The MAC - MAE Checklist

Joseph W. Bartlett, Special Counsel, McCarter & English, LLP


Herewith some thoughts prompted by David Marcus' excellent piece on the now-notorious material adverse effect clause (the "walk right") in buyout transactions, in The Deal, "In Praise of Ambiguity." [1] The landscape for Marcus' note is the extraordinary frequency of litigation involving conflicting interpretations of the material adverse change or effect clause in agreements between public companies (targets or the "sell side") being taken private by a buyout fund (the "buy side"). Some contingency arises between signing and closing and the buy side claims it has a right to walk away without penalty, the material adverse effect has occurred. The sell side says "no." Huge dollars are involved. The language in the contract is opaque- it does not define the qualifying events except by using the term "material." And the questions, asked by e.g., Cathy Reese and me (, is why hasn't more work been put into defining and cataloging potential events when the deal was negotiated?

The Marcus piece gives the justifications. Quoted by Marcus, William Savitt, a Wachtel partner, noted that:

"contractual indeterminacy [in the material adverse change, material adverse effect area] can be valuable in allowing parties to reach a deal."

In support of that thesis, the article reports that Judge Richard Posner has argued forcefully:

"Deliberate ambiguity may be necessary condition to making the contract; the parties may be unable to agree on certain points yet be content to take their chances on being able to resolve them, with or without judicial intervention, should the need arise. It is a form of compromise."

The Marcus piece goes on to paraphrase and quote Judge Posner as follows:

"As Posner noted, one cost of attempting to craft a perfect contract may be the failure to strike an agreement in the first place. Later in the piece, he described the inevitable tension between lawyer and client over how detailed a contract should be, the former pushing for the inclusion of endless protective clauses and the latter worrying that pressing for such clauses will not only protract negotiation and increase legal fees, but also make him seem a sharpie and kill the deal. Better that the contract should be kept reasonably short and that if an unforeseen contingency arises, it should be resolved in a commonsensical fashion." Judge Posner cited the common example of a case he adjudicated which involved a two thousand page contract, but did not resolve the issues the litigants had raised in his courtroom.

The push back from this soap box is three fold:

First, if the parties are unable to agree on certain critical points and "contractual indeterminacy" is a "necessary condition of making the contract," I would argue that the contract, in many cases anyway, should not have been executed in the first instance. The frictional costs of failed buy-out transactions. both direct and indirect, and including the extraordinary debilitation of the target and its shareholders once the target has been left at the altar in the ceremony which the whole world witnesses are enormous. Accordingly, I find the social justification for "contractual indeterminancy" highly questionable, at least in today's environment.

Secondly, if the idea is that the contingencies will be resolved in a "common sense fashion," why bother to draft anything at all? Why not simply put in a clause to the effect that, if a contingency occurs and allegedly impacts the parties' economic bargain, it will be up to the judge to use his or her notion of "fireside equity," as they say, and come out one way or the other, or come out somewhere in the middle.

Third, if the idea is to leave the impact (if any) of subsequent contingencies, and there are always subsequent contingencies, in the laps of the Gods, i.e., as a jump ball, how do the shareholders of the target have anything resembling adequate information in order to figure out whether they should vote in favor or against the deal? Do you put in the proxy words to the effect that, "If an unexpected contingency arises between signing and closing, the economic consequences to the company and the buyer are anybody's guess"?

The short of the matter is that all lawyers acknowledge no contract can provide for every possibility. However, let me use this issue as a lead in to a preliminary discussion of directions in which I think the law business is going, or at least it ought to go, in order to enhance efficiency and quality and reduce legal expense. A longish piece by me on the general subject sets out observations and recommendations, the thrust of which being bottomed on my conclusion that we need to do a lot, those of us who make a living in the law business, to catch up with other service providers and take advantage of the streamlining and expediting (plus costs savings) made possible in the service sector by huge improvements in information technology. [2]

Focusing on the case of "contractual indeterminacy," I am working with some colleagues on a feature which will, in due course, be posted on VC Experts, [3] and will take the form of a checklist. There is, of course, nothing technologically exciting about checklists. They've been around since The Flood. That said, medical crusaders with experience in the operating room, have increasingly convinced even the most distinguished surgeons that the institution of a checklist reduces errors and saves lives. Checklists, even for physicians who think they know everything there is to know on a given subject, are producing remarkable improvements in the healthcare business.

And, I see no reason why a checklist, in the right spot, i.e., here, should not be equally as efficacious in the law business. In fact, a start on that process is contained in an extremely useful paper published by the American Bar Association's Section of Business Law, "2008 Strategic Buyer/Public Company Target Mergers & Acquisitions Deal Point Study," [4] selected excerpts from which are set out in Appendix A. In like vein, herewith follows a description of the chores with which we have tasked ourselves at VC Experts. That is, we are patrolling every instance we can find on line of an event or item which was the subject of an argument concerning a MAC/MAE "walk right." We are starting small, with a primitive list along the lines set out in Appendix B, planning to build to, say, a list of some 200 (+/-) items which the parties are required to check off:

Is XYZ Contingency a material adverse effect? Check Yes or No?

Obviously, the longer the list, the more comprehensive its coverage. Accordingly, we are instituting a Wiki-type of operation; all our visitors are invited to add items, in some cases based on bitter experience. To be sure, even with a two hundred item checklist, like the two thousand page contract Judge Posner cites, there will be ambiguities. I readily concede that no contract can cover every potential contingency. However, there are important reasons we should do the best we can and not allow indeterminacy to rule. The reason, Economics 101, is that the terms of any contract should be incorporated into the economics of the deal. If the deal makes sense at $3 billion but the contract is such that the buy-side enjoys an unpaid for walk right at any time prior to closing, i.e., the deal is an option, my colleague at Cornell Business School, Ola Bengtsson, calculates that an option should be valued at 7% of the purchase price; such is the economic reality when you do the math. If the buyer has a shot on walking away because it has been able unilaterally (due to contract indeterminacy) to make a claim of a material adverse effect (however justified or unjustified), it has "bought" an option for very little money unless the option is reflected in the price.

It can be argued, of course, that a checklist is a shortcut, a lazy man's way out. But, based in my decades as a draftsperson, I argue that that the opposite is true in today's demanding environment. When drafting, I routinely focus and refine contract language by use of specifics, typically numerical examples, starting off with an ancient phrase "for the avoidance of doubt." Words are ambiguous; numbers, generally are not. In fact, I have changed my approach as contracts (e.g., a Series A round) are initiated. I recommend that the buy and sell side reduce the agreement on the economics to a spreadsheet. [5] The words then drafted are to follow the numbers and, in cases of ambiguity, the words are subordinate to the numbers. Again, and to state the obvious, there will be situations where the spreadsheet doesn't cover a given contingency. Point conceded. But, the use of numbers to drive the deal brings clarity to the process. The typical free-for-all, with lawyers jousting with one another to enhance their own self esteem, is an inferior way of proceeding, in my view.

The short of the matter is that, once the checklists are available, VC Experts subscribers will be both the contributors and the ultimate judges. The situation can't be much worse than what currently obtains, in light of giant, down-the-hole and unproductive frictional expense when the parties have at each other in court because of "contractually indeterminate" events arising between signing and closing.


"MAC/MAE Carveouts [6]

"Material Adverse Change/Effect" means, when used in connection with the Target, any change, event, violation, inaccuracy, circumstance or effect that is materially adverse to the business, financial condition or results of operations of the Target and its Subsidiaries taken as a whole, other than as a result of: (i) changes adversely affecting the United States economy (so long as the Target is not disproportionately affected thereby); (ii) changes adversely affecting the industry in which the Target operates (so long as the Target is not disproportionately affected thereby); (iii) the announcement or pendency of the transactions contemplated by this Agreement; (iv) the failure to meet analyst projections, in and of itself; (v) changes in laws; (vi) changes in accounting principles; or (vii) acts of war or terrorism."

