Material Adverse Change Research Articles

Hexion v. Huntsman: Elaborating the Delaware MAC Standard

This brief article discusses Hexion Specialty Chemicals, Inc. v. Huntsman Corp. and explains how this case elaborates the Delaware courts' interpretation of material adverse change (MAC) clauses in business combination agreements.

Material Adverse Change Clauses and Acquisition Dynamics

Material-Adverse-Change clauses (MACs) are present in virtually every acquisition agreement. These clauses are the outcome of extensive negotiation and exhibit substantial cross-sectional variation in the number and types of events that are excluded from being ‘material adverse events’ (MAEs). MAEs are the underlying cause of 69% of acquisition terminations and 80% of renegotiations. Moreover, these renegotiations lead to substantial changes in the price offered to target shareholders. We find that acquisitions with fewer MAE exclusions are characterized by wider arbitrage spreads (i.e., the difference between the price offered to target shareholders and the current market price of the target’s shares) during the acquisition period and are associated with higher offer premiums. We conclude that material adverse change clauses have an economically important impact on the dynamics of corporate acquisitions and stock prices during the acquisition period.

Bank loan commitments and Material Adverse Change clause

As Ergungor (2001) indicated, some critical problems still exist in the valuation of bank loan commitments. One of them is the Material Adverse Change (“MAC”) clause as a contractual discretion that may be exercised by banks. We explain how the MAC clause can affect the value of bank loan commitments in the competitive loan market.

Lessons Learned from Private Equity Deals

For deal lawyers, 2007 was an interesting year. The two prior years produced a record number of acquisitions by private equity firms, and 2007 initially appeared to be following suit. But the credit market tightened and the stock market softened in the latter part of 2007, putting a crimp in the smooth closing of many of the deals signed earlier in the year. Buyers grappled with buyer’s remorse, lenders rethought their willingness and ability to finance various deals, and sellers were forced to closely examine what – if any – leverage they had to close the deals they signed in more certain times. Skittish buyers and sponsors tried to escape their deal obligations by invoking the material adverse change (MAC) clauses and reverse termination fee provisions in their merger agreements. In response, sellers attempted to secure their buyers by arguing that MAC provisions were not implicated by the circumstances at hand, and specific performance was required. The resulting jousting, maneuvering, litigation, settlements, and fall-out has provided a stream of learning opportunities for deal lawyers, bankers, and business people alike.

Risk Allocation and Flexibility in Acquisitions: The Economic Impact of Material-Adverse-Change (MACs) Clauses

I analyze the economic consequences of Material-Adverse-Change clauses (MACs) in merger agreements. MACs, used in more than 90% of acquisitions in my sample, show a high level of customization through the Material-Adverse-Event (MAE) exclusions, which limit the acquirers abandonment option defined through MACs. In this paper, I show the economic consequences of MACs are significant in at least four ways. First, the number of Material-Adverse-Event (MAE) exclusions is negatively related to the premium offered to the target. Second, acquisitions with more MAE exclusions have narrower arbitrage spreads. Third, limiting the abandonment option through MAE exclusions significantly reduces the probability and hazard rates of renegotiation and termination. Finally, acquirers that renegotiate after the target experienced a firm-specific MAE obtain, on average, a 15% reduction in the premium paid. Results imply acquirers are willing to pay more to be able to terminate or renegotiate if necessary. These findings indicate that MACs have an economically meaningful impact on the takeover process.

Accredited Home Lenders v. Lone Star Funds: A MAC Case Study

This case study is based on the 2007 material adverse change dispute between Accredited Home Lenders and Lone Star Funds. It is designed to familiarize law and other students with the principles and case law governing material adverse change clauses as well as the structure and usage of these clauses.

Navigating trans‐atlantic deals: warranties, disclosure and material adverse change

PurposeThe purpose of this paper is to explore certain remaining differences in the underlying legal considerations and the differing customs and practices of US and UK mergers and acquisitions in relation to certain issues.Design/methodology/approachA review was undertaken of the leading cases in the UK and various states of the USA and custom and practice in the UK and USA, in each case in relation to the following areas: representations and warranties; disclosure; the effect of the buyer's knowledge; repetition of warranties/representations; and material adverse change.FindingsAlthough the historical differences between UK and US mergers and acquisitions are diminishing as the frequency of trans‐atlantic transactions increases, there remain certain variances which have important implications for the allocation of risk between a buyer and seller in any trans‐atlantic merger or acquisition.Originality/valueThis paper is useful for professional advisers acting in connection with a trans‐atlantic merger or acquisition and for buyers and sellers contemplating such transactions.

