015 (July 22, 2013 email from J. Heskett to S. Monteith, et al.)) at C_001623957.)  The principal risk that Huntsman claims Rockwood concealed was not only disclosed, but discussed and admittedly well understood by Huntsman before closing.  Huntsman also knew that it would be its own responsibility to actually build the 1000 m3 Bluebird reactors at Augusta and ensure could perform at the desired level.  As Peter Huntsman testified, Huntsman “became responsible at closing to complete the construction, . . . commissioning and startup at Augusta.”  (Ex. B (Huntsman Tr.) at 256:23–257:4.)  Huntsman’s head of pigments, Simon Turner, freely admitted the same, noting that among the risks for the Augusta Facility was that “the thing wasn’t built.”  (Ex. E (Turner Tr.) at 61:18–62:10.) 

Huntsman’s other claims fare no better.  The evidence will show that the only reason Huntsman was unable to achieve the results it expected in the Augusta Facility is that it deliberately deemphasized that project in favor of the more lucrative TiO2 opportunity and as a result fell far short of the “flawless execution” that it had been warned would be necessary to achieve the projected results.  The use of the Bluebird reactors in Augusta was not expected to open up new markets, increase sales or allow for higher prices; rather, it was expected to reduce the costs of producing certain red and yellow iron oxide pigments.  Specifically, Huntsman estimated that, with the Augusta Facility up and running, it would be able to shutter some older, less efficient plants and save roughly $15 million per year in operating costs.  This was peanuts compared with the nearly billion dollars in synergies that Huntsman expected to achieve—and did achieve—from layoffs and plant closures when combining Huntsman’s titanium dioxide (“TiO2”) business with the TiO2 business it was acquiring from Rockwood.  And, post-closing, Huntsman allocated its time, attention and resources accordingly:  it focused heavily—and in its own view “rightly”—on achieving the massive TiO2 synergies to prepare for the spinoff.  The message from CEO and Chairman Peter Huntsman to his senior management team was both explicit and emphatic: “we can afford for a few mistakes in Turin or Augusta,” but not on TiO2.  (Ex. F (RX-1262 (Dec. 12, 2014 email from W. Rogers to P. Huntsman)) at C_001491990.)

That laser focus on the principal source of value (TiO2) paid off handsomely for Huntsman, as reflected in its $915 million profit when it spun off the combined businesses.  But it also had predictable consequences for the Augusta Facility.  Huntsman never achieved its desired level of production at the Augusta Facility, and so it never achieved the full $15 million in annual savings that it had expected from that plant, which it owned for less than three years before selling it off as part of the Venator spin.  It now claims that its failure to achieve those savings is because the Bluebird reactors—which it had full access to and ran without any claim of fraud for nearly two years after closing—are in fact a “fundamentally flawed” “busted technology,” and because it was defrauded and lied to by Rockwood.  On that basis, Huntsman seeks to recover as damages more than the entirety of what it paid in the Rockwood transaction for all five businesses including TiO2, and seeks to recover those damages from Albemarle, which had no role in the pigments transaction but which purchased the remainder of Rockwood after the Huntsman transaction had closed.

As the Panel will see at trial, Huntsman’s narrative is not supported by the evidence.  There was no fraud here and no contractual breach, and to conclude otherwise would require finding that at least five witnesses—including a public company CEO, two lawyers, and a former Huntsman employee—all lied under oath.  The statements that Rockwood made to Huntsman prior to the transaction concerning the Bluebird reactors and Augusta Facility were not only sincerely believed by Rockwood, but were true.  Indeed, the underlying Bluebird technology works, and Huntsman’s inability to achieve success at the Augusta Facility post-closing is entirely of its own making, directly attributable to numerous errors of management and Huntsman’s very clear and deliberate focus on the TiO2 business at the expense of Augusta and Turin—i.e., Peter Huntsman’s explicit “we-can-afford-for-a-few-mistakes” strategy. 

