M & A Law Prof Blog

Editor: Brian JM Quinn
Boston College Law School

A Member of the Law Professor Blogs Network

Thursday, May 15, 2014

A controversial customary MAE Carveout

Students in my just completed M&A class will enjoy Rick Climan's latest installment of this series of mock negotiations with Keith Flaum.  This one on a potentially controversial customary carveout to the MAE.  

 The lesson -- even though everyone is including it, doesn't mean you have to!

-bjmq

May 15, 2014 in Material Adverse Change Clauses, Merger Agreements | Permalink | Comments (0) | TrackBack (0)

Tuesday, December 3, 2013

More on MACs

OK, so it's that time of year for students all over the country...you're starting to study for exams.  I know, I know, if you are my students you have been more than diligent.  You've read ahead, you've come to office hours, etc.  You can walk through a merger agreement with your eyes closed by now. I'm not worried about you.  I'm worried about all those other students...  For their edification, here's the latest in Rick Climan's 5 minute series on merger agreements.  This one - part 1 of 2 deals with negotiating the Material Adverse Change/Material Adverse Effect clause.  

-bjmq

December 3, 2013 in Material Adverse Change Clauses | Permalink | Comments (1) | TrackBack (0)

Wednesday, November 13, 2013

Annual Nixon Peabody MAC Report

Nixon Peabody just released their annual MAC report.  Here's a taste, the  change in markets carveout:

2013MACCarveouts
 

 

-bjmq

November 13, 2013 in Material Adverse Change Clauses | Permalink | Comments (0) | TrackBack (0)

Tuesday, June 25, 2013

Smithfield...MAC in the making?

Get this ... Buzzfeed breaks merger news:  Will Shuanghui back out of the Smithfield transaction now that Smithfield has walked away from Paula Deen? For those of you not paying attention, here's all the Paula Deen news you could possibly want.  My guess is that Shuanghui is acquiring Smithfield for reasons that have nothing to do with Ms. Deen.

If you take a long term view of the economics driving Shuanghui's acquisition, losing Ms. Deen isn't even a blip on the radar. Given the standard that for a court to determine there has been a material adverse change sufficient to permit a buyer to walk, the event in question has to be one that "substantially threatens the overall earnings potential of the target in a durationally-significant manner."  Frankly the loss of Ms. Deen just doesn't meet that standard, especially when one looks at the access Smithfield will have to new export markets in Asia once the aquisition is completed.

-bjmq

June 25, 2013 in Material Adverse Change Clauses | Permalink | Comments (0) | TrackBack (0)

Wednesday, April 24, 2013

Signaling and risk allocation in merger agreements

Macia and Moeller of TCU have posted their paper, Signaling and Risk Allocation in Merger Agreements. They argue that targets use firm specific MAC carveouts to signal their unobservable quality.  By declining to include firm specific MAC carveouts (e.g. carveouts relating to restatements or CEO retention, etc), high quality firms are able to create a separation from low quality firms that tend to include more firm specific MAC carveouts.  It's an interesting paper.  I will ignore (not really) their subtle finance dig:

[T]here are only few rigorous academic studies about MAC clauses, arguably because of a lack of readily available data. Instead, MAC clauses have been almost exclusively studied by practitioners and legal scholars.

Ahem...ok, temper in check. Here's the abstract:

Acquirers and targets allocate interim risk in merger agreements through Material Adverse Change (MAC) clauses and exclusions [bjmq: e.g. carveouts]. While virtually all acquisitions have MAC clauses, there is broad cross-sectional variation in the number and type of MAC exclusions. Using comprehensive hand-collected data, we find that acquisitions with fewer firm-specific MAC exclusions, i.e., stronger abandonment options for the acquirers, are associated with higher acquirer announcement returns, higher combined surplus gains, higher target announcement returns, and better prior target performance. Fewer firm-specific MAC exclusions appear to be credible signals of higher target quality and are more prevalent when information asymmetries are likely high and signaling is particularly beneficial. In contrast, more market-wide MAC exclusions are not associated with higher acquirer or target gains although acquirers tend to assume the largely exogenous, market-wide interim risk when the expected completion periods are longer.