MAC/MAE Carveouts [7]

(General Economy)


MAC/MAE Carveouts [8]



Other Popular MAC/MAE Carveouts [9]

Deals in 2004


Deals in 2005/2006


Deals in 2007




MAC/MAE Clauses

[Ed. Note] The below items are only sample placeholders, informally stated for, and only for purposes of illustration and subject to much more elegant and specific wordsmithing. The drafter's job is to tie the event to an objective and verifiable threshold. Note: In the recent Hexion v. Huntsman decision, the Delaware Court of Chancery stated that it was "not a coincidence" that Delaware courts had never found a MAC to have occurred in the context of a merger agreement. That being the case, why, unless the clause is so specific there can be no argument, bother to include the clause at all?

The following Interim Events are MACs or MAEs

(1) Target Cash Flow less than $_____________ for the quarter ended _________ 2008.

(2) [10]

(3) Backlog for ___________ [product] falls below $___________, at the close of any calendar quarter measured by the Target's customary and methodology as described on Exhibit ___, and verified by PWC.

(4) Target stock price declines to $_________ or lower, closing price on the NYSE as reported in The WSJ [average for ___ days].

(5) Credit rating downgrade. [11] Specify S&P; Moodys; to AA or below, etc.

(6) FTC or DOJ extends Hart-Scott-Rodino review for > ___ calendar days.

(7) SEC Investigation commences.

(8) XYZ Agency fails to approve the closing by [date].

(9) Regulatory clearance not received by COB [date] NYC, the "drop dead" date, all provided that Seller can extend for ___ calendar days, if, and only if, the agency confirms in writing [without conditions] that clearance will be forthcoming in due course.

  • Seller can extend the "drop dead" date for ___ calendar days pending the vote of a new member of the Agency, who has indicated assent and who has been confirmed.

(10) Dow Jones closing average below 7,000 for ___ for 4 trading days

(11) Loss of [____]% in market share, [12] [defined] indicate index by which market share is measured and the relevant data points: Threshold drop, expressed as a percentage, enduring for a n. business days.

(12) LIBOR above ____% for [____] business days

(13) Producer Price Index above ____. for [____] business days

(14) Threatened litigation involving _______. Describe inflection points; TRO granted; named individual [retired judge] opines the complaint will survive interlocutory positions.

(15) Acts of terrorism or war. [13]

(16) EBITDA Requirements. [14]

(17) Bankruptcy Provisions. [15]

The following Interim Events are not MACs or MAEs:

(1) Standard & Poor Index declines by > ____ %. [16]

(2) VIX increases by > _____ %.

(3) Full [and final, non appealable] regulatory clearance not received by the "drop dead" date.

(4) Changes in general economic or financial market conditions. Specify by indexes and rates.

(5) Exception to (4) for quantifiable changes, e.g.: "Dow Jones Index below ______; for __ consecutive business days; trading suspended [17] on NYSE for ____ consecutive business days.

(6) Changes in industry conditions. [18]

(7) Exceptions to (6).

(8) Changes in "internal" [19] or "external" [20] conditions. [21]

(9) Threatened litigation involving ____. [22]

(10) Changes resulting from the announcement of the transaction, [23] including loss or threatened loss of customers, [24] employees, [25] suppliers, [26] or financing sources.

(11) Changes result from the parties' compliance with the terms of the agreement.

(12) Changes in generally accepted accounting principles of requirements.

(13) Changes in law [27] or interpretation thereof.

(14) Liabilities and expenses of all pending or threatened litigation matters exceed $________. [28]

(15) Acts of terrorism or war. [29]

(16) Changes in the share price or the failure of the target to meet financial projections. [30]

(17) Changes in commodity prices.[31]

(18) Cost of capital. [32]

(19) Failure to Meet Projections. [33]

(20) Market Breaks. [34]

(21) Debt Ratings Requirements. [35]

(22) VIX change by more than X%. [36] (Combine with another metric. For instance, if the stock price or other financial statistic decreases not so sharply, but VIX decreases, indicating a stabilizing market, could this be a MAC market condition clarification mechanism?

Procedural Rules

(1.) Buyer [Seller] has burden of proof, [37]

(2.) Burden on the Buyer is "beyond a reasonable doubt" if the contingency, although worsening in the interim, was existing and known to the Buyer before the contract was signed. [38]

(3.) Disputes to be decided by [named individuals and expedited procedures]


(1) "Cash flow" means _________________.

(2) "Interim Event" means ________________.

(3) "Stock Price" means ____________________.

(4) "Drop Dead Date" means ____________________.

(5) "Terrorism" means _______________. [39]

(6) "Material" means ____________________. [40]

  1. Texas Gulf standard. [41]
  2. Leo Strine standard [42]
  3. Generally

(6) "Prospects" means ___________. [43]

(7) "Business" means ___________. [44]

(8) "Would", "could", and "might" mean ____________. [45]

(9) "The chemical industry" means

  1. The differentiated chemical industry
  2. The specialty chemical industry [46]

Damages to be computed as follows:

(1) Interest rate is APR.

(2) No specific performance. [47]

(3) No punitives or extraordinary damages.

(4) De minimis threshold is $________________.

(5) Discount rate in computing NPV is ___ %.

[1] Marcus, "In Praise of Ambiguity," The Deal, 35 (May 5-11, 2008), p. 35.

[2] See "Meeting Clients Halfway: A Tall Order," Buzz of the Week, 12/12/2008.

[3] See the business intelligence in The Data Center,

[4] A Project of the Mergers & Acquisitions Market Trends Subcommittee of the Committee on Negotiated Acquisitions of the American Bar Association's Section of Business Law.

[5] For the metrics, see my article on the subject in Bartlett, "The 21st Century Term Sheet," 21 Venture Capital Review, 15 (Spring 2008).

[6] M&A Market Trends Subcommittee of the Committee of Mergers & Acquisitions," Public Target Study, slide 24, Release Date 11/13/08.

[7] M&A Market Trends Subcommittee of the Committee of Mergers & Acquisitions," Public Target Study, slide 24, Release Date 11/13/08

[8] M&A Market Trends Subcommittee of the Committee of Mergers & Acquisitions," Public Target Study, slide 24, Release Date 11/13/08

[9] M&A Market Trends Subcommittee of the Committee of Mergers & Acquisitions," Public Target Study, slide 24, Release Date 11/13/08

[10] Specifying threshold amounts is important because

[c]ourts treat MAC/MAE provisions like other contractual provisions-if unambiguous, courts will enforce them according to their terms. Because courts perceive MAC/MAE provisions as likely to have been heavily negotiated by sophisticated parties, they are unwilling to read into agreements any risks not in some way identified in the contract, especially if such risks are out of the target's control.

If the parties include financial benchmarks in their contracts, or other criteria by which the materiality of a change can be measured, courts will abide by the agreement's plain, unambiguous language. If not, the courts will do so by considering other factors, including the plain meaning of the contract, the value and nature of the transaction and extrinsic evidence such as correspondence between the parties during negotiations.

Sherri L. Toub, Note, "Buyer's Regret" No Longer: Drafting Effective MAC Clauses in a Post-IBP Environment, 24 Cardozo L. Rev. 849, 885 n.191 (2003) (citing Arthur H. Rosenbloom & Jeffrey E. Mann, Liability Issues in the Interpretation of Material Adverse Change/Material Adverse Effect Clauses, Del. Corp. Litig. Rep. (Andrews) at 11 (July 9, 2001) (internal citations omitted) (footnote omitted)). Providing a threshold value can limit the options available to a court:

Threshold values, over which any change will constitute a per se breach of the MAC provision, provide an objective measure courts can use to evaluate whether an adverse change is material. Where there is no threshold value, the court may adopt a long-term perspective in which the change will be material only if it "substantially threatens the overall earnings potential of the target in a durationally-significant manner."

