“A MAC invocation is really a renegotiation tool for a lower price”
A good article from the New York Times DealBook blog on recent trends around material adverse change (MAC) clauses in US deals, looking in particular at the invocation of the MAC clause on the recent Cerberus / Chatham Lodging / Innkeeepers USA transaction:
“The private equity buyers are asserting a MAC based on the clause included in their letter of intent and term sheet to buy Innkeepers. Under their agreement, a material adverse change is:
[t]he occurrence of any condition, change or development that could reasonably be expected to have a material adverse effect on the business, assets, liabilities (actual or contingent), or operations, condition (financial or otherwise) or prospects of [Innskeepers]…
MAC aficionados will immediately notice two important things about this MAC. First, it does not have carve-outs. A typical clause will exclude items like changes in the general economy. Broadly speaking, a MAC clause is drafted so that general risks like a downturn in the economy are borne by the buyer, while risks unique to the seller constitute a MAC. But the Innkeepers MAC picks up both of these risks, making it more favorable to Cerberus and Chatham.
Second, the clause includes the word “prospects.” This term is not typically included in public acquisitions, because it is considered to significantly broaden the MAC to include events that adversely affect the future performance of the company. There is not much, if any, case law interpreting what “prospects” actually means and what future events it is meant to pick up, but it is generally thought to at least cover adverse changes in earnings projections.”
The article makes the general point about MACs that:
“These MAC assertions were really part of the negotiation dynamic among the parties as the financial crisis took hold. The reason is the way a MAC clause works. A buyer can invoke a MAC clause to try to drive down the price of an acquisition by taking advantage of either changed market conditions or adverse events affecting the target company.
In such a case, the seller usually settles at a lower price for two reasons. First, the seller does not want to litigate and argue in court how badly the MAC clause termination stinks. Second, the seller and its shareholders are typically happy to take the lower premium than risk litigation and an adverse decision resulting in no deal at all. This same dynamic also pushes a buyer to settle after invoking a MAC. The buyer also does not want to lose the litigation and be stuck buying the company at the original price. Thus, a MAC invocation is really a renegotiation tool for a lower price.”
Interestingly, the article asserts that “Delaware courts, the place where most of these cases have been litigated, require a MAC to be “significantly durational” in impact and have never found a MAC“.
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