Monday, August 13, 2007
Another Material Adverse Change case has popped up. And this one has the potential for a landmark MAC opinion in the Delaware Chancery Court. This dispute concerns the private equity fund Lone Star's agreed takeover of Accredited Home Lenders. On Friday, Lone Star filed an amendment to its Schedule TO which stated that:
On August 10, 2007, Lone Star informed the Chairman of the Special Committee of the Board of Directors of the Company that, in light of the drastic deterioration in the financial and operational condition of the Company, among other things, as of today, the Company would fail to satisfy the conditions to the closing of the tender offer. Accordingly, Purchaser does not expect to be accepting Shares tendered as of the end of the current offer period ending at 12:00 midnight, New York City time, on August 14, 2007.
AHL responded that day in its own press release:
With the receipt of all required regulatory approvals and the resolution of the Wan litigation, Accredited believes that, assuming more than 50% of Accredited’s outstanding shares are tendered by the expiration of the current tender offer period on August 14, 2007, all conditions to closing of the tender offer will have then been satisfied.
Accredited noted that the Agreement and Plan of Merger with Lone Star expressly provides that changes generally affecting the non-prime industry in which the Company operates which have not disproportionately affected the Company do not provide a basis for Lone Star to walk away from its obligations. Accredited said that it intends to hold Lone Star to its obligations, and to hold it fully responsible for any damages caused by its failure to satisfy those obligations.
And today it was reported that AHL had sued Lone Star for specific enforcement of the transaction in Delaware Chancery Court. Note that the Merger Agreement is governed by Delaware law and any dispute thereunder is required to be litigated there.
The underlying story here is that Lone Star is asserting that a MAC occurred under the Merger Agreement due to the recent deterioration of the financial markets and the sub-prime industry generally in which AHL operates. AHL is disputing this assertion by stating that these events are specifically excluded under the negotiated MAC clause. To determine who is correct, the starting point is to look at the MAC clause in the merger agreement. The relevant section defines a MAC as:
“Material Adverse Effect” means, with respect to the Company, an effect, event, development or change that is materially adverse to the business, results of operations or financial condition of the Company and the Company Subsidiaries, taken as a whole; provided, however, that in no event shall any of the following, alone or in combination, be deemed to constitute, nor shall any of the following be taken into account in determining whether there has been, a Material Adverse Effect: (a) a decrease in the market price or trading volume of Company Common Shares (but not any effect, event, development or change underlying such decrease to the extent that such effect, event, development or change would otherwise constitute a Material Adverse Effect); (b) (i) changes in conditions in the U.S. or global economy or capital or financial markets generally, including changes in interest or exchange rates; (ii) changes in applicable Law or general legal, tax, regulatory or political conditions of a type and scope that, as of the date of this Agreement, could reasonably be expected to occur, based on information that is generally available to the public or has been Previously Disclosed; or (iii) changes generally affecting the industry in which the Company and the Company Subsidiaries operate; provided, in the case of clause (i), (ii) or (iii), that such changes do not disproportionately affect the Company and the Company Subsidiaries as compared to other companies operating in the industry in which the Company and the Company Subsidiaries operate . . . .
Thus, AHL is arguing that any material adverse effect is caused by changes to the sub-prime industry generally and that they do not disproportionately effect AHL. The argument in Delaware court will likely be over the "disproportionate effect" of these changes. This will be a fact-based inquiry. And, as I noted in my post on the SLM MAC, Delaware raises a high bar to proving a MAC placing the burden on the asserting party. Therefore, we will have to wait for Lone Star's day in court to see whether it can meet this bar. But, if the case does result in an opinion, it will likely clarify the grounds for invocation of MAC clauses in a number of pending transactions which have been effected by the current market crises.
NB. M&A attorneys take note that Lone Star is in a different negotiating position than the SLM consortium. There, the consortium specifically negotiated in their merger agreement that specific performance of the transaction was not a permitted remedy and that the consortium's damages would be limited in any dispute to $900 million even in the case of any willful or intentional breach of the agreement by the consortium. Lone Star has no such provision and their merger agreement contemplates in Sec. 11.07 specific performance for any breach. Thus, the calculus for Lone Star in asserting a MAC is much different and uncertain than the SLM consortium.