-bjmq

 

 


																	
									
									

April 24, 2013 in Material Adverse Change Clauses, Merger Agreements | Permalink | Comments (0) | TrackBack (0)

Tuesday, October 23, 2012

2012 MAC survey

Nixon Peabody has posted their 2012 MAC survey.  It's a useful overview of what people are negotiating into their MACs.  

-bjmq

October 23, 2012 in Material Adverse Change Clauses | Permalink | Comments (0) | TrackBack (0)

Wednesday, October 12, 2011

Skyworks arbitration

Here's a tidbit from the ongoing Skyworks/AATI arbitration:

A preliminary hearing was held before Chancellor Leo Strine of the Delaware Court of Chancery on October 7, 2011 on the petitions for arbitration filed on September 26, 2011 by Skyworks Solutions, Inc., a Delaware corporation, against Advanced Analogic Technologies Incorporated and the petition for arbitration filed on September 23, 2011 by AATI against Skyworks in the Delaware Court of Chancery in connection with the parties' May 26, 2011 Merger Agreement. At the preliminary hearing, Chancellor Strine ordered the two petitions consolidated for all purposes of the arbitration proceedings, and ordered that the arbitration hearing take place on November 28, 29 and 30 and, if additional time is needed, one or more days during the week of December 5.

OK, that's ten weeks from filing to hearing. Although the results will be confidential, both parties have obligations to file something under the securities rules, so we'll presumably be able to find out the outcome of the arbitration hearing.  What won't happen is that the result of the hearing will not become part of the Delaware common law.  So, if for example the court were to find that there was a MAC, no one else can rely on the decision, or its reasoning, to plan transactions or counsel clients about how future courts might decide.

-bjmq

October 12, 2011 in Material Adverse Change Clauses | Permalink | Comments (4) | TrackBack (0)

Monday, October 10, 2011

Innkeepers MAC settlement talks

According to Reuters, Innkeepers and Cerberus are now in settlement talks:

Innkeepers USA Trust is in talks to resolve litigation over the collapse of a planned $1.12 billion asset sale to Cerberus Capital Management Chatham Lodging Trust .

Innkeepers Chief Restructuring Officer Marc Beilinson said in a statement that the two sides were negotiating on Monday, but no agreement had been reached.

You'll remember that Cerberus tried to get Innkeepers to renegotiate its transaction before calling a MAC. Although Cerberus' MAC claim seemed weak, the strategy seems to nevertheless have worked.  Presumably settlement negotiations will lead to a repricing of the transaction before it goes forward. 

-bjmq

Reuters update:

A source close to the talks told Reuters discussions began over the weekend and that the sides had exchanged proposals and were far along in the process. The deal would feature a reduction in the purchase price, said this person, who spoke anonymously on details of a possible settlement because the talks are private.

October 10, 2011 in Material Adverse Change Clauses | Permalink | Comments (0) | TrackBack (0)

Wednesday, October 5, 2011

MAC Survey

Nixon Peabody's 2011 MAC Survey is available. Here's a useful chart from the survey highlighting the various elements of MACs.

-bjmq  

MAC elements

October 5, 2011 in Material Adverse Change Clauses | Permalink | Comments (0) | TrackBack (0)

Tuesday, September 13, 2011

Cerberus says "so what?"

According to Reuters, Cerberus has blamed the poor economy for its MAC its deal with Innkeepers. In Cerberus' reply to Innkeepers' complaint, they blame "unforeseeable, unprecedented, and materially adverse economic developments", namely the prospect of a double-dip recession, for the claimed MAC.  So...if I can find a reputable economist, like Krugman or Roubini, who was predicting a double-dip recession in say July, then the economic developments would no longer be unforeseeable?  

Anyway, the reply also seems to stick it in Innkeepers' nose that the MAC was really, really broad, essentially giving Cerberus a contractual right to walk away from the deal at the slightest event: 

Innkeepers -- MAE

Doesn't really matter anyway.  The essence of Cerberus' reply is "so what?"  They argue that it doesn't really matter whether the court decides there isn't a MAC, because the parties agreed to a $20 million reverse termination fee as liquidated damages in the event of a contractual breach by Cerberus.  