Jonathon M. Grech, Comment, "Opting Out": Defining the Material Adverse Change Clause in a Volatile Economy, 52 Emory L.J. 1483, 1516 (2003) (citing In re IBP, Inc. S'holders Litig., 789 A.2d 14, 68 (Del. Ch. 2001)). Without this objective measure, the court will have to determine whether a MAC has occurred on its own:

A look at some of the cases illustrates this point. See, e.g., Esplanade Oil & Gas, Inc. v. Templeton Energy Income Corp., 889 F.2d 621, 624 (5th Cir. 1989) (holding that 30% drop in price of oil on the spot market did not constitute a MAC); Pacheco v. Cambridge Tech. Partners (Mass.), Inc., 85 F. Supp. 2d 69, 74 (D. Mass. 2000) (holding that a 22% decline in acquirer's stock price after missing earnings projections did not constitute a MAC); Allegheny Energy, Inc. v. DQE, Inc., 74 F. Supp. 2d 482, 490 (W.D. Pa. 1999) (holding that a write-off representing 105% of target's 1998 net income constituted a MAC), aff'd, 216 F.3d 1075 (3d Cir. 2000); IBP, 789 A.2d 14 (holding that a 64% decline in the target's earnings during its first quarter 2001 compared with the same period in 2000 constituted a MAE); Katz v. NVF, Co., 473 N.Y.S.2d 786 (N.Y. App. Div. 1984) (holding that a 400% drop in the target's earnings for fiscal year 1981 over prior year's earnings constituted a MAC); Borders v. KRLB, Inc., 727 S.W.2d 357 (Tex. App. 1987) (holding that 50% decline in target's market share was not a MAC).

[11] Grech, supra, at 1515 n.260.

[11] See Toub, supra note 1, at 901 n.259 (citing Raphael Grunfeld, Cliffhanger, The Deal, Dec. 19, 2001, (discussing the carve-out of a credit-rating downgrade event from the MAC clause)).

[12] At least one court has found this not to be a MAC, unless specifically provided.

For instance, in Borders v. KLRB, Inc., the Court of Appeals of Texas held that a fifty percent drop in a radio station's Arbitron ratings-resulting from a loss of over half its listeners-did not constitute a MAC. In reaching its decision, the court cautioned that "the ultimate restraint is that a court cannot, through the construction process, make a new contract for the parties, one they did not make." The court then found "no mention of Arbitron ratings and no language guaranteeing or promising [the buyer] that the station would maintain its audience share" during the executory period and thereby affirmed the trial court's judgment against the buyer.

The court's narrow construction of the MAC provision in Borders did not produce results commensurate with the economic reality of the transaction. Instead of finding that a drop in Arbitron ratings constituted a MAC in the seller's business, "which would impair the operation of the radio station," the court opined that the MAC provision "contemplated deliberate adverse action by management" and that there was nothing that indicated that the seller "aided, abetted, or encouraged the ratings decline." In doing so, the court shifted any consequential losses from the decrease in ratings to the buyer. Surely the buyer did not intend such a result. To be sure, the buyer was in a better position to protect itself; the buyer could have paid a premium to have the seller warrant its "prospects," for example. By strictly construing the MAC clause, however, the court created a windfall for the seller. Had the court taken into account parol evidence, for instance, it might not have held the buyer liable for damages related to a decrease of nearly half of the seller's listeners.

Grech, supra note 1, at 1499-1500 (discussing Borders v. KRLB, Inc., 727 S.W.2d 357, 358 (Tex. App.-Amarillo 1987, writ ref'd n.r.e.) (citations omitted)).

[13] For example, Orion Power Holdings Inc. and Reliant Resources Inc. addressed the issue directly in their merger agreement of September 28, 2001:

In their $ 4.7 billion deal, the power companies excluded from the definition of a MAC "changes or developments in financial or securities markets or the economy in general except to the extent caused by a material worsening of current conditions caused by acts of terrorism or war (whether or not declared) occurring after [Sept. 28]."

Such specificity has thus far been the exception rather than the rule. Most agreements do not clearly address the possible results of war or terrorism, in part because many lawyers assume that such events are implicitly covered in the definitions commonly used before Sept. 11. That approach stems in part from the inherent difficulty of predicting what might turn into a MAC.

Toub, supra note 1, at 884 n.189 (citing David Marcus, 2001 Review: Courts, Lawyers Tangle Over MACs, The Deal, Dec. 26, 2001, For reference,

[t]he clause drafted in the Reliant Resources/Orion Power Holdings deal reads as follows:

For purposes of this Agreement, the term "MATERIAL ADVERSE EFFECT" shall mean any change or event or effect that, individually or together with other changes, events or effects, is materially adverse to the business, assets or financial condition of the Company and its subsidiaries, taken as a whole, except for any such change, event or effect resulting from or arising out of: (1) changes or developments in international, national, regional, state or local wholesale or retail markets for electric power or fuel or related products including those due to actions by competitors, (2) changes or developments in national, regional, state or local electric transmission or distribution systems except to the extent caused by a material worsening of current conditions caused by acts of terrorism or war (whether or not declared) occurring after the date of this Agreement which materially impair the Company's ability to conduct its operations except on a temporary basis, (3) changes or developments in financial or securities markets or the economy in general except to the extent caused by a material worsening of current conditions caused by acts of terrorism or war (whether or not declared) occurring after the date of this Agreement, (4) effects of weather or meteorological events, except to the extent causing damage to the physical facilities of the Company and its subsidiaries, or (5) any Change of Law.

Toub, supra note 1, at 898 n.243.

A word of caution:

There are a number of interpretative and probative issues with the Reliant-type clause. If the buyer seeks to invoke the clause, the buyer must prove: (a) that terrorism or war caused a change; (b) the extent to which terrorism or war caused the change; and (c) specifically in the case of the particular language in Reliant, that there has been a material worsening of current conditions and, in the first of the two italicized clauses, that the change is not temporary. These issues create potentially significant obstacles to invoking the clause as a basis for termination.

Id. (citing Warren S. de Wied, The Impact of September 11 on M&A Transactions, The M&A Lawyer, Oct. 2001).

[14] Several agreements conditioned the buyer's obligation to consummate the transaction on the selling company's ability to maintain a minimum EBITDA. For example, the February 2008 agreement between private equity firm Heller & Friedman and Getty Images contained a provision stating that "Consolidated EBITDA . . . for the twelve (12) month period ending March 31, 2008 (or, if the Closing Date shall occur on or after September 2, 2008, for the twelve (12) month period ending June 30, 2008) shall not be less than $300,000,000."

[15] Recent agreements have included as conditions to closing that certain parties to the agreement not be subject to any bankruptcy or insolvency proceedings. The Delta-Northwest merger agreement contains a specific condition to closing stating that "No proceeding shall have been instituted and not dismissed by or against [either party] seeking to adjudicate it bankrupt or insolvent, or seeking liquidation, winding up, reorganization, protection or other relief of it or its debts or any similar relief under any law relating to bankruptcy, insolvency or reorganization or relief of debtors. . . ." If either party were subject to such a proceeding, the counter-party would not be obligated to effect the merger. The October 2008 Wells Fargo-Wachovia merger agreement included a similar provision as part of the conditions to closing, stating that neither Wachovia "nor any of its Significant Subsidiaries has filed for bankruptcy or filed for reorganization under the U.S. federal bankruptcy laws or similar state or federal law, become insolvent or become subject to conservatorship or receivership."

[16] This type of clause has been around for some time:

Common in the late 1980s after the steep market drop that occurred on October 19, 1987, such a clause permits a party to walk away from a transaction if he Dow Jones Industrial Average (or other specified market index) falls by more than a specified number of points or more than a specified percentage.

