Legal terms that let buyout firms renege on deals due to unforeseen calamities and misfortunes grew more seller-friendly over much of the past year, according to a new report. And that’s not good news for shops trying to wiggle out of buyouts, or at least renegotiate price, in the face of housing woes and credit market disruptions.
At least a handful of deals remain in limbo over “material adverse change” provisions commonly inserted in purchase agreements to protect buyers. Late last month, audio equipment maker Harman International industries Inc. said that
MAC clauses usually contain two parts. The first part lists developments that would let a buyer back out of a deal, such as an event that has a materially adverse effect on the business, operation and financial condition of the target. The second part lists events that, no matter how disruptive, wouldn’t count as a so-called “MAC out”; exceptions might include a rise in interest rates, or a change in exchange rates.
Over the course of the seller’s market that prevailed until at least recently, buyers lost ground on the heavily negotiated MAC provisions, especially on the largest deals, according to the Sixth Annual MAC Survey report published by law firm Nixon Peabody LLP. The report surveyed 413 M&A deals with values of at least $100 million and whose agreements were signed during the year that ended May 31, 2007.
Sellers managed to narrow the scope of the MAC outs slightly over the survey period, giving them a small advantage. For example, where one in 10 agreements (9 percent) had a MAC related to the prospects of the target in the 2006 survey, just 2 percent include that language this year. Sellers made even bigger strides by expanding the number and variety of exceptions in their agreements. More than half (59 percent) carved out an exception for changes in laws or regulations, according to the latest survey. That was way up from 42 percent in the prior survey.
Exceptions related to terrorism, acts of war and related events rose across the board, according to the survey. Well over half (61 percent) of the agreements surveyed included exceptions related to acts of terrorism in the United States or abroad, way up from just over a third (35 percent) the year before. As with other exceptions studied, the larger transactions tended to have more seller-friendly terms. For example, the terrorism exception appeared in more than four in five (82 percent) of the top 100 deals studied this year.
If there’s a silver lining for buyers it’s in a qualification often included in MAC exceptions. In more than two-thirds (69 percent) of all transactions studied and nearly nine in 10 (89 percent) of the top 100 deals, certain exceptions lose their bite if the event affects the target company significantly more than it does others in its industry. The qualification “is a sophisticated tool for the buyer to push back on what would typically be a seller’s negotiation victory,” according to the report.
Looking ahead, Dominick DeChiara, partner and LBO practice group leader at Nixon Peabody, said it’s too early to tell how changing dynamics in the buyout market will affect the MAC clauses. If buyers stay scarce in the market for mega-deals, he wouldn’t be surprised to see terms there become more buyer-friendly.
“Clearly now when I get a bid document in an auction, it’s still very littered with all of the exceptions,” said DeChiara, who works primarily on deals of $100 million to $1 billion. “I’m negotiating one now, and it’s hard to tell if I’m going to be successful, but I did push back on some things that I ordinarily would not have. Or put it this way—June 1 I would not have.”