Contract Was Formed by Allegheny Energy and

¶ … contract was formed by Allegheny Energy and Merrill Lynch so that Allegheny Energy could acquire the Global Energy Markets Unit (GEM) division of Merrill Lynch. A definitive agreement was signed by Merrill Lynch and Allegheny Energy, and under the terms of that agreement Allegheny Energy would purchase GEM for $490 million plus a 2% equity interest. The transaction would be viewed as a purchase, and therefore Allegheny's earnings per share would be expected to rise dramatically (Allegheny, 2005).

It was also stated, though, that there were many variables that could affect the ultimate outcome of the transaction, and that there were aspects of it that were beyond the control of the companies. These were mentioned in the contract in order to be sure that everyone understood that many things were not guaranteed by the contract and that there was the possibility of unstable conditions in the market in the future, under the Private Securities Litigation Reform Act Safe Harbor Statement. 2.

What were the elements of the contract pertaining to performance? Where performance is concerned, the contract made it clear that there were no guarantees regarding the quality of the energy market, and therefore the merger/purchase between the companies did not necessarily mean that Allegheny was going to make a huge profit, or that Allegheny's shareholders would make a great deal.

However, Merrill Lynch did misrepresent the GEM unit that they sold to Allegheny Energy in many different ways, and therefore Allegheny Energy felt that Merrill Lynch failed in its performance of the contract. Because Merrill Lynch failed to disclose the trades that it had made with Enron before Enron had all of its problems, Allegheny Energy believed that Merrill Lynch was dishonest and that the company misrepresented the worth of the GEM unit that was sold to it.

In other words, Merrill Lynch failed to perform the duty that it had to Allegheny Energy to enter into the contract properly and not to misrepresent anything in the contract. 3. Was the performance of any party excused? It does not appear that the performance of any party was excused from what happened to Merrill Lynch and Allegheny Energy. However, Allegheny Energy does admit to also trading with Enron before the Merrill Lynch deal took place (Heiser, n.d.).

Since it was before the deal, and Allegheny was the one paying money to acquire the business, there is no reason why these particular trades, whether honest or not, should matter. Even though it might appear that Allegheny was also dishonest and therefore should not hold Merrill Lynch liable for any problems encountered with the GEM unit, the fact remains that Allegheny's trades did not have anything to do with the contract, where Merrill Lynch's trades in fact did.

Because of this, the trades that Allegheny Energy made with Enron can be overlooked, as they are not related to this case and have no bearing on its outcome. The trades that Merrill Lynch made, however, helped to raise the GEM stock price and to overvalue the stock to the extent that Allegheny Energy ended up paying much more than the stock was actually worth in order to complete the purchase -- something that Allegheny Energy believes should be rectified and has therefore brought suit over. 4.

Was a party in breach? Why? Or why not? Some may argue that Allegheny Energy breached the contract by not disclosing their trades with Enron, but this does not appear to be the case. The one point of concern with Allegheny, however, is that the company waited a year and a half after the deal was completed to come forward about the trades with Enron and to ask that Merrill Lynch be made to pay for the alleged problems with the GEM unit (Heiser, n.d.).

While there is no reason that Allegheny could not sue after that length of time, it seems rather odd that the company would wait that long, especially if it was losing money, to speak up and say that the trade was flawed somehow or that Merrill Lynch was in breach of contract. As for Merrill Lynch, it appears that company is in breach of contract.

While Merrill Lynch and Allegheny Energy agreed that there were no guarantees that Allegheny Energy would make a profit or do well with the GEM unit (Merrill, 2005), Merrill Lynch also misrepresented the value of the company that is sold to Allegheny Energy, and therefore basically lied on the contract about what Allegheny was receiving for the money. This is not something that should have been done by either one of the companies, but it happens all too often.

Unfortunately for Merrill Lynch, the dishonesty that was seen in the contract may end up costing the company a great deal of money in the future, if Allegheny Energy wins its lawsuit.

While Merrill Lynch would get the GEM unit back, it would not be worth much and no one else would want to purchase it for a fair price, so Merrill Lynch would be stuck with something that it could not sell and would also have to pay a great deal of money to Allegheny Energy, both to pay back the purchase price and to pay for the problems that were caused. 5. What type of damages are being or can be sought? Allegheny Energy is looking for damages from Merrill Lynch.

Among the damages that Allegheny wants are compensatory damages for the fraudulent inducement of Merrill Lynch in an amount that has not yet been determined and will be determined during the trial. Allegheny believes that this amount will be more than $490 million plus the value of 2% of the equity.