Among the advantages such a provision has over a Reliant-type clause, it is unambiguous, avoids issues of causation, and covers a broader array of events and circumstances than a clause focused on terrorism or war. Although most counterparties will also oppose this type of clause, its clarity and simplicity may make it easier to negotiate than the Reliant-type clause [quoted in footnote 4 above].

Toub, supra note 1, at 900 n.252 (citing Warren S. de Wied, The Impact of September 11 on M&A Transactions, The M&A Lawyer, Oct. 2001 (discussing the "Dow Jones" clause)).

[17] As an example of one transaction that incorporated this provision, "[t]he Burlington Resources agreement to buy Canadian Hunter Exploration for $2.1 billion has already emulated that clause, by including a provision permitting a walkaway if financial markets are closed for ten days." Yair Y. Galil, MAC Clauses in a Materially Adversely Changed Economy, 2002 Colum. Bus. L. Rev. 846, 864 (2002) (citing Martin Sikora et al., A War of Words at the Negotiating Table, 36 Mergers & Acquisitions 12 (2001), How Some Deals Get Done in the Teeth of an Economic Gale, 37 Mergers & Acquisitions 1 (2002)).

Furthermore, "this device, if used, typically provides an out for underwriters in a transaction. . . . For a discussion of the use of these 'calamity clauses' used by underwriters in IPOs, see Heidi Moore, SEC Keeps Sharp Eye on IPO Calamity Clauses (Nov. 9, 2001), at" Toub, supra note 1, at 900 n.251 (citing David J. Kaufman & Jane C. Hong, Post-attack MAC, The Deal, Dec. 13, 2001,

[18] A MAC clause carving this out can prove invaluable, as "[i]t must be noted that, if the MAC clause in IBP-Tyson contained a carve-out for changes affecting the meat industry as a whole, the issue of the decline in IBP's earnings from the harsh winter presumably would have vanished." Toub, supra note 1, at 901 n.256.


[s]ometimes, conditions specific to the industry in which the seller operates give rise to a MAC in the seller's business. Often this takes the form of an event that causes a change in the supply of or demand for goods within an industry. For example, the price of goods depends in part on how much competition exists in the marketplace. An increase in the number of competitors in an industry may drive down the prices a company can charge for its products, resulting in a subsequent loss of revenue. Furthermore, many industries are cyclical in nature; the demand for certain goods changes depending on the time of year. A downturn in an industry's cycle may adversely affect a company's profits over the short term.

Courts have taken differing views as to whether events extrinsic to the business of the seller constitute a MAC. In Pittsburgh Coke & Chemical Co. v. Bollo, the court intimated that such events do not give rise to a MAC. When the two largest suppliers to Standard Aircraft Equipment Company (Standard), a leading distributor of airline parts, decided to deal directly with the airline aftermarket rather than through their distributors, Standard's failure to share in new business with them did not constitute a MAC in Standard's business. Even though one of the suppliers had led Standard to believe that it would choose Standard as a distributor for its new business, the court observed that there were technological and economic changes in the aviation industry which undoubtedly affected the business of all who had dealings with that industry. But to say that these extrinsic developments constituted material adverse changes in Standard's existing business or financial condition is patently unreasonable. The court then held that because the loss of business affected Standard's prospects, which were not warranted by the MAC provision, Standard had not breached the merger agreement. Other courts have followed this reasoning where the merger agreement contained a broadly drafted MAC provision.

Alternatively, in Great Lakes Chemical Corp. v. Pharmacia Corp., the Delaware Chancery Court concluded that external market changes may constitute a MAE in the "business of the [target] Company." While Great Lakes Chemical Corp. (Great Lakes) was negotiating the purchase of NSC Technologies Co. (NSC), a business unit of Pharmacia that developed and sold pharmaceutical intermediates and compounds, significant changes occurred in the market for NSC's products. Specifically, new sellers entered NSC's market, while price competition drove several of NSC's customers out of the market. These changes forced Pharmacia to reduce NSC's sales projections by twenty-seven percent and Great Lakes sought damages for breach of contract. The court strictly interpreted the MAE provision and opined that a "reasonable inference from such a broadly worded definition is that price cutting in the market, patent infringement by a competitor, diminished sales that resulted from these events, and the loss of a major customer due to market forces" are events that "directly affected [the target's] business."

Grech, supra note 1, at 1494-95 (citations omitted).

[19] Courts may consider how a typical player in an industry would act with certain information about a party's internal circumstances:

Courts may also decipher intent from custom-how the parties typically negotiate deals in the industry in which they operate. In Pine State Creamery Co. v. Land-O-Sun Dairies, Inc., for example, the seller failed to deliver to the buyer its most recent balance sheet that reflected an operating loss in the seller's business. Instead, the buyer relied on an earlier balance sheet in which the seller reported a profit. The buyer terminated the agreement on the ground that the seller's performance constituted a MAC, while the seller argued that its ongoing financial results were irrelevant to the acquisition. The court heard testimony by the CEO of the buyer, who had participated in thirty-five dairy acquisitions, in order to determine whether "a sudden downturn in [the seller's] profitability would be a material factor in [the acquirer's] decision to follow through with the purchase." Ultimately, the court vacated the district court's grant of summary judgment to the seller and concluded that the seller's ongoing financial results were relevant to the buyer's decision to purchase it.

Grech, supra note 1, at 1501-02 (citations omitted) (emphasis added).

[20] Indeed, "Broadly drafted MAC clauses limit the seller's liability to unknown events. They will be held, however, to encompass events extrinsic to the seller's business, including industry-wide changes-such as increased levels of competition and other industry downturns-that may result in decreased revenues." Grech, supra note 1, at 1516 (citations omitted) (emphasis added).

[21] The relevance of footnotes 8 and 9 is illustrated by the following:

When drafting a MAC clause, Buyers' Counsel must be aware of the fact that each and every word, no matter how insignificant it may seem at the time of drafting, is potentially the most important word in the clause. Great Lakes, a recent case decided in the Delaware Court of Chancery, highlights the importance of this warning. In the relevant Purchase Agreement, Seller warranted that "there has been no change in the business of the Company, which would have a Material Adverse Effect." In the Agreement, MAE was defined as "a negative effect or negative change on the operations, results of operations or condition (financial or otherwise) in an amount equal to $6,500,000 or more." While Seller urged that the aforementioned provision distinguishes between internal and external changes, the Court determined that "on its face . . . that provision makes no such distinction." If the drafter would have taken the time to think about what the clause was intended to cover, the clause easily could have been altered to achieve this objective.

Toub, supra note 1, at 892 (citations omitted) (emphasis added). For instance, the drafters could have said "operations or internal conditions" or "operations or external conditions."

[22] Such a clause was recommended by one court:

The court in S.C. Johnson formulated a bright line rule under which pending litigation against the seller did not constitute a MAC. The court ignored the probability that Tenneco would succeed on the merits of its claim and focused on whether an actual "change" occurred. The court found that "a final judgment in Tenneco's favor still has not occurred to date and may, in fact, never occur." That said, SCJ might have been able to avoid bearing the risks associated with the litigation by altering the MAC provision in several ways. First, SCJ could have included "pending" or "threatened" litigation that "is reasonably likely to exceed" a specified amount or prevent the continued operation of the seller's business as an event that triggers the MAC provision. Second, SCJ could have required that DowBrands represent and warrant that its "prospects" have not suffered a MAC. Without similar forward-looking language, the seller bears the risk that "an event whose impact has not yet been fully realized or determined may not qualify as a MAC."

Grech, supra note 1, at 1493 (citations omitted).