There was no fraud.  Huntsman claims that Rockwood falsely told Huntsman, among other things, that the Bluebird technology was “proven” and the Augusta Facility would be a “Game Changer” for the color pigments business.  (Huntsman Br. at 2–3.)  Putting aside whether such statements are even actionable, the evidence will show that this is precisely how Rockwood described the Bluebird technology and plans for the Augusta Facility internally, years before Huntsman came on the scene.  It was based on these very same assessments that Rockwood chose to invest its own capital (ultimately to the tune of $172 million) in the Bluebird technology.  Huntsman has never shown Rockwood’s internal assessments of the Bluebird technology to the Panel, for good reason.  They are fatal to its fraud claim.

Rockwood was always confident in the technology.  Huntsman claims that between signing and closing, “a whistleblower within Rockwood complained to management that the Bluebird technology would not work,” and that “Rockwood’s investigation ‘confirmed’ that to be the case.”  (Huntsman Br. at 1.)  This is false.  The testimony of five separate witnesses will establish that Rockwood’s most senior pigments scientist, David Crabbe, personally reviewed the test data in light of questions that had been raised by the purported “whistleblower,” an employee in Turin, and that Crabbe remained confident in the technology and assured senior management of his confidence.  That was the unequivocal conclusion of what Huntsman refers to as an “emergency meeting” held at Rockwood’s offices in February 2014.  The credibility of this expert—David Crabbe—is unimpeachable:  Huntsman itself has identified him as “one of the top iron chemists in the world” and as the Rockwood employee “best placed” to advise on Bluebird issues.  Indeed, Huntsman itself employed Crabbe in that capacity until it spun off Augusta, and Huntsman’s own witnesses have confirmed his unflagging confidence in the technology—the same confidence he expressed to Rockwood’s management.  

In short, the notion that the investigation “confirmed” the reactors “would not work” (Huntsman Br. at 1 (emphasis added)) is not only false, it is the exact opposite of the truth.  The result of the investigation—as sworn to by five separate witnesses who participated in the relevant discussions—was continued confidence in the technology.  Huntsman’s only reply is to accuse all five of these individuals of lying under oath.  Importantly, the Panel already dismissed Huntsman’s fraud claims against Rockwood’s former CEO and another executive because “the Demand does not allege any false statement actually made by either Mr. Ghasemi or Mr. Ross.”  (Panel Order No. 9 at 4.)  Now, with the completion of discovery, Huntsman still has not identified one new fact to support its specious allegations of fraud.     

The representations to Huntsman were true.  Huntsman claims that Rockwood, among other things, misrepresented “that the ‘new reactor technology . . . has been demonstrated in Turin for red and yellow products,’ and that the process possessed ‘[h]igh process reliability and reproducibility.’”  (Huntsman Br. at 2–3 (emphasis omitted).)  In fact, the evidence will show that these statements were true.  Among other things, the technology had made high quality color pigments, and Rockwood had proven that it could scale up the technology to a large, commercial-size reactor.  The reactors also cut costs, since they relied on lower cost raw material.  And, as noted, this is precisely how Rockwood discussed the reactors internally, long before Huntsman was on the scene.  Moreover, none of these statements were contained in the SPA.  Indeed, the SPA expressly states that, except for the effect of Section 4.27—a section that nowhere contains the above statements—Rockwood “make[s] no representation or warranty, express or implied regarding the design, capabilities, capacity or performance of the Augusta Site.”  (Ex. G (RX-0854 (SPA)) § 4.27(e).)

The Performance Test always was achievable.  Huntsman claims that the Augusta Facility could never pass the contractual Performance Test and that Rockwood knew it.  (Huntsman Br. at 5–6.)  In fact, the evidence will show that, not only was the Performance Test designed to be achievable, but the Augusta Facility always could pass the Performance Test, and it is only because of Huntsman’s gross execution failures that Huntsman did not succeed in getting the facility up and running.  In fact, the Panel will hear from Huntsman’s own witnesses that, even after Huntsman hatched its fraud claim in August 2016, Huntsman still believed “into 2017” that the “Augusta facility would pass the performance test.”  (Ex. H (Buberl Tr.) at 42:16–25.)  If Huntsman itself believed as much in 2017, how can Huntsman now claim that Rockwood’s similar conclusions years earlier were somehow fraudulent?  It cannot.