The argument is that Cerberus didn't actually acquire Innkeepers, it acquired an option to purchase Innkeepers.  To top it off, if the court decides there was a MAC, then Cerberus wants its deposit back. Ouch. That would hurt.  

-bjmq

September 13, 2011 in Material Adverse Change Clauses, Private Equity | Permalink | Comments (1) | TrackBack (0)

Tuesday, August 30, 2011

Innkeepers challenges Cerberus on MAC

So now Innkeepers has filed a complaint against Cerberus in the SDNY challenging Cerberus' decision to call a MAC on its acquisition of Innkeepers.  

The MAC as it appears in the Commitment Letter is as follows:

The occurrence of any condition, change or development that could reasonably be expected to have a material adverse effect on the business, assets, liabilities (actual or contingent), or operations,  condition (financial or otherwise) or prospects of the Fixed/Floating Debtors taken as a whole . . . 

Here's the Innkeepers' complaint. They are looking for specific performance. The crux of their argument is that while there may have been some market volatility recently, there has been no material adverse change.  Consequently, there is no basis for Cerberus to walk away from the transaction.  Indeed, Innkeepers argues that the subject of the MAC clause - the Fixed/Floating Debtors - are doing just fine, thank you very much.  Recent market volatility has - according to Innkeepers - is not relevant to the performance of the properties in question and in any event was foreseeable at the time of the contract.  They accuse Cerberus of trying to force a renegotiation of terms.

 My best guess is that Innkeepers has the better side of the argument here, although that's left to be seen.  We'll continue to follow this case as it develops.

-bjmq

 

August 30, 2011 in Material Adverse Change Clauses, Private Equity | Permalink | Comments (0) | TrackBack (0)

Tuesday, August 23, 2011

Innkeepers' MAC

Cerberus and Chatham Partners, LP have reportedly walked away (here: Deal Journal's coveragel) from their deal to acquire Innkeepers out of bankruptcy citing a MAC. You can find the bankruptcy filings here. There is no MAC in the APA. The MAC that the acquirers are citing can be found Term Sheet (Exhibit B to the Binding Amendment Commitment Letter - Exhibit F).   Here's the relevant termination language from the Term Sheet:

Unless otherwise agreed by the Plan Sponsors in writing, the Plan Sponsors may terminate the Amended Commitment Letter and Term Sheet by written notice to the Company and the Special Servicer upon the earliest occurrence of the following events (each a “Termination Event”):

6. The occurrence of any condition, change or development that could reasonably be expected to have a material adverse effect on the business, assets, liabilities (actual or contingent), or operations, condition (financial or otherwise) or prospects of the Fixed/Floating Debtors taken as a whole; provided, however, that this Termination Event shall not apply to the chapter 11 case of Grand Prix West Palm Beach LLC;

This is mighty buyer friendly MAC language.  No carveouts for anything except one specific contingency. That's pretty unusual these days. Cerberus and Chatham are apparently citing some change since May when they agreed to acquire Inkeepers.   I think things have been generally bad since May, haven't they? OK, there has been a bit of recent volatility since early August, but hey ... isn't that just more of the same these days? You'd think that someone making an acquisition of a business out of bankruptcy would anticipate the effects of temporary volatility or an additional downturn on the business. In IBP Shareholders Litigation, the Delaware Chancery Court set the bar for invoking a MAC pretty high:    

... [the MAC] is best read as a backstop protecting the acquiror from the occurrence of unknown events that substantially threaten the overall earnings potential of the target in a durationally-significant manner. A short-term hiccup in earnings should not suffice; rather the Material Adverse Effect should be material when viewed from the longer-term perspective of a reasonable acquiror.

Or maybe Cerberus is telling us something about their longer-term view on the state of the economy?

-bjmq  

August 23, 2011 in Leveraged Buy-Outs, Material Adverse Change Clauses | Permalink | Comments (0) | TrackBack (0)

Tuesday, February 22, 2011

Once more into the MAC breach!

Once more unto the MAC breach, dear friends, once more;
Or close the wall up with our dead deals.  With apologies to Shakespeare.