[23] See Deal Risk, Announcement Risk and Interim Changes-Allocating Risks in Recent Technology M&A Agreements, 219 PLI/Corp. 217 (discussing "deal-related "fallout" in general" (citing Lycos-Terra Networks (May 16, 2000), Seagate Technology-Veritas (March 29, 2000), Deutsche Telecom-Voicestream Wireless (July 23, 2000), Nortel-Bay Networks (June 15, 1998), CKS Group-USWeb (September 1, 1998), Lucent-Ascend (January 13, 1999), Ascend-Cascade (March 30, 1997), Hewlett Packard-VeriFone (April 22, 1997), Network General-McAfee (October 13, 1997). For two particularly broad carve-outs for deal-related fallout, see Lucent-Ascend (January 13, 1999) (carve-out for "any change, effect, event, occurrence, state of facts or development . . . which is attributable to the announcement of this Agreement and the transactions contemplated hereby"), and Lycos-WhoWhere? (August 7, 1998) ("any adverse effect that is attributable to the Merger or the announcement of the Merger") (See also from page 5 for the belt-and-suspenders approach-a general broad carve-out for deal-related fall-out, and a laundry list of specific categories of deal-related effects) and specific categories of deal-related fallout-e.g., reduction, cancellation, or changes in terms of customer orders, to the extent attributable to the merger or the announcement or pendency of the merger, or the financial effects of such reductions, cancellations or changes on revenues, earnings, gross margins, or other measures of financial performance (citing i2 Technologies and Aspect Development (March 12, 2000), Nortel-Alteon Websystems (July 28, 2000), Sabre Holdings-Getthere (August 28, 2000), JDS Uniphase-E-Tek (January 17, 2000), Applied Micro Circuits-MMC Networks (August 28, 2000), Lucent-Ascend (January 13, 1999), CKS Group-USWeb (September 1, 1998), Hyundai Electronics America-LSI Logic (June 28, 1998), Cisco-StrataCom (April 21, 1996), Rational Software-Pure Atria (April 7, 1997), Seagate-Conner Peripherals (October 3, 1995), Synopsys-EPIC Design (January 16, 1997), and At Home-Excite (January 19, 1999) (carve-out for adverse effects on "current or prospective advertisers or sponsors")) (emphasis added for organizational clarity).

[24] See Toub, supra note 1, at 862 n.64 (2003) (citing Polycast Tech. Corp. v. Uniroyal, Inc., 792 F. Supp. 244, 253, 274 (S.D.N.Y. 1992) (deciding that cancellation of a contract with a major profitable customer is arguably a MAC, as the jurors could consider the "doomsday expressions of alarm" voiced in the wake of a cancellation and find that such a cancellation is material)).

[25] See Deal Risk, Announcement Risk and Interim Changes-Allocating Risks in Recent Technology M&A Agreements, 219 PLI/Corp. 217 (December 2000) (discussing "employee attrition attributable to the announcement or pendency of the merger or the buyer's post-merger plans" (citing CKS Group-USWeb (September 1, 1998), Lucent-Ascend (January 13, 1999), Rational Software-Pure Atria (April 7, 1997), Hyundai Electronics America-LSI Logic (June 28, 1998)).

[26] See Deal Risk, Announcement Risk and Interim Changes-Allocating Risks in Recent Technology M&A Agreements, 219 PLI/Corp. 217 (December 2000) (discussing "disruption of supplier relationships, price increases for components attributable to the merger or the announcement or pendency of the merger, or the financial effects of such disruptions or increases" (citing Cisco-StrataCom (April 21, 1996), Intel-Chips & Technologies (July 27, 1997), Seagate-Conner Peripherals (October 3, 1995). See also At Home-Excite (January 19, 1999) (effects on "current or prospective advertisers or sponsors"), Lucent-Ascend (January 13, 1999)).

[27] For instance,

Sometimes a state regulates an entire industry-such as public utilities-in which case, legislative reform may have an adverse effect on all of the companies subject to the regulation. For instance, effective January 1, 1997, Pennsylvania adopted the Electricity Generation Customer Choice and Competition Act in order to facilitate the deregulation of electric generating utilities. The Act permitted customers to choose their own electric suppliers in a competitive market. As a result, however, the suppliers had "no guaranteed customers or revenue base and no assurance that market prices [would] be sufficient to cover the cost of generating electricity or to produce a profit." In order to remedy potential difficulties with the transition, the restructuring legislation provided for a transition period in which customers would be required to pay for the suppliers' costs that were stranded as a result of the deregulation. The Pennsylvania Public Utility Commission (PUC) determined how much each applicant was allowed to recover. In Allegheny Energy, Inc. v. DQE, Inc., DQE, Inc. terminated its Merger Agreement with Allegheny Energy Inc. (Allegheny) because PUC allowed West Penn Power Company, a subsidiary of Allegheny, to recover only one third of its projected $1.6 billion in stranded costs. DQE argued that the effects of the restructuring legislation constituted a MAE in Allegheny's business.

One aspect of legislation is that it applies to every similarly situated company in the industry. The parties took this into account by limiting the effects of the restructuring legislation in the MAE provision. The definition of a "Material Adverse Effect" in the merger agreement provided that any "effect resulting from . . . the application of the Pennsylvania Restructuring Legislation ... shall only be considered when determining if a Material Adverse Effect has occurred to the extent that such effect on one such party exceeds such effect on the other party." In the end, the court agreed with DQE and held that "Allegheny failed to satisfy, and could not readily satisfy, the MAE Condition because as of October 5, 1998, it had already been adversely affected by the West Penn restructuring order to a material extent, and therefore had suffered a MAE." As this illustrates, the court jettisoned an all-or-nothing approach and adopted a view that was "more qualitative and based on economic reality."

Grech, supra note 1, at 1496-97 (citations omitted). Indeed,

DQE canceled the deal under a material adverse effect clause "that [could not] be triggered by a regulatory ruling except "to the extent that such effect on one such party exceeded such effect on the other party." The Pennsylvania legislation was addressed directly in a carve-out to the definition of "Material Adverse Effect" in the merger agreement; nevertheless, the parties interpreted the clause differently, pushing the District Court to acknowledge that "after considering the language of the provision and the proffers of the parties . . . reasonable minds could differ as to the meaning of [the MAC] provision.

24 Toub, supra note 1, at 865-66 (citations omitted).

[28] See Grech, supra note 1, at 1484 n.15 (noting "The merger agreement provided that an 'Enron Material Adverse Effect will be deemed to have occurred' if the 'liabilities and expenses . . . associated with all pending or threatened litigation matters . . . exceed, or are reasonably likely to exceed,' $3.5 billion.") (citing Agreement and Plan of Merger Between Dynegy, Inc. and Enron Corp. 58 (Nov. 14, 2001), 000095012901504043/h92192ex2-1.txt).

[29] Using a clause like this, "'some acquirers have specifically exempted negative business consequences from the terrorist attacks as qualifying as a MAC,' in which case 'parties remain bound to the agreement despite the possible negative financial consequences from the incidents'" Toub, supra note 1, at 899 n.244 (citing David J. Kaufman & Jane C. Hong, Post-attack MAC, The Deal, Dec. 13, 2001,

[30] Frenette & Platteell, Recent Developments in Market Practice and the Law Governing material Adverse Change clauses (April 2008),

One commentator cautions:

Pacheco is precedent for the notion that if a company is likely to fail to meet its publicly announced financial projections, that constitutes a material adverse change in the company's prospects. Some might think it rash to lose the benefit of that precedent by relying on the back-door approach. But relying on a court to follow Pacheco presents risks of its own. If you represent a buyer that wants to be certain that it can walk if it appears that the target will fail to meet its projections, your safest bet would be to make it a condition to closing that there exists no event or circumstance that would reasonably be expected to result in the target failing to meet any publicly-announced financial projections.

Kenneth A. Adams, A Legal-Usage Analysis of "Material Adverse Change" Provisions, 10 Fordham J. Corp. & Fin. L. 9, 39 (2004).

