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Cardozo Law Review
ARTICLE: CANCELING THE DEAL: TWO MODELS OF MATERIAL ADVERSE CHANGE CLAUSES IN BUSINESS COMBINATION AGREEMENTS
CARDOZO LAW REVIEW
31 Cardozo L. Rev. 99
Robert T. Miller*
In any merger between public companies, there is a delay between the time the parties enter into a merger agreement and the time the agreement is consummated, i.e., the time that the purchase price is paid and the merger is effected. The reasons for the delay are various but usually include obtaining needed shareholder approvals and required regulatory consents from government agencies. This delay between signing and closing creates the possibility that, during the interim period, the business or financial condition of one of the parties may deteriorate. When this happens to the target company in a cash deal, or to either company in a stock-for-stock or cash-and-stock deal, the counterparty may conclude that the deal is no longer advantageous for it. It may, therefore, want to cancel the deal.
The primary contractual protection counterparties typically have in such cases is the material adverse effect (MAE) or material adverse change (MAC) clause in the business combination agreement. 1 The basic idea is that, if a party has suffered a MAC between the signing and closing of the agreement, the counterparty may cancel the deal without penalty. When a party to a pending merger agreement suffers an adverse change, whether or not the transaction will close thus depends on whether the change is a MAC as defined in the agreement. These definitions tend to be extremely complex and heavily negotiated. They typically distinguish many kinds of risks to a party's business and assign some risks to the party and ...
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