So Frontier and Holly have - nearly seven years later decided to try again - announcing a merger of equals today.   The last time these two tried a merger, they ended up in court with Holly calling MAC, I mean MAE, and Frontier arguing that Holly had repudiated the deal.  ( Download Frontier v Holly)  As a result of that case, Delaware adopted the MAC standard in IBP v Tyson (a case heard in Delaware, but involving NY law).  Here's hoping that things go better this time around.

-bjmq 

 

February 22, 2011 in Material Adverse Change Clauses | Permalink | Comments (0) | TrackBack (0)

Thursday, January 6, 2011

RIP Don Tyson

Don Tyson passed today.  Without Don Tyson there would be no In re IBP, Inc. Shareholder Litigation.  Remember it was Don Tyson who decided to walk away from Tyson's acquisition of IBP and then call a MAC.

-bjmq 

 

January 6, 2011 in Material Adverse Change Clauses | Permalink | Comments (0) | TrackBack (0)

Thursday, December 9, 2010

This year in MACs

This blog made a bit of a splash a couple of years ago when first were trying to invoke MACs left and right.   Of course, the world seemed like it was about to collapse.  If that's not a MAC, then what is?  In any event, things have been relatively quiet on the MAC front of late.  But that's not to say they aren't still important and not heavily negotiated.  Nixon Peabody put some associates to work researching MACs in 345 transactions over the past year and now have a report summarizing their findings.  You can find it here.

2010MAC exceptions
Deal makers seem to be learning the lesson of the financial crisis -- and increasingly including financial crises as exceptions to the MAC definition going forward. 

-bjmq

December 9, 2010 in Material Adverse Change Clauses | Permalink | Comments (1) | TrackBack (0)

Friday, December 18, 2009

2009 MAC Survey


Nixon Peabody's annual MAC Survey is out.  My only question - which are the 3% of transactions with a MAC, but no definition for what a MAC is?  I know MAC definitions can be frustratingly vague, but c'mon!

-bjmq

December 18, 2009 in Material Adverse Change Clauses | Permalink | Comments (0) | TrackBack (0)

Thursday, December 17, 2009

Exxon/XTO's Fracking MAE

There is a piece in today's WSJ on the Exxon/XTO deal.  The piece centers on the controversial practice of hydraulic "fracking" in the drilling process and whether the deal might be stopped in the event Congress moves legislation to ban or limit the practice or otherwise make the practice commercially impracticable.  It turns out that fracking is really central to this deal.  So central that if fracking were made impracticable Exxon would want to walk.  It's no real surprise.  Fracking is part of the reason we've enjoyed a boom in domestic natural gas supplies these last few years.  Take it away and there wouldn't be much left to pursue in the XTO deal I would imagine.  While the WSJ article doesn't come right out and say it, it doesn't take a genius to figure out how Exxon might have written in a "fracking" out.  It's right there in the definition of the MAE from the Exxon/XTO merger agreement.  

[1.01] ... “Company Material Adverse Effect” means a material adverse effect on  the financial condition, business, assets or results of operations of the Company and its Subsidiaries, taken as a whole, excluding any effect resulting from, arising out of or relating to (A) changes in the financial or securities markets or general economic or political conditions in the United States or elsewhere in the world, (B) other than with respect to changes to Applicable Laws related to hydraulic fracturing or similar processes that would reasonably be expected to have the effect of making illegal or commercially impracticable such hydraulic fracturing or similar processes (which changes may be taken into account in determining whether there has been a Company Material Adverse Effect), changes or conditions generally affecting the oil and gas exploration, development and/or production industry or industries (including changes in oil, gas or other commodity prices)(C) other than with respect to changes to Applicable Laws related to hydraulic fracturing or similar processes that would reasonably be expected to have the effect of making illegal or commercially impracticable such hydraulic fracturing or similar processes (which changes may be taken into account in determining whether there has been a Company Material Adverse Effect), any change in Applicable Law or the interpretation thereof or GAAP or the interpretation thereof, [italics mine] (D) the negotiation, execution, announcement or consummation of the transactions contemplated by this Agreement, including any adverse change in customer, distributor, supplier or similar relationships resulting therefrom, (E) acts of war, terrorism, earthquakes, hurricanes, tornados or other natural disasters, (F) any failure by the Company or any of its Subsidiaries to meet any internal or published industry analyst projections or forecasts or estimates of revenues or earnings for any period (it being understood and agreed that the facts and circumstances that may have given rise or contributed to such failure that are not otherwise excluded from the definition of a Company Material Adverse Effect may be taken into account in determining whether there has been a Company Material Adverse Effect), (G) any change in the price of the Company Stock on the NYSE (it being understood and agreed that the facts and circumstances that may have given rise or contributed to such change (but in no event changes in the trading price of Parent Stock) that are not otherwise excluded from the definition of a Company Material Adverse Effect may be taken into... 

