MAC clauses - strange animals indeed

MAC clauses have long been controversial in deals. But in a ruling out of Delaware last night on the hotly disputed Huntsman transaction, they took on a life of their own.

“… material adverse effect clauses are strange animals, sui generis among their contract clause brethren,” an opinion from Judge Lamb stated. “It is by no means clear to this court that the form in which a material adverse effect clause is drafted (i.e., as a representation, or warranty, or a condition to closing), absent more specific evidence regarding the intention of the parties, should be dispositive on the allocation of the burden of proof.”

The clause allows a buyer to terminate a deal if a material adverse change, or effect, has occured. But lawyers have in the past argued that a high bar is set on MAC clauses by courts. The Huntsman opinion only reinforces that.

“Many commentators have noted that Delaware courts have never found a material adverse effect to have occurred in the context of a merger agreement. This is not a coincidence. The ubiquitous material adverse effect clause should be seen as providing a “backstop protecting the acquirer 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 [an adverse change] should be material when viewed from the longer-term perspective of a reasonable acquirer.” This, of course, is not to say that evidence of a significant decline in earnings by the target corporation during the period after signing but prior to the time appointed for closing is irrelevant. Rather, it means that for such a decline to constitute a material adverse effect, poor earnings results must be expected to persist significantly into the future. ”

The opinion from the judge found that the seller “has not suffered a material adverse effect, as defined in the merger agreement, and further concludes that the buyer has knowingly and intentionally breached numerous of its covenants under that contract”.

For the full opinion click here.