Private Legal Transplants in Negotiated Deals

Anglo-American transactional practice has had an enormous influence on deals practice in continental Europe in recent years. Pre-contractual practices and typical contract clauses have been decentrally adopted into European transactional practice on a broad scale. Yet, while continental private practice has widely assimilated Anglo-American transactional concepts terminologically, identity in terminology does not necessarily imply identity in function and meaning. As is well-known from the more general “legal transplant”-literature, function and meaning of foreign concepts can change as they are being integrated into a different legal system, especially where important systemic differences persist. One important difference between the US and continental European dealmaking environments regarding public deals is the degree to which competition for firms, and the idea to subject transactions negotiated with the management of a public corporation to a “market check”, is encouraged by culture and law. Different attitudes towards the balance between the goals of creating a market for firms and of transactional certainty can significantly change the way particular M & A practices work. Against this background, this paper analyzes the adoption of three broadly-used M & A practices into German practice: letters of intent, breakup fees, and material adverse change clauses, and compares their meaning and function in the US and in Germany. It results that important differences persist. In the longer run, the adoption of Anglo-American deals practices may, however, well change the way markets for firms work in Germany.

The Empirical Case for Specific Performance: Evidence from the IBP‐Tyson Litigation

Contract scholars debate the relative merits of specific performance and damages, but few studies assess remedies from an empirical perspective. This article examines the stock market response to an unusual specific performance award granted to IBP, Inc. in material adverse change (MAC) clause litigation against Tyson Foods, Inc. The combined value of Tyson and IBP rose after specific performance was granted, implying that specific performance created value. This result contrasts with other papers indirectly showing large decreases in combined market value after damages remedies are awarded. These results suggest that, from a postbreach perspective, the common law's preference for damages may be misplaced. The article identifies a number of settings, such as certain types of MAC clause controversies, wherein the use of specific performance rather than damages should be encouraged.

Understanding MACs: Moral Hazard in Acquisitions

The standard contract that governs friendly mergers contains material adverse change (MAC) and material adverse effect (MAE) clauses; these clauses permit a buyer to costlessly cancel the deal if such a change or effect occurs. In recent years, the application of the traditional standard-like MAC and MAE term has been restricted by a detailed set of exceptions that curtails the buyer's ability to exit. The term today engenders substantial litigation and occupies center stage in the negotiation of merger agreements. This article asks what functions the MAC and MAE term serve, what function the exceptions serve, and why the exceptions have arisen only recently. It answers that the terms encourages the target to make otherwise noncontractable synergy investments that would reduce the likelihood of low value realizations, because the term permits the buyer to exit in the event the proposed corporate combination comes to have a low value. The exceptions to the MAC and MAE term impose exogenous risk on the buyer; the parties cannot affect this risk and the buyer is a relatively superior risk bearer. The exceptions have arisen recently because the changing nature of modern deals makes the materialization of exogenous risk a more serious danger than it had been. The modern MAC and MAE terms thus respond to the threat of moral hazard by both parties in the sometimes lengthy interim between executing a merger agreement and closing it. The article empirically examines actual merger contracts and reports results that are consistent with the analysis.

The Empirical Case for Specific Performance: Evidence from the Tyson-IBP Litigation

While contract scholars debate the relative merits of specific performance and damages, few studies assess remedies from an empirical perspective. To gain a sense of how market participants view specific performance, this article examines the stock market response to an unusual specific performance award granted to IBP Inc. in Material Adverse Change (MAC) clause litigation against Tyson, Inc. The combined value of Tyson and IBP rose after specific performance was granted, implying that specific performance created value. This result contrasts with other papers indirectly showing large decreases in combined market value after damage remedies are awarded. These results suggest that, from a post-breach perspective, the common law's preference for damages may be misplaced. The article identifies a number of settings, such as MAC clause controversies, wherein the use of specific performance rather than damages should be encouraged.