Fracking appears not once but twice in the carve-outs to the carve-outs of the MAE - so important is it to the deal.  What the parties have done here is that they have taken the MAE definition, which is typically written to leave foreseeable risks with the buyer and unforeseeable risks with the seller and left a foreseeable and entirely likely risk with the seller.  So, in the event something freaky happens that no one could have foresee, the buyer is able to walk away.  On the other hand, if there is a foreseeable event, one that presumably the buyer could price into the transaction, then the buyer remains in the hook for close the transaction.  Now, a spokesman for Exxon says that the deal is subject to "a number of customary provisions for a transaction of this nature."  

True enough, but I dare say the fact that the parties foresee the risk of legislative changes specific to the business and have written them into the MAE is not quite customary.  It's more like the MAE we saw in the Sallie Mae deal of a couple years ago where parties carved-out from the carve-out legislative changes to educational lending.  The way the Exxon/XTO deal is written, if tomorrow Congress were to ban fracking, then Exxon would get a free option to walk from the deal.

-bjmq

December 17, 2009 in Material Adverse Change Clauses | Permalink | Comments (0) | TrackBack (0)

Sunday, October 25, 2009

BAC-ML: More E-Mail

OK, so now that BAC has started turning over internal e-mails to the House Committee on Oversight, it's not looking so good ... especially for the lawyers.  Law.com/Corporate Counsel has had access to the e-mail and it's quite a tangled web. 

The e-mails show that early on the morning of Dec. 19 [Eric] Roth [, a litigation partner at Wachtell] advised the bank's chief executive, Ken Lewis, and its interim general counsel, Brian Moynihan, on how difficult and financially risky it would be to try to invoke a so-called MAC -- or material adverse change -- clause, which would allow the bank to get out of the merger with Merrill.

But another e-mail from associate general counsel Teresa Brenner to Moynihan, sent several hours later and on the same day as Roth's e-mail, says, "Eric made a very strong case as to why there was a MAC" during a conference call with some officials from the Federal Reserve.

Later, Roth writes another e-mail to the legal/business team:

The e-mail says any attempt to invoke the MAC would certainly cause Merrill to file suit. Roth then lists a half dozen reasons why Merrill's arguments could prevail in court. It lists no argument in Bank of America's favor. But perhaps the most compelling fact on the list was this one: The merger deal is governed by Delaware law and "no Delaware court has ever found that a MAC occurred permitting an acquiror to terminate a merger agreement."

Yeah, this isn't turning out well for the lawyers.  It's looking like on the one side you had Treasury and the Fed saying do this deal or the economy goes down the tube and then on the other side BAC trying to come up with arguments to get the Treasury/Fed to subsidize what at the time was looking like a bad deal.  All the time, the shareholders were told nothing.

-bjmq


October 25, 2009 in Cases, Material Adverse Change Clauses | Permalink | Comments (0) | TrackBack (0)

Saturday, June 27, 2009

BAC's "MAC-Attack"

I received a couple of questions offline about Lewis’ “MAC-attack” and whether a MAC claim would have plausible (who knew we had readers in Europe?!).  The strength of a potential MAC claim by BAC was well covered by Steven a couple of weeks ago at the Deal Professor (Assessing a MAC Claim: The Lewis Ostrich Defense).   I’d like to address Lewis’ concern.  He apparently told Paulson/Bernanke that he feared shareholders would sue him for not claiming a MAC.  It’s hard to imagine that this was anything other than a threat to get the Fed/Treasury to put up more cash.  Why?  Well, the lawsuit he suggests is one that wouldn’t go very far. 

