Material Adverse Changes

© Husch Blackwell LLP 1

Material Adverse Changesby Chauncey M. Lane

What is a Material Adverse Change?

A Material Adverse Change ("MAC") or Material Adverse

Effect ("MAE") is a significant change that negatively

affects the seller/target or its assets or future business

prospects.

What is the Purpose of a MAC Clause?

Provides protection for a buyer whose inclination to

conclude a deal has evaporated due to reasons that

were unknown at time of agreement; gives buyer benefit

of bargain

Prevents buyer from walking away from a deal in

response to minor events that do not impact the seller’s

business

Why are MAC Clauses Important?

Heavily negotiated and litigated provision

Buyers seek broad MAC clauses for maximum flexibility

to exit the transaction

Sellers prefer narrow MAC clauses to ensure that the

transaction closes at the agreed-upon price

Challenging to determine what “materiality” means in

MAC clauses

Materiality in MAC Clauses

“Materiality” is usually left undefined

Difficult to construct a comprehensive definition

Difficult for counsel to agree on a definition

Easier to trust that judges will know “materiality” when they see it

Ambiguity incentivizes parties to negotiate to amend or terminate agreement if MAC is alleged

2 Types of MAC Provisions

Closing Condition ("MAC Out")

Representation and Warranty or

Covenant

“MAC Out” Provision

“From the date of this Agreement, there must not have

occurred any Material Adverse Change, nor will any event

or events have occurred that, individually or in the

aggregate, with or without the lapse of time, would

reasonably be expected to result in a Material Adverse

Change.”

“MAC Out” Provision (cont.)

MAC Out Remedy: Buyer may exit deal or renegotiate

terms if unforeseen MAC occurs

Generally relevant during the period between executing

the acquisition agreement and closing the transaction

Representation and Warranty MAC

“In the two-year period prior to the execution of this

Agreement, other than in the ordinary course of business

consistent with past practice, with respect to the Business,

the Purchased Assets, or the Assumed Liabilities there has

not been any event, occurrence or development that has

had, or could reasonably be expected to have, individually

or in the aggregate, a Material Adverse Effect.”

Representation and Warranty (cont.)

MAC provisions can be used to modify a representation

as to some aspect of a party’s operation so as to indicate

the absence of anything leading to a MAC:

“Seller’s books and records contain no inaccuracies

except for inaccuracies that would not reasonably be

expected to result in a MAC.”

Representation and Warranty (cont.)

Rep/Warranty Remedy: An inaccurate representation

could give a party a cause of action for damages or a

claim for indemnification under the indemnification

provisions of the acquisition agreement.

MAC Definition: 2 Parts

Definition of what is a material adverse change or effect

Exclusions

Sample MAC Definition Clause

“‘Material Adverse Change’ means any event, occurrence,

fact, condition or change that is, or could reasonably be

expected to become, individually or in the aggregate,

materially adverse to (a) the Business, its results of

operations or prospects, condition (financial or otherwise)

or assets, (b) the value or condition of the purchased

assets, (c) the ability of seller to consummate timely the

transactions contemplated by this Agreement, or (d) the

ability of seller to fulfill its obligations under this

Agreement.”

97

49

29

0

1

2

2

3

7

0

95

55

31

0

0

1

1

2

3

0

MAC on the business, operations, financial condition, etc.

MAC on target's ability to close the deal

MAC on bidder's ability to close the deal

Losses over a specified threshold deemed to be a MAC

MAC on the benefits contemplated by the agreement

Ability of bidder to continue to operate business immediately after closingin substantially same manner as immediately before closing

Ability of target to continue to opoerate business immediately afterclosing in substantially same manner as immediately before closing

MAC on prospects of target

MAC on the securities or purchased assets

MAC on validity or enforceability of agreement

MAC ELEMENTS

% of top 100 deals having element/exception% of deals having element/exception

57

0

29

93

3

56

0

31

88

5

Reasonable expectation of event to have a material adverse effect/change

MAC out with no definition of "MAE" or "MAC"

MAC on bidder's ability to close the deal

Disproportionate Effect Language

No MAC out

MAC ELEMENTS: DEFINITIONAL MATTERS

Sample MAC Exceptions Clause

“ . . . provided, however, that the following shall not

constitute a Material Adverse Change: (i) changes in

general legal, Tax, regulatory or business conditions that, in

each case, generally affect the geographic regions or

industry in which the Seller conducts the Business;

(ii) changes in conditions in the U.S. economy or capital,

financial or credit markets generally, including any

disruption thereof; (iii) changes in applicable law or

regulations, or applicable accounting regulations or

principles or interpretations thereof; or (iv) any change

resulting from the announcement of the transactions

contemplated by this Agreement.”

96

89

77

66

36

36

90

88

73

55

37

33

Change in the economy or business in general

Change in general conditions of the specific industry

Change in securities markets

Change in trading price or trading volume of target's stock

Change in interest rates

Change in exchange rates

MAC EXCEPTIONS: CHANGE IN MARKETS

MAC EXCEPTIONS: HOSTILITIES, CALAMITIES AND ACTS OF GOD

89

90

75

77

17

11

85

85

67

67

17

11

Acts of war or major hostilities

Acts of terrorism

Acts of God

Change in political conditions

National calamity

International calamity directly or indirectly involving U.S.

