Saturday, September 22, 2007
Posted by Jeff Lipshaw
Both the Wall Street Journal and the New York Times ran stories today about KKR's backing out of its deal to acquire Harman Corporation, stereo maker and significant audio component supplier to the automotive industry. The focus of both stories was the "material adverse change," or MAC, clause, found in one form or another in almost every significant merger or acquisition agreement. In a nutshell, most deals have a delay between signing the agreement and the closing, either to get regulatory approvals or to obtain necessary third party consents. The representations and warranties characterize the business at the time of the agreement (and they are generally "brought down" to the closing date by a certificate of an officer of the target to that effect), but there is generally a condition to closing that says the buyer is not obliged to close if there has been a material adverse change in the business since the signing of the agreement. There is some negotiating around this - the question for the seller being how much can you limit it expressly to the four corners of the Business with a capital "B" and insure that it has a high hurdle, and the question for the buyer being how much can you turn it into an option if anything in the world in or out of the business changes its prospects at all.
The neat thing was that friends from practice and academia turned up in the articles. I thought the WSJ article captured the foregoing essence of a MAC better than the NYT, and Gerald Nowak, above left, a partner at Kirkland & Ellis, who used to do work for us when I was at Great Lakes was quoted about the legal standard. The NYT, on the other hand, quoted Steve Davidoff (Wayne State, right) from our sister blog, M&A Law Prof, and was stronger on the deal context. Apparently all KKR has at stake is a $225 million walkaway fee on an $8 Billion deal. So in making the decision to walk away, it knows, even if its claim on the MAC is thin, its liability is capped, and there will be a discount for litigation risk and certainty. And Harman, on the other hand, knew that in the worst case it was giving an option on the company for up to $225 million.
I think the WSJ Deal Journal appropriately notes that the more significant sanction here is reputational.