LEGAL ISSUES ARISING FROM LEVERAGED BUYOUTS

Journal of Restructuring FinanceVol. 02, No. 01, pp. 81-90 (2005) ARTICLESNo AccessLEGAL ISSUES ARISING FROM LEVERAGED BUYOUTSANGELA LIM and KAREN LIMANGELA LIMBaker & McKenzie, Wong & Leow, 1 Temasek Avenue, #27-01 Millenia Tower, Singapore 039192, Singapore Search for more papers by this author and KAREN LIMBaker & McKenzie, Wong & Leow, 1 Temasek Avenue, #27-01 Millenia Tower, Singapore 039192, Singapore Search for more papers by this author https://doi.org/10.1142/S0219869X05000208Cited by:1 PreviousNext AboutSectionsPDF/EPUB ToolsAdd to favoritesDownload CitationsTrack CitationsRecommend to Library ShareShare onFacebookTwitterLinked InRedditEmail AbstractThis paper discusses the structure of typical leveraged buyout transactions in the Asian context and highlights several legal issues that commonly arise from such buyouts, for example, financial assistance, corporate benefit, and tax. A broad overview of "material adverse change" clauses and the introduction of Basel II, and their potential impact on leveraged buyout transactions, is also given in this paper.Keywords:Leveraged buyoutfinancial assistancecorporate benefitmaterial adverse changeBasel II FiguresReferencesRelatedDetailsCited By 1EDITORIAL OVERVIEW: CORPORATE RESTRUCTURING AND MANAGEMENT BUYOUTS IN THE ASIA-PACIFIC AND EUROPEWINSTON T. H. KOH8 April 2012 | Journal of Restructuring Finance, Vol. 02, No. 01 Recommended Vol. 02, No. 01 Metrics History KeywordsLeveraged buyoutfinancial assistancecorporate benefitmaterial adverse changeBasel IIPDF download

Understanding MACs: Moral Hazard in Acquisitions

The standard contract that governs friendly mergers contains a material adverse change clause (a MAC) and a material adverse effect clause (a MAE); these clauses permit a buyer costlessly to cancel the deal if such a change or effect occurs. In recent years, the application of the traditional standard-like MAC and MAE term has been restricted by a detailed set of exceptions that curtails the buyer's ability to exit. The term today engenders substantial litigation and occupies center stage in the negotiation of merger agreements. This paper asks what functions the MAC and MAE term serve, what function the exceptions serve and why the exceptions have arisen only recently. It answers that the term encourages the target to make otherwise noncontractable synergy investments that would reduce the likelihood of low value realizations, because the term permits the buyer to exit in the event the proposed corporate combination comes to have a low value. The exceptions to the MAC and MAE term impose exogenous risk on the buyer; the parties cannot affect this risk and the buyer is a relatively superior risk bearer. The exceptions have arisen recently because the changing nature of modern deals make the materialization of exogenous risk a more serious danger than it had been. The modern MAC and MAE term thus responds to the threat of moral hazard by both parties in the sometimes lengthy interim between executing a merger agreement and closing it. The paper's empirical part examines actual merger contracts and reports preliminary results that are consistent with the analysis.

Simulating the Value of Loan Commitment with the MAC Covenant and the Uncertain Drawdown

This paper investigates the valuation of loan commitment by quantifying the material adverse change (MAC) covenant contained in most commitment contracts. A MAC clause, which gives bank latitude in honoring a commitment, affects the credit insurance value negatively. The MAC clause can be transformed into a non-lending threshold on defaultable rate or credit spread. This paper first provides an analytical solution for a European-style loan commitment, then a simulation solution by considering the MAC covenant, the uncertain drawdown time and amount, and the commitment limit simultaneously.

Bank Loan Commitment Contracts: Data, Theory, and Tests

Over 80 per cent of all commercial bank lending to corporations in the U.S. is done via bank loan commitments. Yet the authors have little empirical knowledge of loan commitment contracts. In this paper they describe the rich contractual structure of bank loan commitments based on data pertaining to over 2,500 contracts. The authors then develop a model which demonstrates that the observed complex structure of bank loan commitment contracts (which typically include multiple fee structures borrower-specific contracting variables, and the standard 'material adverse change clause') is important when the bank faces borrower adverse selection and moral hazard problems. Finally, the authors verify the robustness of their model by confronting its additional testable predictions with the data. Copyright 1997 by Ohio State University Press.

Bank Loan Commitment Contracts: Data, Theory, and Tests

Over 80% of all commercial bank lending to corporations in the U.S. is done via bank loan commitments. Yet we have little empirical knowledge of loan commitment contracts. In this paper we describe the rich contractual structure of bank loan commitments based on data pertaining to over 2,500 contracts. We then develop a model which demonstrates that the observed complex structure of bank loan commitment contracts (which typically include multiple fee structures, borrower-specific contracting variables, and the standard material adverse change clause) is important when the bank faces borrower adverse selection and moral hazard problems. Finally, we verify the robustness of our model by confronting its additional testable predictions with the data.