90

70

1

4

85

65

1

3

Change in laws or regulations

Change in interpretation of laws by courts or government entities

Changes resulting from bankruptcy or actions of a bankruptcy court

Change in applicable taxes/tax law

MAC EXCEPTIONS: LEGAL DEVELOPMENTS

MAC EXCEPTIONS: EMPLOYEE MATTERS

18

0

5

19

0

3

Employee attrition

Lay-offs

Changes in the target's relationship with any labor organization/unions

11

0

3

1

14

0

3

3

Reduction of customers or decline in business

Commencement of a proceeding in bankruptcy with respect to a materialcustomer

Adverse effect resulting in seasonable reduction in revenues

Delay or cancellation of orders for services or products

MAC EXCEPTIONS: CHANGES IN ORDINARY COURSE OF BUSINESS

8

83

7

76

88

83

13

34

7

80

6

73

82

72

10

28

Developments arising from any facts that were expressly disclosed to thebidder/public

Effect of announcement of transaction

Expenses incurred in connection with transaction

Changes caused by the taking of any action required or permitted or in anyway resulting from or arising in connection with the agreement

Changes in GAAP

Failure by the target to meet revenue or earnings projections

Any action required to be taken under any law or any existing contract bywhich the target is bound

Litigation resulting from any law relating to the agreement or thetransactions contemplated

MAC EXCEPTIONS: MISCELLANEOUS

In re IBP Shareholders Litigation (2001)

IBP, the nation’s largest beef and second largest porkdistributor, was to merge with Tyson, the nation’s leadingchicken distributor in a cash and stock deal.

Tyson Foods alleged that IBP breach its representationand warranty that it had not suffered a Material AdverseChange because IBP’s first quarter of 2001 earningswere 64% behind those for the first quarter of 2000.

Prior to suit and signing of agreement with IBP, Tysonwas aware that IBP had not been performing well.

In re IBP Shareholders Litigation (2001) (cont.)

Court held that there was no Material Adverse Change

Change was not material

Did not substantially threaten earning potential

Change was not durationally significant

Focus is on the long-term effects of the MAC

A short term hiccup in earnings would not suffice

Hexion Specialty Chemicals, Inc. v.

Huntsman Corp. (2008)

Hexion Specialty Chemicals and Huntsman Corporation

engaged in negotiations for the sale of 100% of

Huntsman’s stock for a price of $28 per share.

Issues arose when Huntsman reported lower-than-

expected earnings in the first quarter that were lower

than its projections.

Hexion advanced an MAC argument in hopes of

avoiding liquidation damages required by agreement.


Huntsman Corp. (cont.)

Court held that no Material Adverse Change had

occurred.

The downturn in earnings was not material

The court examined each year and quarter and compared it to

the prior year’s equivalent period

Huntsman’s 2007 EBITDA was 3% below its 2006 EBITDA, and

Huntsman projected that its 2008 EBITDA would be 7% below its

2007 EBITDA

Huntsman’s second quarter 2008 EBITDA was down 6% from its

2007 second quarter EBITDA



Change was not durationally significant

Court pointed to macroeconomic challenges like the increase

in crude oil and natural gas prices that affected Huntsman’s

2007 numbers; such challenges where expected to abate in

the future

Hexion estimated that Huntsman will earn $817 Million in 2008

and $809 Million in 2009.

Huntsman countered that it will generate $878 Million in 2008

and $1.12 billion in 2009

Court concluded that the more likely 2009 outcome would be

$924 Million, a decrease of 3.6% from 2006 and essentially

flat when compared to 2007.



7 years after the IBP case, the Delaware Chancery Court

continued to rely on the IBP’s analysis by requiring that

MACs be material and durationally significant.

Court noted that it had never found a MAC in its history

and placed the burden of proof on buyer to show that

there had been a MAC.

Cooper Tire & Rubber v. Apollo

(Mauritius) Holdings (2014)

Apollo Tire agreed to acquire all outstanding shares of Cooper Tire for $35 per share for a total deal value of $2.5 billion.

Cooper Tire sued Apollo for failure to use best efforts in negotiating with Cooper Tire’s union to reach new collective bargaining agreements.

After suffering a defeat, Cooper Tire terminated the merger agreement and sued to recover a reverse break-up fee from Apollo.

Apollo countered that it could not be required to pay the fee because Cooper Tire was itself in breach of the agreement.


(Mauritius) Holdings (cont.)

Merger Agreement Covenant:

"Cooper Tire shall, and shall cause each of itsSubsidiaries to, conduct its business in the ordinarycourse of business consistent with past practices . . .and shall cause each of its Subsidiaries to, usecommercially reasonable efforts to keep availablethe services of its directors, officers and employeesand maintain existing relations and goodwill withcustomers, distributors, lenders, partners, suppliersand others . . . ."



MAC Definition Clause:

"Any fact, circumstance, event, change, effect or

occurrence that (i) has had or would reasonably be

expected to have a material adverse effect on the

business, results of operations or financial condition

of the Company, its Subsidiaries and Joint Ventures,

taken as a whole . . . (ii) that would reasonably be

expected to prevent or materially delay or impair the

ability of the Company to perform its obligations . . . ”



MAC Exception Clause to (i):

“but will not include . . . (F) the execution and

delivery of this Agreement or the public

announcement or pendency of the Merger . . .

Including the impact thereof on the relationships,

contractual or otherwise, of the Company or any of

its Subsidiaries . . ..”



Lesson:

Must pay close attention to how MAC clauses are written:

MAC exception in (F) applied only to subparagraph (i) and did

not apply to subparagraph (ii) such that Cooper Tire’s inability

to satisfy its obligations was not cured by the exception in (F).

Short term disruptions may constitute a MAC

First time the Delaware Chancery Court found the

presence of a MAC.

Practice Tips

Pay careful attention to how the MAC definition clauses and

exception clauses link together; courts will strictly interpret.

Add appropriate exceptions to MAC provision and operating

covenants that account for events that may occur at partially owned

subsidiaries that are out of the target’s control.

Short term disruptions that may not be “durationally significant” may

still qualify as a MAC.

Documents

Material Adverse Changes