Renewed Focus on Material Adverse Change Clauses: Following the Terrorist Attacks, Acquiring Companies Are Paying More Attention to Deal “Outs”

The material adverse change (MAC) clause – the line in the acquisition agreement that spells outs the conditions under which a party to a deal might be excused from its obligation to close the transaction – took on new importance following the September 11 terrorist attacks. The clause, which has long been a vigorously negotiated point by legal counsel to a deal, is used as a risk management device to provide an “out,” typically for the acquirer, should there be any material adverse change in the target’s financial condition, operations, or prospects or in economic, regulatory, or stock market conditions in the time period between signing and closing. Most transaction agreements condition the buyer’s obligation to complete the deal on the absence of a material adverse change affecting the target firm. Sellers generally try to qualify MACs to exclude events affecting the economy or the industry in general and say they should apply only to conditions directly caused by the seller. Acquirers believe that regardless of the source of the MAC, if the target company has suffered and is not the same business that it was when the deal was agreed on, the original agreement should not be binding. The impact that the recent terrorist attacks had on the stock market, the economy, and a variety of industries has prompted companies to pay a lot more attention to MAC outs, says Michael Littenberg, a partner in the corporate practice at Schulte, Roth & Zabel, a New York-based law firm. In the current environment, MAC outs may be used more frequently, he notes. “In good economic times, even though lawyers argue over them, a lot of businesspeople view them as just some legal issue to be dealt with. Businesspeople are now much more focused on MAC outs and listen more intently to them,” he says. In the current deal environment, a MAC out that doesn’t offer the buyer protection on general economic or industry conditions can put it in a position of having to complete a transaction that it might not otherwise want to do, he adds. “What we are seeing now is businesspeople focusing on what that MAC out means and what level of risk they are willing to take. We are still seeing deals getting signed up that have relatively narrow MAC outs, but it makes people a lot more nervous,” he says. Deals are not in the control of just the buyer, however. Sellers typically try to limit the MAC out’s scope by having it worded as narrowly as possible, whereas buyers want to cover as many bases as possible. There is often a lot of tension between the parties in negotiating the MAC outs. Since not many deals have been signed up since the attacks, Littenberg says that it’s difficult to tell how companies are structuring their MAC outs in the wake of the attacks. “Over the last several months, however, with all of the noise about the economy, companies have been focused much more on MAC outs and exclusions from those, especially exclusions that relate generally to the economy or the industry,” he states. One of the key factors in structuring MAC outs going forward will be the amount of time expected to pass between signing and closing. “If you have a deal that needs regulatory approval, you will have a longer window of time between signing and closing. That’s going to be a factor in how companies approach MAC outs. The more time it takes to get the deal closed, the more time that the parties are at risk of some event occurring that would allow one of the parties to walk away from the deal.” In the wake of the terrorist attacks, USA Networks Inc. announced that it had ended its agreement to acquire National Leisure Group Inc., a company that procures travel packages. The decision was disclosed in court filings in the Chancery Court of Delaware. USA Networks cited in court documents reasons for its decision, including a MAC clause in the original merger agreement as well as effects on National Leisure’s operations that may result from the September 11 attacks.