A costly and confusing collapse

Following a legal battle that ended in the collapse of the proposed $10.6 billion merger of Apollo Global Management-backed Hexion Specialty Chemicals and chemical manufacturer Huntsman, Apollo was left with a dilemma regarding the $1 billion now owed to Huntsman.

While common practice is for limited partners to bear the cost, in this case things were complicated by the fact that Apollo had four funds with an interest in the matter.

“The practice of having multiple funds managed by the same sponsor in the same transaction has been going on for a long time and this problem doesn't come to light until one of those blows up,” says Daniel O'Donnell, a partner at US law firm Dechert. “The basic problem is that, if you're the sponsor, you owe fiduciary duties to all of the limited partners in all of the funds.”

Apollo funds IV and V were existing investors in Hexion and would have cashed out of all or most of their investment as part of the merger. Fund VI and its co-investment vehicle affiliate AAA were to finance the acquisition of Huntsman and would have gained from the deal's upside.

According to a communication to limited partners, damages of $325 million will be paid to Huntsman by Credit Suisse and Deutsche Bank, which had agreed to provide financing for the deal; Apollo Funds IV and V will pay damages to Huntsman of $225 million; while Apollo Fund VI and AAA will purchase $250 million of Huntsman's senior convertible notes to be repaid at maturity in cash or common stock at Huntsman's choice.

In an unusual move, the general partner will pick up the remaining $200 million of damages alongside Funds IV and V, which O'Donnell says it is probably not obligated to do under fund documentation.

“I am sure a lot of thought went into this on the Apollo side and the fact that the general partner is contributing something suggests to me that the firm recognised there were all these conflicts and was trying to do something in an effort to show it wasn't trying to favour one fund over any of the others, ”O'Donnell says.

Apollo declined to comment.