Red-hot M&A target comes with a little legal problem in the US

For months now, Swiss seed maker Syngenta AG has been publicly courted by the likes of Monsanto Co. and China National Chemical Corp., part of a historic consolidation wave sweeping the agri-chemicals business.

But lurking behind any deal are lawsuits against Syngenta in which U.S. farmers and grain handlers are claiming losses of up to $6 billion. The suits in federal and state courts accuse Syngenta, the world’s third-largest seed company, of putting growers at risk by selling a genetically modified corn seed, engineered to fend off insects, without first obtaining Chinese import approval. Officials there rejected the grain in 2013, pushing down its price and crimping sales for farmers, plaintiffs say.

While damage estimates are often inflated as a negotiating tactic, even the risk of a sizable award, covering tens of thousands of farmers, could erode Syngenta’s value in merger negotiations, analysts say. A group of Syngenta shareholders last month called for more disclosure of legal liabilities “that could have a substantial impact on the company’s value.”

“There is going to be a lot of money in this thing," said Donald Swanson, an agriculture attorney at Koley Jessen PC in Omaha, Nebraska, who isn’t involved in the suits.

GMO regulations

Syngenta denies any wrongdoing, but the litigation underscores the continued controversy over how genetically modified crops are introduced in countries with varying regulations. And it comes amid massive restructuring in the chemicals industry. Dow Chemical Co. and DuPont Co. agreed to merge last month with a plan to split the combination into three companies, including an agriculture business that would be larger than Syngenta’s.

That has put pressure on Syngenta to do a deal. ChemChina, as state-owned China National Chemical is known, is currently in takeover talks with Syngenta, according to people familiar with the situation. St. Louis-based Monsanto continues to weigh an offer after withdrawing a $47 billion bid in August, Chief Executive Officer Hugh Grant told analysts Jan. 6.

In an interview a month before abandoning the bid, Grant said that understanding the “magnitude of risk” of the litigation is something he’d need to “get our arms around” before buying Syngenta. ChemChina didn’t respond to an email seeking comment.

Bumper crop

Syngenta disputes that the GMO seed caused any damages at all, saying that a bumper crop in 2013 created a global corn glut that drove down prices. “The plaintiffs argue the price went down because China rejected” the U.S. grain, Syngenta lawyer Michael D. Jones, a partner at Kirkland & Ellis LLP in Washington, said in an interview last week. “Our belief is China rejected it because prices went down.”

Syngenta also believes that the company did nothing wrong in selling the seed, known as Viptera, because it was approved for planting in the U.S. in 2010 and China doesn’t have a reliably functioning regulatory system for biotech crop approvals, Jones said.

“The complaints themselves make clear that plaintiffs are sophisticated industry players who were well aware that cross-pollination and commingling can occur, that China had not approved Viptera, and that Syngenta was not attempting to force the rest of the growing and distribution chain to isolate Viptera,’’ Syngenta said in a June filing.

Segregating Viptera

Syngenta has instead blamed Archer-Daniels-Midland Co., Cargill Inc. and other grain handlers and exporters, saying in a counterclaim that they failed to segregate Viptera corn from approved varieties when shipping it to China.

Syngenta’s allegations against ADM are “meritless,” Jackie Anderson, an ADM spokeswoman said in an email. Cargill said in a statement that “Syngenta’s commercialization practices and conduct are responsible for the industry’s damages.”

ADM and Cargill are pursuing their own lawsuits against Syngenta in state courts in Louisiana. Like the farmers, ADM and Cargill allege that Syngenta failed to take steps to avoid a foreseeable trade disruption.

Plaintiffs initially claimed damages up to $2.9 billion, citing a study by the National Grain and Feed Association based on loss of income for farmers and grain handlers in the 2013 harvest. Those parties have since raised their damage estimate to as much as $6 billion, claiming the Chinese demand for U.S. corn never recovered.

Class action

“The problem for the U.S. is that China found alternative sources in the Ukraine,” said Scott Powell, a lead attorney for farmers and grain handlers. The federal lawsuit in Kansas City, Kansas, is seeking to represent more than 350,000 corn farmers in the U.S. as a class action, he said.

Plaintiffs cleared an initial legal hurdle in September when a federal judge in Kansas City rejected Syngenta’s motion to dismiss the suit, opening the way for depositions of company executives this month. U.S. District Judge John Lungstrum said Syngenta’s defense that it had gained U.S. approval didn’t immunize it from “liability for wrongful conduct in selling” the seed.

Syngenta’s decision to sell the seed before Chinese approval departed from the policies of leading industry groups, plaintiffs say in the lawsuits.

Chinese approval

In their complaint, the farmers have quoted internal emails that they say reveal a more insidious side to Syngenta’s actions. The emails show that Syngenta intentionally misled U.S. farmers to believe Chinese approval was imminent to ease their concerns and continue buying the seed, plaintiffs argue.

By 2012, American corn farmers were stocking up on Viptera, which the U.S. had approved two years earlier. But as planting time drew near, China hadn’t yet cleared the seed. Since shipping unapproved biotech corn to China risked disrupting trade with a major importer, farmers were starting to return the seed, plaintiffs say, allegedly alarming company officials.

"We need to try to stop this," Sarah Hull, head of Syngenta’s global external affairs, said in an email to a colleague on April 10, 2012, according to the plaintiffs’ filing. Syngenta needs to tell farmers "that China Viptera approval is done and is only waiting for the administrative signatures," she wrote. Hull referred questions to Jones.

‘Handicap definitively’

A few days later, then-chief executive officer Mike Mack told analysts on a conference call that Syngenta expected to have Chinese import approval for Viptera "quite frankly, within the matter of a couple of days," according to the lawsuit. Plaintiffs didn’t mention that just two sentences later Mack cautioned listeners that he couldn’t “handicap definitively” when regulatory authorities will act, Syngenta said in its motion to dismiss.

Plaintiffs argue that the company had no indication that China had approved the technology. Syngenta had completed its application only four months earlier, and the country normally required two to three years before ruling, according to the complaint. An email in July 2011 from a marketing manager said approval wasn’t anticipated for a few years. It finally came in December 2014, 32 months after Mack’s declaration.

“The signals we were getting from these conversations was that approval was going to be coming, otherwise Mike never would have said it,” said Syngenta lawyer Jones. The company responded to a request for an interview with Mack by reiterating its views.

Reduced demand

After China detected Viptera corn in U.S. grain deliveries in 2013, it rejected an estimated 1.4 million metric tons, effectively cutting the U.S. out of the world’s fastest-growing corn market, the suits say. Corn futures tumbled as China’s action reduced demand, they allege.

The litigation is expected to drag into next year, with the first of six so-called bellwether cases scheduled for June 2017. It won’t be an easy suit to win because Syngenta had U.S. approval for the seed, said Kristine A. Tidgren, staff attorney at Iowa State University’s Center for Agricultural Law and Taxation.

“Any company that is going to buy Syngenta is going to have weighed the risks," she said.