MAC Clauses in Materially Adversely Changed Economy

Tuesday, January 1st, 2002 at 12:00 am by Yair Y. Galil
Yair Y. Galil, MAC Clauses in Materially Adversely Changed Economy, 2002 Colum. Bus. L. Rev. 846

In recent years, the negotiation and drafting of material adverse change (‘MAC ‘) clauses have increasingly figured in the practice of mergers and acquisitions lawyers. Last year, the debate on MAC clauses and the issues surrounding them moved into center stage in mergers and acquisitions law, as a result of three main developments.

First, 2001 was marked from the outset by a deterioration in the stock market and a slowdown in economic activity, with a decline in new merger and acquisition agreements matched by an upturn in the termination of existing ones. The dollar volume of announced M&A deals, having risen from $3.4 trillion in 1999 to $3.5 trillion in 2000, fell to $1.7 trillion in 2001. The value of cancelled deals, meanwhile, was $68.8 billion from 242 deals in 2001, compared to $40.2 billion from 205 deals in 2000.

An additional factor intensifying the debate on MAC clauses was the advent of two much-bruited decisions, in Delaware and London, interpreting such clauses. In both cases–In re IBP, Inc. S’holders Litig. v. Tyson Foods, Inc. in Delaware, and the WPP Group ruling by the London Takeover Panel –the buyer was held to the deal notwithstanding its negotiated MAC clause.

Finally, the terrorist attacks on the United States on September 11 caused lawyers to rethink the potential contexts and circumstances of MAC clauses, resulting in ever more painstaking drafting as well as a number of new types of conditions. More immediately, of course, the attack weakened an already jittery economy, giving rise to a cluster of deal terminations that further highlighted the importance of MAC clauses. For instance, on September 17 of 2001, Berkshire Hathaway Inc. pulled out of its agreement to buy $500 million worth of bonds from Finova Group Inc., citing the terrorist attacks as an act of war that allowed it to cancel the deal. Finova declined to sue Berkshire over the decision.

In interpreting MACs, courts have produced case law that is complex and perplexing. Most cases turn on the particular fact patterns involved, and give rise to conflicting standards. In the face of such idiosyncratic jurisprudence, this paper does not attempt to offer a clear summary of the prevailing legal standards. Rather, its goal is to present a useful list of issues of which the practitioner should be aware, accompanied by cautionary examples of buyers and sellers who ignored those issues–and what befell them.

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