M & A Law Prof Blog

Moar MACs Pleez

Ok, so Akorn has attracted a lot of attention - as it should. It's the first ever MAC seen in the wild. Of course, the Chancery opinion is going to get appealed, so it's not the last word on the issue. But for now, there it is and its facts are interesting. At the same time, there is another MAC case percolating in Chancery. You might remember I noted the Channel Medsystems v. Boston Scientific case. I pooh-pooh'ed the claim that an apparent embezzlement of $3 million was not a MAC/MAE under the current understanding of the law. So, is this where I eat crow?  Uh...no. Here's why:

In Channel, the underlying claim is that a Vice President of Quality Assurance embezzled some $3 million from Channel. In order to cover his tracks, he apparently made up/forged receipts for stuff that was never purchased and, importantly, tests that were never conducted. All of this became known after signing of the agreement. In fact, in a surprising coincidence it came to light at basically the same time the problems with Quality Assurance came to light at Akorn. In Akorn, the blame was pinned on the VP for Quality Assurance, just like in Channel. In Akorn, those problems called into question the viability with the FDA of basically all of Akorn's products. In Channel, there is only one product, so that looks the same too. This is starting to look eerily like Akorn Part Deux. OK, Quinn, seems like it's time to eat some crow. Except it's not.

Channel is single product company where the product is still in development. At the time of the deal, getting a good sense of the valuation is hard because the company only has value if the FDA approves the project. That's reflected in the structure of the deal. The deal is basically structured as put/call rather than a typical merger. The transaction has an outside date of Sept 29, 2019. If, before the outside date, the FDA approved Channel's product, then Channel has an option to put the company to Boston Scientific for some $250 million, and Boston Scientific has a reciprocal call option. That's critical.

Boston Scientific is arguing that the embezzlement and the accompanying cover up by the VP has resulted in an MAE and so it's termination of the agreement was proper. Channel is seeking a declaratory judgment that the embezzlement was not an MAE and that the FDA will approve the company's product in the first quarter of 2019.

Let me skip to the chase. If the embezzlement and cover up is material, then one should expect the FDA to refuse to approve the product on schedule and the contracted September 29, 2019 outside will come and go without an approval, and Boston Scientific would not be required to complete the transaction since Channel's put option would not vest. If the embezzlement is not material, then the FDA will approve the product before the outside date and then Channel will put the company to Boston Scientific. In any case, this particular contract has a competent third party ready to do their thing - that is evaluate and determine whether Channel's product should be able to be sold on the market.  Terminating the contract now, claiming there is a MAC, seems premature.

In the claim before the court right now, Boston Scientific's argument looks a lot more like buyer's remorse than it does a MAC. Because if the effect of the embezzlement was really bad, then under the terms of the contract, Boston Scientific will never have to close. If it's not and the product is approved before the outside date, there is no reason for Boston Scientific not to close. 

Anyhow, that's how I see it, buyer's remorse, not a MAC.

-bjmq

A MAC, a MAC!!

Sorry, catching up. It's a 247 page opinion for Chrissakes! It takes a guy some time to read that and the footnotes! What?! 800 plus footnotes?  What are we doing here? Anyway, as this case is no doubt going up for appeal, the Chancery opinion is not going to be the last word on this. Nevertheless, here we go.

So, for those of you not paying attention, in Akorn v. Fresenius Vice Chancellor Laster found - for the first time - that a buyer properly terminated a merger agreement after finding that a seller had breached a representation and that a material adverse effect had occurred. There are a couple of things, I think, worth thinking about at least initially.

First, it's pretty clear that early on the seller, Akorn, was running into market headwinds. The business did not perform nearly as well as it had previously due to the entrance of new competitors in the generics business. This poor performance caused Fresenius to worry and to experience some "buyer's remorse." You'll remember from IBP v Tyson and other cases, buyer's remorse is never going to be enough to cause a MAC.  Nevertheless, seeing the poor performance, Fresenius sought opinion of counsel whether that might be sufficient cause for them to walk away from the deal. Correctly, in my view, NY counsel told them, "No." They were in the business for all its ups and downs and the fact that others entered the market causing Akorn to suffer was not going to be the kind of thing that could permit Fresenius to walk away. 

Then, a fraud was uncovered. An anonymous letter revealed that, basically, all of Akorn's quality assurance programs were basically a fraud. This is a whole different kettle of fish. The effect of having basically faked its quality assurance programs meant that all of the data sent to the FDA were unreliable and that approvals granted to Akorn's drugs and pipeline are now in jeopardy of being pulled. "How about now?", asked Fresenius of its outside counsel. Well, if you are buying a drug company that, post-signing, reveals that it lied to the FDA and that its drugs are no longer going to be marketable for a, what's the word?, a yes, "durationally significant" period of time, that starts to look like what a MAC should look like. A first for Delaware. 

Actually, if the facts as outlined in this opinion aren't a MAC, then you'll never find one. This shouldn't even be close. I'm sure there's a line to be crossed - this is a MAC and this isn't - and if there is, these facts are well over that line.

In any event, I don't want to spend too much time on it. It's going to get appealed and the Delaware Supremes are going to want to have the last word on what a MAC looks like. Thankfully, they constrain themselves to opinions under 40 pages.

-bjmq

 

MAE Claim in Chancery

Earlier this week, Channel Medsystems sued Boston Scientific (complaint: Medsystems) over Boston Scientific's termination of their merger agreement. Boston Scientific claimed a MAE as the reason to scuttle the deal - in this case it was the apparent embezzlement of $3 million by a Channel Medsystems' employee.  Embezzlement as an MAE? They should probably read IBP  again. Under current law, while it's certainly not good, it's probably not going to be enough to be an MAE. Is a $3 million theft from a company worth $275 million material? Sure! Is it an MAE as described under IBP? Um. Probably not. While few (none) of these cases result in actual MAE's, they do offer parties opportunities to renegotiate the price. For example, in this transaction, a $3 million theft likely  hasn't changed the prospects of the target in any durationally significant manner. So, an MAE isn't going to fly, but it has likely reduced the price level for the target. 

-bjmq

Nixon Peabody MAC Survey

Nixon Peabody has just released its annual MAC survey. It's worth downloading to check-in on the latest trends with respect to MACs in merger agreements. The biggest change in recent years appears to be the steady adoption of carveouts for changes in legal regulation that might affect the target. So, in the past deals would be able to point to changes in legal regulations that adversely affect the value of the target as reasons to walk, increasingly that's not an excuse that will work any more as more of that risk is shifted to buyers.

-bjmq

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

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

Annual Nixon Peabody MAC Report

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

 

 

-bjmq

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

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

 

 

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

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

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.

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  

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: 

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

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

 

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  

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 

 

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 

 

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.

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

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