Sept. 30 (Bloomberg) -- Huntsman Corp. surged the most in more than three years in New York trading after a judge ruled Hexion Specialty Chemicals Inc. must honor a $6.5 billion buyout agreement.

Huntsman rose $5.25, or 71 percent, to $12.60 at 4:15 p.m. on the New York Stock Exchange, the biggest percentage gain since the shares started trading in February 2005. The stock still has dropped 51 percent this year.

Delaware Chancery Court Judge Stephen Lamb ruled yesterday that Columbus, Ohio-based Hexion, a unit of buyout firm Apollo Management LP, didn't have grounds to cancel its offer for Huntsman. Hexion agreed in July 2007 to buy Salt Lake City-based Huntsman for $28 a share.

Lamb found Hexion officials ``knowingly and intentionally'' violated their agreement with Huntsman to complete a merger creating one of the world's largest specialty-chemical makers. If the deal is canceled, Lamb will consider ``uncapped'' damages in a second phase of the trial in Wilmington, Delaware.

Huntsman officials persuaded a Texas judge today to bar units of Credit Suisse Group AG and Deutsche Bank AG from pulling the deal's financing. Montgomery County District Judge Fred Edwards ordered the banks to refrain from any action that ``could reasonably be expected to impair, delay, terminate or prevent consummation'' of the financing under an agreement with Hexion, Huntsman officials said in a statement.

Bid Interference

Huntsman, which also has operations in Houston, sued New York-based Apollo and partners Leon Black and Joshua Harris and the banks in Texas state court north of that city.

The suit accuses Black, Harris and the bankers of wrongfully interfering with a previous bid for the chemical maker. Hexion's bid topped a $25.25-a-share offer from Access Industries Holdings LLC's Basell unit.

Deutsche Bank spokesman John Gallagher and Credit Suisse spokesman Duncan King declined to comment.

The Texas ruling comes a day after Lamb concluded in the Delaware case that Hexion couldn't renege on its buyout offer for Huntsman.

``This is a spectacular win for Huntsman,'' Antony Page, an associate professor at Indiana University School of Law in Indianapolis, said in an e-mail. ``The court's findings of knowing and intentional breach will help Huntsman's efforts to get Apollo on the hook if Hexion cannot pay.''

Lamb, who heard six days of testimony in the case earlier this month, said he will extend the deal's Oct. 1 termination date until Hexion completes the merger.

`Substantial Obstacles'

``The court recognizes that there remain substantial obstacles to closing this transaction,'' Lamb said in his 89-page decision. ``Some of those result from the current unsettled credit environment.''

Huntsman officials have said they'll seek to recoup at least $3 billion, or the difference between the company's current share price and the agreed purchase price, if the deal fails. Hexion is the top producer of adhesives used in plywood, and Huntsman is the world's biggest maker of epoxy additives.

``We call on Hexion to complete the remaining actions required by the agreement and proceed to closing,'' Peter R. Huntsman, Huntsman's chief executive officer, said in an e-mailed statement yesterday.

``We are disappointed by the court's decision,'' Hexion officials said in an e-mailed statement late yesterday. ``We are reviewing the decision and our options.''

HSBC Securities analyst Hassan Ahmed said Huntsman probably will end up back in court seeking damages.

`Doubt' About Merger

``I doubt very much the merger can go through, because Hexion can turn around and say, `Our financial condition is bad and getting worse,' '' Ahmed said today by phone from New York. ``How the heck will a merger happen at any price?'' He rates the shares ``sell.''

Huntsman expects Hexion to complete the merger as ordered, spokesman Russ Stolle said today.

``The court has said unequivocally that Hexion continuing to game the process will not be fruitful,'' Stolle said.

Hexion and Apollo officials had argued a decline in the chemical industry and operational problems within Huntsman gave them the right to renege on the buyout.

They also tried to convince Lamb that the combined company would be insolvent and that its lenders were leery of financing the deal. That would have limited Hexion's and Apollo's damages for canceling the agreement to $325 million under the deal, officials of the two firms said.

In his decision, Lamb refused to rule on whether the combined company was solvent. He noted that expert witnesses for each side gave differing opinions.

Not 'Properly Framed'

``That issue may arise in the future in the course of this litigation or some related action, but it is not now properly framed by the terms of the merger agreement,'' Lamb wrote.

Hexion and Apollo couldn't prove the slowdown in Huntsman's business or its failure to reach earnings targets caused a ``material adverse effect'' on its businesses that justified canceling the deal, the judge concluded.

Huntsman executives argued in court filings that Hexion and Apollo officials sought to use pretexts to get out of the purchase because of the meltdown in the U.S. credit markets tied to subprime mortgages.

``We have claimed all along that Apollo would resort to any means necessary to break a legal and binding contract,'' Jon M. Huntsman, the company's founder and chairman, said in the statement. ``Apollo was dishonest, untruthful and lost the case.''

Bond Movement

Jon M. Huntsman Jr., the founder's son and older brother of CEO Peter Huntsman, is Utah's governor.

Hexion bonds fell while Huntsman's rose. Hexion's 9 3/4 percent notes maturing in November 2014 fell 2.5 cents on the dollar to 75.5 cents on the dollar, according to Trace, the bond price reporting system of the Nation Association of Securities Dealers.

Huntsman's 7 7/8 percent notes maturing in November 2014 rose 7.5 cents on the dollar to 88 cents on the dollar, according to Trace.

The case is Hexion Specialty Chemicals Inc. v. Huntsman Corp., CA3841, Delaware Chancery Court (Wilmington).

To contact the reporters on this story: Jack Kaskey in New York at jkaskey@bloomberg.net; Jef Feeley in Wilmington at jfeeley@bloomberg.net.

Last Updated: September 30, 2008 16:24 EDT