A study of merger, stock purchase and asset purchase agreements from mid-2012 to mid-2013 finds something for both bidders and targets to like in the evolution of a key term that gives bidders the right, under certain conditions, to walk away from a deal without penalty.
In its latest study of the material adverse change (MAC) clause, law firm Nixon Peabody finds it to be almost a standard feature of agreements. A MAC clause regarding the “business, operations, (or) financial conditions of the company” appears in 98 percent of the agreements studied, up from 89 percent in the 2011-2012 period, the study found. Along with business, operations or financial conditions, more than half (56 percent) of the deals studied have MAC clauses letting the bidder walk away for reasons related to the target’s ability to close the deal, up from 44 percent in the previous edition of the study. Not surprisingly, only a small percentage (12 percent) of deals provide an out related to the bidder’s ability to close the deal.
Targets naturally fight for strong exceptions to be included in the MAC clause, such as for an economic or industry downturn beyond their control. And it is here that targets have been gaining ground. Nixon Peabody found 31 different exceptions included in the agreements it studied this year; of those 25 grew more prevalent in this year’s study compared with last year. For example, some 95 percent of the agreements studied have exceptions related to shifts in the economy, up from 76 percent in the previous version of the study, while 91 percent have exceptions related to business conditions in a particular industry, up from 75 percent.
Meantime, those gains by targets are somewhat tempered by changes in the language of the exceptions negotiated. For example, in nearly nine out of 10 (89 percent) agreements reviewed by Nixon Peabody, exceptions that ”disproportionately affect” the target—a recession that crushes the target more than its peers, say—could still allow the bidder an escape hatch under a MAC. That’s up from 73 percent in the previous year’s study.
While they can be written to be either bidder or target-friendly, MAC clauses offer benefits for both bidders and targets. Bidders should be more willing to invest time and effort in a deal knowing they can cut and run without penalty under certain conditions, such as a sudden tanking of the target’s business; by the same token, targets can take comfort that they won’t be penalized by events beyond their control.
To produce its report, Nixon Peabody studied 195 merger and related agreements for deals executed between June 1, 2012 and May 31, 2013 and ranging in value from $100 million to $54 billion. The law firm used information from financial documents filed with the U.S. Securities and Exchange Commission. The firm has been conducting annual studies of the MAC clause for over a decade. In general it has found that MAC clauses become more bidder-friendly during times of economic frailty, such as 2003 and the 2008-2009 period, and more target-friendly during times of economic strength.