Bidders score gains on MAC clause, a key deal term: Survey

That is the upshot of the latest survey of material adverse change (MAC) clauses by law firm Nixon Peabody, which studied agreed-to M&A transactions from mid-2013 to mid-2014. For the uninitiated, a primary purpose of the MAC clause is to provide a so-called “MAC out”an escape hatch for a bidder that spells out events or conditions that would let it walk away from a deal penalty-free or try to renegotiate a price. The MAC out is tempered by pro-target “MAC exceptions” that spell out events preventing the bidder from escaping through the MAC out.

Below are four ways the MAC clauses have become more bidder-friendly in recent years:

  1. Nearly a third (31 percent) of transactions studied give the bidder a MAC out for material changes in the bidder’s “ability to close the deal.” That is up from 12 percent in the 2012-2013 survey and from 17 percent in the 2011-2012 survey.
  2. Nearly nine in 10 (88 percent) purchase agreements in the latest survey include “disproportionately affect” language ensuring the bidder maintains a MAC out in specified exceptions, such as a recession, in which the target suffers more than its rivals. That is up from less than half in the surveys conducted four and five years ago.
  3. More than half (56 percent) of transactions studied incorporate in the MAC clause the pro-bidder concept of circumstances that “would reasonably be expected to” lead to a MAC out event. That is up from fewer than a third of transactions studied three years ago and just 13 percent four years ago.
  4. This year’s survey found a pro-bidder shift in exceptions to the MAC clause. For example, it registered ”pronounced” declines in the prevalence of four pro-target exceptions to the MAC clause, including one for employee turnover, which fell to 19 percent of purchase agreements studied from 40 percent.

The 13th annual survey report published by the law firm covered 235 transactions valued at more than $100 million each that took place from June 1, 2013, to May 31 this year. Data came from public filings with the U.S. Securities and Exchange Commission. The period studied was marked by corporations tapping into record cash balances to do a number of mammoth deals, including Actavis’s $25 billion acquisition of Forest Laboratories, according to the survey report. Transactions ranged in size from $100 million to the $48 billion AT&T bid for DirecTV. 

The MAC clause is closely watched by M&A players, as changes in the clause over time reflect changes in the relative negotiating strength between bidders and their targets. According to the survey report: ”MAC clauses are often heavily negotiated between the parties. Targets seek to narrow the MAC definitional elements and expand the exceptions in order to shift risk to the bidder.” Some 95 percent of the purchase agreements studied by Nixon Peabody in its latest survey have MAC clauses, down a tad from 98 percent the year before.

(Correction: The story lists four ways that MAC clauses have become more bidder-friendly in recent years. The original version of this story said three.)