The Validation Plan affirmed Rockwood’s belief in Augusta and the Bluebirds.  Huntsman claims the plan Rockwood set up to “validate” the Augusta reactors was a “sham and a failure” and that its mere existence is reflective of fraud.  (Huntsman Br. at 7.)  Far from it.  The Panel will hear and see contemporaneous evidence reflecting that the Validation Plan was simply a program that evolved from a plan developed at the early stages of the project in 2012 to use the 500 m3 Bluebird test reactor at Turin, and the 1000 m3 Bluebird test reactor once built, to optimize the operational conditions and promote a successful start-up of the Augusta Facility.  Huntsman never appreciated the importance of this program, and instead allowed the program to “peter out” post-closing, ultimately contributing to its post-closing failures. 

Huntsman had full access to and ran the Bluebird reactors for nearly two years without any concern about the Performance Test, much less any claim of “fraud.”  Huntsman claims that Rockwood “concealed the problems with the Bluebird technology” by limiting Huntsman’s access during diligence.  (Huntsman Br. at 1.)  The evidence will actually show that any limits on Huntsman’s diligence access were reasonable, typical, and necessary—particularly in a transaction like this between competitors, which was subject to antitrust review, and in which closing was uncertain.  But the notion that any incremental diligence access would have changed Huntsman’s view of the transaction is any event fanciful.  What the evidence will actually show is that post-closing, with full access to the proprietary technology, including to all documents and data, all relevant personnel, and extensive hands-on experience actually running the Bluebird reactors in both Turin and Augusta, Huntsman did not believe it had been misled by Rockwood or question the capability of the technology or the Augusta Facility.  The notion that, with just a bit more access during diligence, Huntsman would have promptly identified some fundamental flaw with the technology is a revisionist fantasy.  And the reason it would not have identified any fundamental flaw with the technology is that there is none.    

BACKGROUND  

I.                   LONG BEFORE ANY TRANSACTION WITH HUNTSMAN, ROCKWOOD INVESTS IN A NEW COLOR PIGMENTS FACILITY BASED ON ITS CONFIDENCE IN THE “PROVEN” BLUEBIRD REACTORS

Rockwood was a specialty chemicals company with a broadly diversified portfolio comprising six business segments.  In the SPA, Huntsman purchased two of those segments, containing five specialty chemicals business lines, for approximately $1.1 billion.  Of relevance to this arbitration is one facility in one of those business lines; specifically, Rockwood’s color pigments business and its, as of the time of signing and closing, unbuilt Augusta Facility, which was one of 18 color pigment plants that Huntsman acquired.  (Ex. I (CX-001 (April 2013 Confidential Information Memorandum)) at 1–7.)

