mergers & acquisitions section 2d: documenting the deal prof. amitai aviram [email protected]...

Mergers & acquisitionsSection 2d:

Documenting the dealProf. Amitai [email protected]

University of Illinois College of LawCopyright © Amitai Aviram. All Rights Reserved

S16D

Documenting the dealOverview of Section 2d

1. Document structure2. Shopping for legal consequences (form vs. substance)3. Navigating change of control clauses4. Risk of SH rejection5. Risk of third-party bid6. Regulatory risk7. Risk of adverse change

© Amitai Aviram. All rights reserved.2

Document structureElements of the acquisition agreement

• Representations & warranties (“reps”): factual claims (by either party) addressing situation pre-signing– Separate sections for representations & warranties of X and those of S/Y– Remedy – if rep is materially incorrect:

• Condition is usually triggered, allowing the other party an “out”• When X isn’t publicly owned, Y often also entitled to indemnification from

sellers (XS). Why isn’t this done when T is a public firm?• Covenants: promises as to post-signing but pre-closing period

– Affirmative covenant – promise to take specified action– Negative covenant – promise not to take specified action– Financial covenant – promise to:

• maintain certain level of financial performance; or• not take action unless certain level of financial performance exists at that time


Document structureElements of the acquisition agreement

• Conditions: circumstances that have to occur for the parties to have to perform (failing to satisfy a condition gives a party an “out”)– Satisfying regulatory requirements– Material adverse change (MAC)– Financing condition (Y has “out” if it can’t secure financing for the deal)– Representations & warranties materially correct

• Termination: circumstances that allow a party an “out”– Breach by other party– “Fiduciary out” (“out” if superior offer materializes)– Failure to satisfy conditions by specified (“drop dead”) date


Document structureAddressing issues in the acquisition agreement

• Known legal issues– Shopping for legal consequences (form vs. substance)– Navigating change of control clauses

• Foreseeable risks– Risk of SH rejection– Risk of third-party bid– Regulatory risk– Risk of adverse change


Form vs. substanceShopping for legal consequences

• Board consent– Mergers & asset sales require board approval– Share acquisitions do not require board approval

• (Group) SH consent– Mergers & asset sales require a majority in a SH vote– Share acquisitions do not require a SH vote

• Individual SH consent– Mergers & asset sales do not require individual SHs’ consent– Share acquisitions require individual SHs’ consent

• SH appraisal rights– Mergers & asset sales may trigger appraisal rights– Share acquisitions do not trigger appraisal rights

• Will the law respect parties’ choice of deal structure?


Form vs. substanceMagnolia’s at Bethany [Del. Super. 2011]

• Magnolia’s sues Artisan for the damages caused by Meridian– General rule: Y in asset sale is not liable for X’s obligations

• The Magnolia’s case describes exceptions to this rule:– Assumption of liabilities (Y assumed X’s liabilities)– De facto merger (deal was effectively a merger, not an asset sale)– Successor liability (Y is a mere continuation of X under different name)– Fraud – not alleged in Magnolia’s


Form vs. substanceMagnolia’s at Bethany

• Assumption of liabilities– Express: Artisan did not expressly assume liability related to Magnolia’s (a

completed project at the time of the acquisition)– Implied: Did Y impliedly assume X’s liability by presenting the condo as their

project on their Facebook page?– Court: No. Posting aimed to solicit business (by showing projects their

employees did); can’t be understood to intend to assume liabilities. Also, at time of posting Y likely didn’t know about the liability.



• De facto merger– General rule - doctrine of independent legal significance: a legal action taken

under one provision of Delaware law is valid even if it would have violated another provision of Delaware law if it had been taken under the second provision (Hariton v. Arco Electronics, Inc. [Del. 1963])

– Exception – de facto merger doctrine: transaction is considered to have legal consequences of a merger when three elements are satisfied:

• X transfers all of its assets to Y• Y pays in stock, issued by Y directly to XS

• Y agrees to assume all the debts & liabilities of X– Here, none of the elements are satisfied

• Y bought most, but not all of X’s assets• Y paid in cash, not stock• Y only assumed liability for uncompleted contracts & permits



• Successor liability– Occurs when the new entity is so dominated and controlled by the old

company that separate existence must be disregarded (so new entity is liable for old entity’s obligations)

• “The test is not the continuation of the business operation; rather, it is the continuation of the corporate entity.”

