Considerations relating to other provisions of the Agreement. In many agreements, in determining whether the conditions for entering into an agreement or raising funds are met, it will also be relevant whether the company`s representations and warranties can be credibly “lowered” (for example. B those relating to undisclosed liabilities; the adequacy of reserves; Status of the existing supplier and other contracts and business relationships; labour availability; and similar) and whether the entity substantially complies with its obligations (for example. B.B in the ordinary course of business until closing and while maintaining certain capital or leverage requirements). As with a MAC in general, the assessment of these changes in relation to the COVID-19 pandemic may change depending on the duration of the pandemic, other government responses, and the cumulative impact of the pandemic on the business over time (in most cases compared to others in its industry). While MAC clauses in acquisition agreements are generally only relevant in the time between the signing of the agreement and the closing of the transaction, a MAC clause in an ELOT has a lasting impact on a borrower. In particular, the occurrence of a CMA may constitute an event of default, require a borrower to notify the lender of the event, or impair a borrower`s ability to raise funds under a revolving credit facility or a late loan to the extent that it cannot provide representation and security from the CMA. Regardless of the length and scope of the MAC definition, the courts have their own approach to interpreting clauses based on the circumstances of the transaction. MAC clauses are a common way to mitigate the risks to which a buyer may be exposed during an acquisition exercise due to adverse business or economic developments. The primary purpose of including a MAC clause in a transaction agreement is to grant the buyer a walkout shortly before closing or to create a basis for renegotiating the transaction if the target company`s business undergoes a material negative change that compromises the profit of the purchase price[2]. In the context of acquisition and debt financing, the impact of COVID-19 depends on the specifics of the MAC clause and the circumstances that accompany it. Buyers, sellers, borrowers and lenders should ask their lawyer to review the current MAC clauses and take special precautions when negotiating future MAC clauses.
The buyer`s ability to enter into the transaction is limited by MAC clause exceptions that are as diverse as the transactions they contain. Overall, buyers will argue for a general CMA clause that will allow them to terminate the agreement if adverse events make the acquisition unattractive. Sellers, on the other hand, will attempt to negotiate a strict MAC clause to crowd out the risks of closing the target transaction. Some terms that amend the clause include the transfer of the burden of proof of the absence of a MAC to the seller, forward-looking standards (the pre-closing event has or is reasonably likely to have a post-closing effect) and adverse events that are not permanently material. March 26, 2020 – Acquisition and debt financing agreements generally address explicitly or implicitly the possibility of unforeseen changes in circumstances such as pandemics in a material adverse change clause (“MAC”). This customer alert reviews MAC clauses related to COVID-19 related to mergers and acquisitions and debt financing agreements. You can find Hughes Hubbard`s ongoing coverage of the legal response to COVID-19 here. In an agreement, a MAC clause can be found as a condition, representation or both. As a closing condition, a MAC clause allows the buyer not to close the transaction if the target company undergoes a MAC between a base date (e.B. signature) and the closing date. As a representation of the seller, a MAC clause states that the target company did not undergo a MAC between the base date and the closing, as well as a closing condition that allows the buyer to leave if this representation is incorrect on the balance sheet date.
When such an event occurs, the MAC clause is not “lowered” as a condition of completion. For example, in the merger agreement between Genesco and Finish Line, the parties defined their MAC with exclusions as follows: In our guide to mergers and acquisitions, we saw that when Microsoft acquired LinkedIn on June 13, 2016, there was a $725 million resolution fee that LinkedIn owed to Microsoft. if LinkedIn changes its mind before the closing date. In general, mac settlements have been interpreted narrowly, and the bar was high for determining that a MAC had occurred (as discussed below, there has only been one case where a Delaware court found that a MAC occurred that allowed the termination of a merger agreement). At the same time, the COVID-19 pandemic appears to be a truly unique event, with the potential to have an extreme impact on businesses – and arguably different from the types of events that courts have assessed in the past when it comes to MAC settlements. It is not possible to give general advice on whether the COVID-19 pandemic is a GAC, since the analysis depends in any event on the specific wording of the provision at issue and the impact on the undertaking concerned. It is important to note that the assessment may change over time as long as the pandemic does not go away in the relatively short term. It should be noted that the COVID-19 pandemic may also affect many other provisions of the agreements – such as.
B, the closure of insurance and guarantees (some of which are not subject to the MAC standard), normal course of business operating agreements, end dates and the like. On the other hand, a definition per seller is narrow and can sometimes include exceptions to factors that the seller considers broad and does not adequately protect its interests in the transaction. Comparing a pro-buyer and pro-seller MAC clause, we see that the pro-buyer version contains forward-looking language, because the buyer wants longer-term protection after an acquisition to secure his interest. The pro-seller version, on the other hand, contains a long list of exceptions that limit the possibility of adverse changes that could occur after a transaction is completed, which can be considered a significant change/adverse effect. Notice. Many loan agreements require borrowers to notify their lenders of events or circumstances that led to a GAC or that could reasonably be expected, and failure to provide such notice could result in default. Borrowers and their lawyer should review loan agreements to determine if and when the impact of COVID-19 may require MAC notification. By Matt Farber: Since the beginning of the financial crisis, news columns and law firm memos have paid a lot of attention to Mac (Material Adverse Change) clauses. Undoubtedly, this quick attention followed the significant litigation that the MAC clauses received after many disappointed buyers attempted to opt out. Therefore, it may be useful for a new transaction lawyer to learn about MAC clauses, including their purpose, their location in a contract, and their range of risk-disaggregating formulations. Company-specific factors in relation to the industry as a whole. As mentioned above, a standard definition of CMA (in acquisition agreements as well as in acquisition financing agreements that refer to the CMA in the purchase agreement) excludes the impact of industry-wide conditions, unless certain industry-wide conditions have a disproportionate impact on the business.
Therefore, a change usually needs to be based on “company-specific” effect factors to form a MAC. In Akorn, the General Court found that the decline in the target company was due to conditions specific to the company. The Target (Akorn) argued that there was no MAC because its decline was the result of industry-wide “headwinds,” including an increase in the number of new competitors due to the FDA`s efforts to approve generics. The court noted that “everyone – including [the acquirer] – was aware of this `industry headwind`” and also knew that if the headwind was greater than expected, Akorn would “likely outperform its competitors.” However, the Court concluded that `[t]he `[t]he knowledge of the allocation of risks established by the concentration agreement,. The causes of Akorn`s negative development were actually the business risks associated with Akorn. The unexpected new entrants competing with Akorn`s top three products “were specific to Akorn because of its product line. The problems were endogenous risks specific to Akorn`s business. In addition, the Court held that even if (for reasons of reasoning) these problems concerned the industry as a whole, they “disproportionately affected Akorn” and therefore posed risks attributed to Akorn under the merger agreement. The court pointed to Akorn`s much greater underperformance compared to analysts` consensus estimates, as evidence of the disproportionate impact of these issues on Akorn. But what exactly is an “adverse event”? The response is specific to the agreement; Nevertheless, a MAC is generally considered to be “an effect, event, development or change that, individually or totally, is materially detrimental to the business, the results of operations or the financial condition of the Company and its subsidiaries as a whole”.
On this basis, the parties negotiate certain exclusions called “exclusions”. These can be found in the lead-in of the MAC clause or in the MAC definition itself.. .