In the 2000s, Rockwood developed at its plant in Turin, Italy a new reactor design called the “Bluebird” reactor that would use a well-established process for making red and yellow pigments.  Initially developed and tested at a pilot plant stage, the Bluebird reactor was scaled up to a commercial-production sized, 500 m3 test reactor in 2009.  (Ex. J (CX-003.001 (June 2013 Turin Site Presentation)) at 21, 30, 41–47, 56–58; Ex. K (RX-0920 (500 m3 Bluebird test reactor Capital Expenditure Summary)).)  On the strength of the results achieved at the pilot plant and the 500 m3 test reactor scales, Rockwood developed a plan (referred to as “Project Fenice”) that included the construction of the Augusta Facility—a new facility in Augusta, Georgia that would use four as-yet-unbuilt 1000 m3 Bluebird reactors to consolidate Rockwood’s iron oxide pigment production.[1]  (Ex. L (RX-0587 (May 2013 Management Presentation)) at 14, 27–28; Ex. J (CX-003.001 (June 2013 Turin Site Presentation)) at 62–63; Ex. M (RX-3824 (Livingston Rep.)) at 37.)  A number of internal presentations in 2011, including to the Rockwood Board, described the results that had been attained on the existing reactors and what future development was expected to achieve.  The assessments of the Bluebird reactors and Augusta Facility in those internal presentations in 2011 used language identical to the statements that Rockwood would later make to Huntsman in 2013 and that Huntsman now alleges were false: they described the technology as having been “proven to scale,” “[c]apable of high quality red and yellow iron oxide production,” and assessed the planned Augusta Facility as a “game changer.”  (Ex. BG (RX-0293 (May 2011 Project Fenice Presentation)) at C_000071004, -009; (Ex. P (RX-0350 (Aug. 9, 2011 Project Fenice Board Presentation)) at ALB_00164817, -818, -852.))

Based on its confidence in the technology, the Rockwood Board approved a $115 million investment in the project, subsequently increased to $172 million.  (Ex. P (RX-0350 (Aug. 9, 2011 Project Fenice Board Presentation)) at ALB_00164817.)  In considering that investment, the Board heard from Rockwood CEO and Chairman Seifollah Ghasemi, who expressed his view that “the technology has been proven.”  (Ex. Q (RX-0351 (Aug. 9, 2011 Rockwood Board Meeting Minutes)) at ALB_00409242.)  The Board also inquired as to the steps that Management was taking to protect the intellectual property associated with the Bluebird reactors from competitors.  (Id. at -241.)  Rockwood also began planning construction of a $3.6 million 1000 m3 Bluebird test reactor in Turin that Rockwood planned to use to develop and “validate” the operating procedures for the Augusta Bluebird reactors.  (Ex. R (RX-0534 (1000 m3 Bluebird test reactor Capital Expenditure Proposal)) at -338.)  The decision to make this nine-figure investment was before any sale process, and certainly before Huntsman was even considered as a potential buyer.

 

II.                ROCKWOOD SELLS ITS COLOR PIGMENTS BUSINESS TO HUNTSMAN AND ACCURATELY REPRESENTS THE BLUEBIRD TECHNOLOGY

A.                Huntsman Approaches Rockwood About Selling its TiO2 Business—the Economic Driver of the Deal—and Rockwood Accurately Describes the State of Development of the Bluebird Reactors

In early 2013, Huntsman expressed interest in purchasing Rockwood’s Pigments & Additives division.  Huntsman’s motivation for the purchase was “catalyzed” by its interest in Rockwood’s TiO2 business:  Huntsman already had its own titanium dioxide business (the 4th largest globally), and it planned to combine its business with Rockwood’s (the 6th largest globally) in order to create the second largest TiO2 producer globally, and spin off the combined company in an IPO.  (Ex. E (Turner Tr.) at 33:2–9; Ex. B (Huntsman Tr.) at 192:22–193:2; see Ex. S (RX-3814 (Van Zijl Rep.)) ¶ 34.)  As Huntsman’s financial advisor put it, Huntsman’s TiO2 strategy was “to get smaller by first getting bigger”—i.e., to acquire another TiO2 business in order to give Huntsman’s TiO2 business the necessary scale for a successful spinoff/IPO.  (Ex. T (RX-0958 (Dec. 19, 2013 email from A. Desjardins to M. Cashia)) at BofAS00007357.)

