UPDATE 1-Fiat, UAW trust both score points in Chrysler hearing

Thu Apr 25, 2013 3:25pm EDT

By Tom Hals

WILMINGTON, Delaware, April 25 (Reuters) - Fiat SpA and a United Auto Workers trust each appeared to score points with a Delaware judge on Thursday during a hearing that could help determine what the Italian company has to pay to acquire the rest of car maker Chrysler Group LLC.

Fiat Chief Executive Sergio Marchionne wants to buy a minority stake in Chrysler that is held by the trust to create the world's seventh-largest auto maker and give Fiat the added cash flow and scale to ride out Europe's economic slump.

The two sides differ sharply on the value of Chrysler's equity, which the union trust has estimated at $11.493 billion and Fiat saying it is worth $4.68 billion, according to court papers. Thursday's hearing could help shape those negotiations by giving each side a better sense of their legal theories and the time frame for resolving the case.

The dispute stems from Fiat's call option to buy from the trust a 3.3 percent stake in Chrysler and has offered to pay $139.7 million. The UAW trust has said in papers filed with Delaware's Court of Chancery that the stake is worth at least $342 million.

The union trust, known as a voluntary employees beneficiary association or VEBA, appeared to sway judge Donald Parsons that Fiat was improperly accounting for Chrysler's debt which the VEBA said was depressing the value of Chrysler.

However, later in the hearing, Parsons seemed dismissive of the VEBA's arguments that Fiat's proposed purchase price was barred by federal laws governing retirement benefits because the price was arguably below fair market value.

Fiat acquired a stake of Chrysler in 2009 out of a controversial bankruptcy that was funded with money from the U.S., Canadian and Ontario governments.

As part of the reorganization, the VEBA ended up with a 41.5 percent stake in Chrysler as well as promissory notes in exchange for foregoing obligations to retirees. Fiat owns the remaining 58.5 percent of Chrysler.

When Fiat gained control of Chrysler in 2009, it also reached a call option agreement that would allow it begin buying part of the VEBA's stake in Chrysler in July 2012. The agreement would allow Fiat to buy up to 16.6 percent of Chrysler from the VEBA by exercising call options over several years.

The two sides have disagreed on how to apply the pricing formula and Fiat sued last year in Delaware, where the parties agreed to take any disputes.

The VEBA has argued the promissory notes should be excluded in calculating Chrysler's debt - which would increase the auto maker's value - because the notes did not meet the definition of "borrowed money" in the call option agreement.

"I'm kind of leaning in his direction," Parsons said, indicating he favored the argument of trust attorney Robert Hirth of Sidley Austin.

Fiat's lawyer, Steven Holley of Sullivan & Cromwell, said after the two-hour hearing he was encouraged by Parsons' indication that he was not buying the VEBA's argument that the proposed purchase price violated federal law.

"That dog won't hunt," Parsons said of the VEBA argument.

Fiat has asked Parsons to rule on the arguments, while VEBA has asked Parsons to allow it to demand documents and question Fiat executives, which would likely add months to any resolution of the dispute.

Parsons indicated he might want expert testimony to guide him on some of the price calculations, such as the differences between European and U.S. accounting standards.

"I don't know that," the judge said. "I need an accounting expert."

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