[31] Negative impacts of the changes in commodity prices have been specifically excluded so that commodity price fluctuations cannot contribute to a MAC. For example, in the April 2008 Delta-Northwest merger agreement a "Material Adverse Effect" excluded "adverse Effects arising out of or relating to U.S. or global economic or financial market conditions, including . . . commodity prices and fuel costs. . . ." The July 2008 merger agreement between In Bev and Anheuser-Busch broadly excluded "effects resulting from changes in the economy or financial, credit, banking, currency, commodities or capital markets generally in the United States or other countries in which the Company conducts material operations or any changes in currency exchange rates, interest rates, monetary policy or inflation . . . ."

[32] Any increase in the costs of obtaining capital have been specifically excluded. The June 2008 stock purchase agreement between Safety Products Holdings and Honeywell International excluded "any increased cost of capital or pricing related to any financing for the transactions contemplated hereby . . . ." The February 2008 merger agreement for the sale of Getty Images excluded "changes generally affecting . . . the economy or the credit, debt, financial or capital markets, in each case, in the United States or elsewhere in the world, including changes in interest or exchange rates . . . ." Similarly, the merger agreement between Fertitta Holdings and Landry's Restaurants excluded "any increase in the cost or availability of financing to Parent or MergerSub . . . ."

[33] Virtually all of the deals reviewed explicitly excluded the seller's failure to meet projections-internal or external-from the definition of a MAC. For example, the October 2008 merger agreement between Eli Lilly and ImClone Systems excluded "any failure by the Company to meet any internal or published industry analyst projections or forecasts or estimates of revenues or earnings for any period ending on or after the date of this Agreement . . . ." The September 2008 agreement between Bank of America and Merrill Lynch excluded the "failure, in and of itself, to meet earnings projections, but not including any underlying causes thereof . . . ." The Apax Partners-TriZetto agreement in April 2008 excluded "the failure of the Company to meet its projections or the issuance of revised projections that are more pessimistic than those at the time of this Agreement . . . ." Similarly, the July 2008 agreement between Teva Pharmaceutical Industries and Barr Pharmaceuticals states that "any failure by the Company to meet internal projections or forecasts or third party revenue or earnings predictions for any period shall not be considered when determining if a Company Material Adverse Effect has occurred . . . ."

[34] Carve-outs from the MAC definition for disruptions in credit, equity and financial markets have been present in the most recent merger agreements. The Safety Products-Honeywell stock purchase agreement excluded "changes in, or circumstances or effects arising from or relating to, financial, banking, or securities markets . . . including . . . any disruption of the foregoing markets, [and] . . . any decline in the price of any security or any market index..." Additionally, the February 2008 merger agreement for the sale of Getty Images to ABE Investment set forth an exclusion from MAC for "the suspension of trading generally on the New York Stock Exchange or the Nasdaq Stock Market . . . ."

[35] Several of the agreements reviewed contained provisions requiring the selling company to maintain a certain minimum debt rating. The September 2008 agreement between Constellation Energy Group and MidAmerican Energy Holdings Company contained a closing condition requiring that "On the Closing Date, all unsecured senior debt of the Company shall be rated investment grade or better with no less than a stable outlook by Moody's Investor Service, Inc., Standard & Poor's Ratings Group, Inc., and Fitch, Inc." Likewise, the June 2008 agreement between Allied Waste Industries and Republic Services, Inc., required that "Republic shall have received written confirmation from the applicable agency that . . . the senior unsecured debt of Republic . . . will be either (i) rated BBB- or better by Standard & Poor's and Ba1 or better by Moody's, or (ii) rated Baa3 or better by Moody's and BB+ or better by Standard & Poor's."

[36] Compare Grech, supra note 1, at 1490 n.59 (noting with respect to a carve out for general economic conditions "This 'carve out' eliminates the effects of systematic risk on the value of the target company's stock price. Systematic risk, also called market risk, captures the reaction of individual stocks . . . to general market swings." (citing Burton G. Malkiel, A Random Walk Down Wall Street 241 (6th ed. 1996) (1973)) (emphasis added). Using VIX would give added benefit of "captur[ing] the reaction of individual stocks . . . to general [volatility] swings. Id. (alterations added).

[37] In IBP-Tyson,

The merger agreement was governed by New York law. However, under either New York or Delaware law, IBP bore the burden of persuasion to justify its right to specific performance-instead of the more customary remedy of monetary damages. Under New York law, IBP had to prove that: (1) the merger agreement was a valid contract between the parties; (2) IBP substantially performed under the contract and was willing and able to perform its remaining obligations; (3) Tyson was able to perform its obligations; and (4) IBP had no adequate remedy at law. These elements must be established by a "preponderance of the evidence."

By contrast, in Delaware the evidentiary standard is "clear and convincing evidence," which requires a far greater showing than the preponderance of the evidence standard applicable in New York. In his decision, Vice Chancellor Strine stated that he had found clear and convincing evidence to support the granting of specific performance-thus acknowledging that he would have reached the same decision under the facts in this case even if Delaware law had governed the merger agreement.

Toub, supra note 1, at 890 n.212 (citing Stephen I. Glover & Scott A. Kislin, Delaware Court Orders Merger to Proceed, The M&A Lawyer, July-Aug. 2001, at 19).

To avoid having the court decide this,

[f]rom the outset, the parties should assign the burden of proof, detailing within the MAC clause (or in a schedule attached to the clause) whether the party wishing to terminate the deal or requesting specific performance must show the presence or the absence, respectively, of a MAC. In addition, the parties to the transaction should decide whether the clear and convincing standard or the preponderance of the evidence standard will be used in such an event.

IBP-Tyson is proof that the parties' decision to contract for one state's law over another is not necessarily helpful in determining with whom the burden of proof should lie and what standard must be met to prove the presence or absence of a MAC. The clause in the Merger Agreement between IBP and Tyson never addressed the procedural issue of the placement of the burden of proof if one of the parties was to contest, as Tyson did, that a MAC had occurred. The question of whether certain aspects of the Merger Agreement were governed by Delaware law or New York law would not have been such a hotly contested issue if the parties had decided, through negotiation, with whom the burden of proof should lie in the event that one party was to assert that a MAC had occurred.

Because the party asserting that the provision has been triggered is the one who is looking to walk away (or to renegotiate for a change in price and so forth), it makes the most sense to place the burden of proof on this party. In terms of the standard of proof, due to the fact that even the most carefully drafted MAC clause may be difficult to interpret in light of a possible triggering event, it seems impractical to use the clear and convincing standard. The preponderance of the evidence standard therefore should be used. While forcing the moving party to come forth with "superior evidentiary weight that, though not sufficient to free the mind wholly from all reasonable doubt, is still sufficient to incline a fair and impartial mind to one side of the issue rather than the other," the preponderance of the evidence standard takes account of the fact that a "material adverse change" or "material adverse effect" often cannot be pinpointed.

Toub, supra note 1, at 890-92 (citations omitted). Courts still see this as a viable alternative: "Hexion had the burden of proof in showing that Huntsman had suffered an MAE. Kenneth A. Adams, Some MAC Thoughts on Hexion v. Huntsman, ADAMS DRAFTING, October 17, 2008, In this footnote, the court pointed out that

the easiest way that the parties could evidence their intent as to the burden of proof would be to contract explicitly on the subject. The idea that it would be helpful for parties to allocate explicitly the burden of proof with respect to material adverse effect clauses is not novel.

Hexion Specialty Chemicals, Inc. v. Huntsman Corp., 2008 WL 5704768, at *16 n.60 (Del. Ch. 2008).