In contrast, the Bluebird reactors were not the economic driver of the deal.  When asked whether he understood that the Bluebirds were “an important part of the transaction,” Rockwood’s CEO Seifollah Ghasemi answered categorically to the contrary: “My understanding is that it was not an important part of the deal . . . . My bankers had said that [Huntsman] have put not much value on that.”  (Ex. U (Ghasemi Tr.) at 281:20-283:6.)  Ghasemi’s recollection was correct: out of three valuation models presented by Huntsman’s financial advisors to the Huntsman board of directors, two did not assign any value to the planned Augusta Facility.  And the one model that did account for the expected earnings of the Augusta Facility resulted in the lowest valuation range of the three and did not support the transaction price until the substantial TiO2 synergies were included.  This was moreover consistent with Peter Huntsman’s account of the transaction to the market, telling investors that Huntsman “did Rockwood . . . for the express purpose . . . to combine it with our TiO2 business and to spin it off.”  (Ex. A (RX-3015 (Huntsman Corp. Q1 2018 Earnings Call Tr.)) at 18.) 

During the course of due diligence, Rockwood gave Huntsman multiple presentations about Rockwood’s specialty chemical businesses, including color pigments.  These presentations discussed the Bluebird technology in precisely the same terms—verbatim—that Rockwood used when discussing the technology and planned Augusta Facility internally (two years before)—and all of those statements were true.  For instance, the 500 m3 Bluebird test reactor had made high-quality color pigments at Turin, and Rockwood had proven that it could scale up the Bluebird technology to a commercial-size reactor. 

Rockwood also provided a presentation containing a chart identifying, among other things, a list of pigment colors that had been “produced with the desired quality” by the 500 m3 Bluebird test reactor at Turin.  (Ex. J (CX-003.001 (June 2013 Turin Site Presentation)) at 61.)

[1] Rockwood’s confidence in the scale up to 1000 m3 was based on extensive research and development (“R&D”) tests on the 500 m3 test reactor.  Because the goal was “to understand the process,” and to perfect the design, it was neither expected nor intended that all of the R&D test runs would achieve the color quality or growth rate needed for commercial production.  (Ex. N (Garetto Tr.) at 67:2–70:3.)  Rockwood also provided samples of the pigment that was hardest to produce (Yellow 1075) that had been made in the Bluebird 500 m3 test reactor and gave it to key customers in the United States, who provided positive feedback.  (Ex. N (Garetto Tr.) at 61:14–63:9.)  Sherwin Williams also fully approved pigment samples made by the 500 m3 test reactor, proving that the commercial scale Bluebird test reactor was able to make high quality pigment for the commercial market.  (Ex. Q (RX-0351 (Aug. 9, 2011 Rockwood Board Meeting Minutes)) at ALB_00409241, -242; Ex. O (RX-3619 (9/1/2020 Sergi Decl.)) ¶ 10.)

Huntsman, through its own diligence and that of its advisor, McKinsey & Co. (“McKinsey”), was well aware of the inherent risks of Rockwood’s color pigments business, and understood that completing Project Fenice was subject to enormous execution risk.  Indeed, McKinsey’s ultimate recommendation to Huntsman as to the proposed color pigments acquisition was a blunt “do not recommend.”  (Ex. D (RX-0015 (July 16, 2013 McKinsey Due Diligence Report)) at C_001623932 (emphasis added).)

As McKinsey warned Huntsman, achieving the projected results at the Augusta Facility would require “flawless execution” during a changeover in management.  (Id. at -931, -957 (emphasis added).)  The facility was also going to be running the Bluebird technology at a new, 1000 m3 scale that, as Huntsman knew, had never been used or tested anywhere in the world: As McKinsey cautioned, the “technology . . . has not yet been deployed at scale” and the “true full capacity is untested at this scale.”  (Ex. C (RX-0013 (July 10, 2013 email from S. Anderson to S. Turner)) at C_000072826; Ex. D (RX-0015 (July 16, 2013 McKinsey Due Diligence Report)) at C_001623957; see also Ex. B (Huntsman Tr.) at 43:24–44:5).)  Building, commissioning and operating the new 100 m3 Bluebird reactors at Augusta would be up to Huntsman.  As Huntsman well understood, among the key risks (though certainly not the only one) was the simple fact that “the thing wasn’t built.” (Ex. E (Turner Tr.) at 61:18–62:10; Ex. B (Huntsman Tr.) at 107:3–13.)