By, Richard F. Langan, Jr., Esq., Partner at Nixon Peabody; David A. Martland, Esq., Partner at Nixon Peabody; John C. Partigan, Esq., Partner at Nixon Peabody; and Philip B. Taub, Esq., Partner at Nixon Peabody.
The Nixon Peabody 2017 MAC Study, is the firm’s 16th annual study of current negotiation trends involving material adverse change in M&A transactions.
After discussing some recent trends in deal-making activity, the authors review the dual purposes of material adverse change (MAC) or material adverse effect (MAE) clauses: the first being to set a threshold for determining the scope of disclosure or compliance relating to risks associated with the changes in the target’s business; the second being to delineate the circumstances under which a bidder would be permitted to exit a transaction without liability, often referred to as a “MAC out.”
MAC clauses are often heavily negotiated between buyer and seller as a form of “risk shifting.”
This year’s survey looked at 203 acquisition agreements ranging in value from $100 million to more than $85 billion, with 89% containing a material adverse change in the “business, operations, financial conditions of the Company” as a definitional element.
The paper next reports and discusses the prevalence of specific MAC exceptions as identified in the study, including definitional matters and exceptions for changes in market; hostilities, calamities and Acts of God; legal developments; employee matters and changes in ordinary course of business;
Interestingly, notwithstanding the lack of case law—and the fact that no Delaware court has ever found a material adverse effect to have occurred in the context of a merger agreement—the authors note that bidders have had some success invoking MAC clauses in recent years, which has resulted in opportunities to renegotiate deal terms in favor of the bidder.
One such example is when health care company Abbott Laboratories sued to enforce the MAC clause in its merger agreement with Alere Inc. after finding that Alere was under a number of government investigations and had been delisted by the New York Stock Exchange, among other issues. In April 2017, the parties settled on a purchase price of $5.3 billion, less than the originally agreed-upon $5.8 billion.
As a result, even when case law favors targets, targets are at times willing to settle by making a purchase price adjustment, rather than risk costly litigation and the possibility that the deal will not close.
Nixon Peabody notes that it continues to observe in MAC clauses an awareness of political and legal developments as they affect deals.