Alvarez’ assessment of a potential lawsuit was correct.  Any suit for failure to claim a MAC would start with the BAC board enjoying the protection of the business judgment rule, which we all remember is a presumption that “the directors of [the] corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company. Thus, the party attacking a board decision as uninformed must rebut the presumption that its business judgment was an informed one.”

That means that any challenge to BAC decision not to invoke a MAC in the agreement would have had to fight a very steep uphill battle.  To succeed, plaintiffs would have had to make the case the BAC board was uninformed/unreasonable.  Since proving a MAC is extremely difficult to do in any event, it’s not clear at all that a board having discussed and considered the circumstances – which it appears clear from the abundance of the e-mails was happening -- would have made an unreasonable or uninformed decision by not attempting to claim a MAC.  Basically, plaintiffs would have to make the case that finding a MAC would have been a “no-brainer” for a court looking at the facts and that the board was somehow absent when it neglected to reach the same conclusion in order to come close to winning on a claim against BAC’s board.  I’m pretty confident that a court would pretty quickly dismiss such a suit. 

So, what was Lewis afraid of beyond the inconvenience/embarrassment of a lawsuit?  Who knows, but he’s got all the inconvenience you can imagine by having to appear in front of Congress on a near regular basis these days.  More likely, the threat of being forced into calling a MAC because of "shareholder pressure" and a potential lawsuit was just a negotiating tactic to get more support from the Fed.

-bjmq

June 27, 2009 in Current Events, Material Adverse Change Clauses, Transactions | Permalink | Comments (0) | TrackBack (0)

Wednesday, June 17, 2009

Breaking the Bank

Last night's Frontline episode gives a blow-by-blow of the BoA/Merrill deal in crisp Frontline style.  Watch it over lunch at your desk.

For those of you keeping score at home, the material adverse change language is from the merger agreement is below.  Having it in front of you will come in handy at certain points while watching the show.

3.8 Absence of Certain Changes or Events. (a) Since June 27, 2008, no event or events have occurred that have had or would reasonably be expected to have, either individually or in the aggregate, a Material Adverse Effect on Company. As used in this Agreement, the term “Material Adverse Effect” means, with respect to Parent or Company, as the case may be, a material adverse effect on (i) the financial condition, results of operations or business of such party and its Subsidiaries taken as a whole (provided, however, that, with respect to clause (i), a “Material Adverse Effect” shall not be deemed to include effects to the extent resulting from (A) changes, after the date hereof, in GAAP or regulatory accounting requirements applicable generally to companies in the industries in which such party and its Subsidiaries operate, (B) changes, after the date hereof, in laws, rules, regulations or the interpretation of laws, rules or regulations by Governmental Authorities of general applicability to companies in the industries in which such party and its Subsidiaries operate, (C) actions or omissions taken with the prior written consent of the other party or expressly required by this Agreement, (D) changes in global, national or regional political conditions (including acts of terrorism or war) or general business, economic or market conditions, including changes generally in prevailing interest rates, currency exchange rates, credit markets and price levels or trading volumes in the United States or foreign securities markets, in each case generally affecting the industries in which such party or its Subsidiaries operate and including changes to any previously correctly applied asset marks resulting therefrom, (E) the execution of this Agreement or the public disclosure of this Agreement or the transactions contemplated hereby, including acts of competitors or losses of employees to the extent resulting therefrom, (F) failure, in and of itself, to meet earnings projections, but not including any underlying causes thereof or (G) changes in the trading price of a party’s common stock, in and of itself, but not including any underlying causes, except, with respect to clauses (A), (B) and (D), to the extent that the effects of such change are disproportionately adverse to the financial condition, results of operations or business of such party and its Subsidiaries, taken as a whole, as compared to other companies in the industry in which such party and its Subsidiaries operate) or (ii) the ability of such party to timely consummate the transactions contemplated by this Agreement.

 

-bjmq

June 17, 2009 in Current Events, Material Adverse Change Clauses, Mergers | Permalink | Comments (1) | TrackBack (0)