[38] See Feldman, "Is It a Material Adverse Effect," VC Experts, Buzz of the Week, (1/10/2006) when the author points out that: "The court might have placed less of a burden on Holly had the Beverly Hills litigation arisen as an issue after the merger agreement had been signed. With the issue arising before the agreement was signed, it could have been addressed with greater specificity. The threatened litigation could have been addressed by allowing an out, or perhaps a mandatory price adjustment, in the event of certain specified, objective occurrences with respect to the threatened litigation-for example, if the threatened litigation became an actual one, or if Frontier, rather than its subsidiary alone were to be named in the suit." What justification, if a contingency is known or knowledgeable on signing for leaving it up in the air?

[39] Even definition of this term has been negotiated. For example, "[i]n a draft dated October 2, 2001, an attorney at the law firm of Weil, Gotshal & Manges LLP, suggests a definition: "Terrorism" shall mean the unlawful use of force or violence (including without limitation the direct or indirect use of chemical or biological agents) against persons or property to intimidate or coerce a Governmental Authority, the civilian population, or any segment thereof, in furtherance of political, religious, ideological or social objectives. Draft from Weil, Gotshal & Manges LLP (Oct. 2, 2001) (on file with author). This definition does not constitute the Firm's generally accepted definition. The draft from which the definition was taken is a work in progress." Toub, supra note 1, at 899 n.247.

[40] Indeed,

Materiality, like the complex concept of intent, suffers from a serious definitional problem. Definitions of materiality are numerous. In cases involving an issue of materiality, the following definitions have appeared: (1) Any fact which would affect the investor's decision to buy, sell, or retain. (2) Any fact which would materially affect the judgment of the other party to the transaction. (3) Any fact which would influence the reasonable and prudent man in an investment decision. (4) Any fact having a "significant propensity" to influence the investment decision. (5) Any fact a recipient would be likely to regard as important. (6) Materiality standards vary according to situations, contexts, and companies. (7) Any omission of facts which has a substantial likelihood of affecting the average prudent investor's decision. One court has even gone so far as to say that "materiality in the abstract is . . . a meaningless concept."

Still, some patterns of reasoning in the cases appear to involve decisions as to whether an item was material. Those patterns of reasoning focus on the following three factors: (1) What type of investor and investment were involved? (2) What type of impact did the disclosure, non-disclosure, or inaccuracy have on the investor? (3) What type of impact would the disclosure, non-disclosure, or inaccuracy have on the investment decision?

Marianne M. Jennings, Philip M. Recker & Daniel C. Kneer, A Source of Insecurity: A Discussion and an Empirical Examination of Standards of Disclosure and Levels of Materiality in Financial Statements, 10 J. Corp. L. 639, 643-44 (1985) (as cited in Toub, supra note 1, at 895 n.234). Courts will look to evidence from the parties themselves when evaluating materiality: "Courts evaluate parol evidence to discern the parties' intentions when the language of the contract is ambiguous. The drafting history of the MAC clause provides guidance as to what the parties intended. Thus, it is important to keep a record of such material." Grech, supra note 1, at 1516 (citations omitted).

[41] In SEC v. Texas Gulf Sulphur Co., the second circuit announced that "material facts include not only information disclosing the earnings and distributions of a company but also those facts which affect the probable future of the company and those which may affect the desire of investors to buy, sell, or hold the company's securities." 401 F.2d 833, 849 (2d Cir. 1968) (emphasis added). The Court later declared "An omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote." TSC Industries, Inc. v. Northway, Inc. 426 U.S. 438, 449 (1976) (emphasis added).

[42] For Vice Chancellor Strine, "[t]he . . . important question is whether the restatements would be influential in the decision-making process of either a reasonable investor or acquiror, having the same total mix of information that Tyson possessed." In re IBP, Inc. S'holders Litig, 789 A.2d 14, 63 (Del.Ch. 2001) ("reject[ing] Tyson's notion that it is utterly irrelevant whether it possessed full knowledge of material facts that might have been technically misreported in the Restated Financials"). Vice Chancellor Strine considered the transaction in the context of federal securities laws, noting "the plaintiff's knowledge of the underlying facts may render an omission immaterial under the federal securities law, because that law considers materiality in light of the total mix of information that the plaintiff had available. That is, even if Tyson is correct that the contractual language is taken from a federal securities context, that context is one that deals with materiality in view of the totality of information available to the user." Id. Crucial to his analysis was that the "issues that were contained in IBP's restatements were not material, when viewed from the perspective of a reasonable 'public' user of its financial statements who was making a decision whether to invest in IBP as of the end of 2000." Id. at 64 (emphasis added). Furthermore, the time frame of an effect was used to evaluate materiality:

Merger contracts are heavily negotiated and cover a large number of specific risks explicitly. As a result, even where a Material Adverse Effect condition is as broadly written as the one in the Merger Agreement, that provision is best read as a backstop protecting the acquiror from the occurrence of unknown events that substantially threaten the overall earnings potential of the target in a durationally-significant manner. A short-term hiccup in earnings should not suffice; rather the Material Adverse Effect should be material when viewed from the longer-term perspective of a reasonable acquiror.

Id. at 68.

One commentator has discussed the "importan[ce of] not[ing] that the Vice Chancellor views materiality through the eyes of the 'reasonable acquiror.' In TSC, the Supreme Court viewed materiality through the eyes of the 'reasonable shareholder.' These standards, in their respective contexts, are consistent." Toub, supra note 1, at 884 n.188. This commentator sees the potential for problems with this analysis, noting that

[w]hile Vice Chancellor Strine appears to be comfortable with the fact that there is no bright-line test for materiality-aside from his opinion that "[a] short-term hiccup in earnings should not suffice," this attitude constitutes nothing more than a sure recipe for disaster. In insisting that there is no need for the drafting of extremely detailed MAC clauses, Strine ignores the fact that the drafting process is meant to be deal-specific, catered to a particular Buyer's view, not to the "longer-term perspective of a reasonable acquiror."

24 Toub, supra note 1, at 896 (citations omitted). This commentator does "give[ Vice Chancellor Strine] credit for acknowledging that it mattered that Tyson was a strategic, as opposed to a financial, buyer. This acknowledgement may imply that he did in fact understand the notion of materiality in a deal-specific way." Toub, supra note 1, at 896 n.238.

[43] Courts can interpret the word prospects in several ways. See Toub, supra note 1, at 868 n.96 (citing In re Chung, 943 F.2d 225, 229 (2d Cir. 1991) (reasoning that "prospects" may include failure to meet budget projections for the coming year), Pittsburgh Coke & Chem. Co. v. Bollo, 421 F. Supp. 908, 930 (E.D.N.Y. 1976), aff'd, 560 F.2d 1089 (2d Cir. 1977) (arguing that failure of a purchased company to break into a projected new market did not constitute a MAC).

Whether or not a MAC clause can be negotiated to include changes in prospects will depend on the nature of the companies involved:

[P]rospects language often survives in the biotechnology area, or in transactions involving development-stage companies where there really are no results of operations . . . [and] really all you can talk about is . . . the prospects of these companies. . . . [A] biotech company with a drug coming before a FDA panel should talk about that particular drug, stating that prospects means the failure of the FDA panel to recommend approval of the drug, perhaps by a particular vote . . . . [U]ltimately, in cases not involving a pure prospects play, . . . most buyers would be prepared to move away from a concept of purely undefined prospects, but would still try to get language that incorporates some concept of proximate future impact of events that have already occurred.

24 Toub, supra note 1, at 868, n.95 (citations and internal quotations omitted). Thus,

[n]otwithstanding the inherent ambiguity that lies within each and every MAC clause, Seller typically seeks to limit the scope of such clauses. Typically, one focus of Seller's efforts will be to delete any reference in the MAC definition to "prospects" or to other forward-looking concepts. As a result, the likelihood that Buyer successfully can invoke a MAC clause is decreased drastically.

Toub, supra note 1, at 868-69.

One court treated the term prospects as follows:

The significance of this sort of language is exemplified best by the 1998 stock-for-stock merger between Cambridge Technology Partners (Massachusetts), Inc. and Excell Data Corporation. In the merger agreement that governed the transaction, Cambridge warranted that there had been no material adverse change in its business condition since June 30, 1998-two months and one day before the deal closed. As set forth in the agreement, "business condition" included "prospects," a term which was defined as "events, conditions, facts or developments that are known to Excell and that in the reasonable course of events are expected to have an effect on future operations of the business as presently conducted by Excell . . . ."

In early August 1998, shortly before the deal was to close, Cambridge officials met to discuss an impending "crisis" that the company anticipated in the third and fourth quarters of that year. Just before the completion of the deal, Cambridge's CEO told an Excell shareholder that Cambridge would meet analysts' expectations for the third quarter. However, the next day, the CEO told a buy-side analyst that Cambridge's revenue growth would be lower than expected.

The District Court judge agreed with Cambridge as to the interpretation of the forward-looking element of the clause. He noted that, "by the parties' express agreement, Cambridge's warranties only covered the accuracy of representations about its current operations, not its future prospects." Therefore, even though Cambridge's "prospects" did diminish after the closing, and Cambridge knew of the adverse change before the closing, the plain language of the MAC clause did not obligate Cambridge to disclose this change to Excell. The judge, in deciding that Pacheco, and certain other Excell shareholders, established no basis upon which to invoke the MAC clause, stressed the importance of careful drafting. He determined that the intra-quarterly information that Pacheco viewed as evidencing a MAC in Cambridge's current business condition must be conceived of as information relating only to Cambridge's ability to meet end-of-quarter expectations, i.e., its "prospects." The judge determined that "any other construction would render the word 'prospects' meaningless and the parties' stylized drafting convention superfluous." Accordingly, he concluded that "judicial revision [was] unmerited in this case." In response to Pacheco, practitioners have reiterated the concern of the judge, often stating that lawyers may have made a tactical error in negotiations over the word "prospects."

Toub, supra note 1, at 869-70 (citations omitted).

As an alternative,

[o]ne compromise is including a representation and warranty on prospects as of the signing date, but carving prospects out of the bringdown in the closing conditions. This is a sensible compromise, viewed in light of the theoretical perspective outlined previously. The seller may have special knowledge of the prospects of the company at the time of signing (especially since the seller will continue to manage the company until closing), but this superior knowledge of prospects may be reduced or even eliminated at closing. Therefore, prospects language at signing time may add significant value while the same language at closing time may not.

Galil, supra note 8, at 855 (citing Rod J. Howard, Deal Risk, Announcement Risk and Interim Changes-Allocating Risks in Recent Technology M&A Agreements, 1219 PLI/Corp. 217, 222 (2000)).

How the parties treated the term prospects during negotiations may be examined by a court:

These negotiations shed light on what sorts of adverse changes the parties view as being material. In determining whether a MAE provision that contained forward-looking language, but not the word "prospects," warranted the seller's future earnings projections, the court in Cendant Corp. v. Commonwealth General Corp. found that the drafting history created an issue of material fact because the seller had rejected the word "prospects" in a prior version of the clause but had agreed to the inclusion of forward-looking language under which the seller's projections might be covered.

Grech, supra note 1, at 1501. In the absence of the word prospects, the court may examine any forward looking language that is present:

Most likely, courts will interpret forward-looking language to include the seller's "prospects." Conversely, without forward-looking language, the court may construe the MAC provision strictly so as not to include the future earnings potential or projections of the seller. Further, specifically disclaiming such forward-looking representations and warranties provides additional safety to the seller.

Id. at 1515-16.

[44] Thus,

even if you do get the word "prospects" out of the merger agreement, the next word that you have to look at is "business." [W]hen using the phrase "a material adverse change in the business," some people will construe the word "business" broadly to include "prospects." [Y]ou want to try to avoid leaving the back door open."

Toub, supra note 1, at 893 n.225 (citations omitted).

[45] Indeed, "[e]ven when using the 'reasonably be expected to' phrase, word selection still matters: 'could' is presumably more encompassing, whereas 'would' suggests a greater likelihood of an event resulting in a MAC, and therefore a higher burden for the party alleging a MAC." Jeffrey Thomas Cicarella, Wake of Death: How the Current MAC Standard Circumvents the Purpose of the MAC Clause, 57 Case W. Res. L. Rev. 423, 429 (2007) (citing Frontier Oil Corp. v. Holly Corp., C.A. No. 20502, 2005 Del. Ch. LEXIS 57, at *124 n.209 (Del. Ch. Apr. 29, 2005) (discussing the connotations of "would," "could," and "might"). Specifically, "drafters often use could [or could not] reasonably be expected, but would is preferable, since it makes rather more sense to speak in terms of the likelihood, rather than the feasibility, of a given expectation." Adams, supra note 21, at 16 (citations omitted). To illustrate:

A party to whom such a representation is made will generally want it phrased in such a way that if the party identifies a problem that has the potential to lead to a MAC, it will be able to avoid its obligations under the contract or recover damages caused by the inaccurate representation. This could be achieved by using the modal verb could, as in could [or could not] result in a MAC. This formulation is very favorable to the nonrepresenting party. Assume that Acme makes the following representation: Acme's books and records contain no inaccuracies except for inaccuracies that could not result in a MAC. To say that an inaccuracy could not result in a MAC is to say not only that a MAC will not occur, but also that no matter how the future might develop, there is no possible alternative course of events that could lead to a MAC occurring. If after signing it were discovered that Acme's books and records contain an inaccuracy that might conceivably result in a MAC, that discovery would serve to render the representation inaccurate, no matter how remote the possibility of a MAC actually occurring.

Id. at 15-16 (2004) (emphasis added).

[46] See Brian Fenske, Correctly Defining Industry of Target May be Key to Determining Whether a Material Adverse Change Has Occurred in M&A Agreements, Fulbright's Corporate & Business Transactions Practice Series, August 2008, (discussing the Huntsman Corporation and Hexion Specialty Chemicals, Inc., litigation).

[47] Indeed,

In a suit over the termination of a merger or acquisition, a plaintiff seller might want the buyer to complete the deal. The plaintiff may thus request an order for specific performance: "Specific performance of a contract is generally appropriate when (1) the contract is valid, (2) plaintiff has substantially performed under the contract and is willing and able to perform its remaining obligations, (3) defendant is able to perform its obligations, and (4) plaintiff has no adequate remedy at law."

The last requirement-that the plaintiff have no adequate remedy at law-presents a problem for the courts. The plaintiff must demonstrate that damages cannot be calculated accurately before the court will grant an order for specific performance. Perhaps the target company believes that the benefits it will receive from the synergies of the combined company cannot be compensated adequately with money damages. One court stated that "no case that has come to our attention has found a business either not unique or not offering a unique opportunity to the buyer." In addition, non-public or closely held companies may be difficult to value. "[A] contract for the sale of corporate stock not publicly traded can be specifically enforced on the ground that valuation is imprecise without an active market for the stock." Other courts have extended this reasoning to publicly traded companies as well. Because of the high costs associated with the specific performance of a merger agreement, buyers should think twice before they invoke the MAC provision to terminate a deal.

Grech, supra note 1, at 1505-06 (citations omitted). Also, when liquidated damages clause is used, it should be understood as an integral part of an acquirer's litigation strategy:

An acquirer can protect itself through liquidated damages, which serve to limit its liability to a predetermined amount should the acquirer be found in breach. However, in order to garner the protection of a liquidated damages clause, the plaintiff must plead the provision as a limitation on liability. See Borders v. KRLB, Inc., 727 S.W.2d 357, 360 (Tex. Ct. App. 1987) (upholding award of $ 350,000 to target company for acquirer's breach despite presence of liquidated damages clause that limited acquirer's liability to $25,000).

Grech, supra note 1, at 1505, n.183.

Joseph W. Bartlett, Special Counsel,

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