– Evidence of continuation of the corporate entity:• Common identity of the officers, directors, or SHs of the predecessor and

successor corporations• Existence of only one corporation at the completion of the transfer

– Here, no such evidence• Artisan has different SHs (and likely officers & directors) than Meridian• Both Artisan & Meridian existed after the transaction



• Fraud– Common law fraud requires five elements (Gaffin v. Teledyne [Del. 1992]):

• Misrepresentation: false representation made by the defendant• Scienter: defendant's knowledge or belief that the representation was false, or

was made with reckless indifference to the truth• Intent: an intent to induce the plaintiff to act or to refrain from acting• Reliance: plaintiff's action/inaction taken in justifiable reliance upon the

representation• Harm: damage to the plaintiff as a result of such reliance

– Equitable (or “constructive”) fraud replaces the scienter element with the existence of a fiduciary relationship (Zirn v. VLI Corp. [Del. 1996]; Klembczyk v. Di Nardo [NY App. 1999])

– Here, no allegation of fraud (so case did not discuss fraud)


Form vs. substancePractice question

• Y (Del. corporation worth $3B) wants to acquire X (subject to MBCA, worth $1B)• Y & X want to structure the deal so that SHs won’t have an appraisal right• Assume majority of SHs support deal, but a few will object

• Structure the acquisition (merger/asset sale/share acquisition) so that:– One firm has both Y’s business & X’s business– Y’s current SHs control 75% of that combined firm; X’s current SHs control the other

25% (Y is paying XS in stock, not in cash)– The deal won’t give YS or XS appraisal rights

• Analyze whether your structure would withstand legal challenge

Delaware MBCA

Merger Appraisal Appraisal

Asset Sale No Appraisal Appraisal (seller only)


CoC clausesAnti-assignment clauses

• X may have assets that lose value if X is acquired– Regulatory permits that can’t be transferred– Loans that default if there is a change of control (“CoC”)

• Why would a lender want this clause?– Joint ventures that terminate upon CoC in one of the parties

• Why would parties to a joint venture want this clause?• Simple CoC clause: anti-assignment clause• Y wants to acquire X

– X has a joint venture with firm Z; agreement prohibits assignment of the contract

– How can Y acquire X without losing the joint venture with Z?


CoC clausesBypassing anti-assignment clauses

• Tender offer + merger rather than asset sale– Bypasses prohibitions on assigning contracts

• Because mergers bypass anti-assignment clauses, parties create CoC clauses that are triggered when there’s a change in the control of the party– E.g., one person or group acquires over 50% of shares


CoC clausesA more complex bypass

• Schering-Plough, a pharmaceutical company, has a joint venture with Johnson & Johnson to market Remicade (an anti-inflammatory drug)– J&J has right to market drug in US; S-P has right to market drug in

rest of world• Estimated value of S-P’s marketing rights: $10 B

– If there is a CoC at S-P, joint venture is terminated and J&J receives S-P’s marketing rights

• Any person becomes owner of over 50% of voting power/stock• Any merger in which the party is not the surviving entity



• On 3/10/2009, Merck signed agreement to acquireS-P for $41B (~$10B in cash, the rest in shares)

• How to structure the deal so joint venture isn’t terminated?• To illustrate, assume that:

– S-P & Merck each have 1B shares outstanding– S-P is worth $40B ($40/share) & Merck is worth $60B ($60/share)

– Deal calls for S-P’s SHs should receive $10B in cash, $30B in shares



• S-P takes over Merck (reverse merger)– S-P creates a subsidiary that merges with M– M’s SHs get 1.5 shares of S-P for each M share they had

• Before… After…

Merck

M’s SHsS-P

S-P’s SHs

S-P Sub

M’s SHs

S-P

S-P’s SHs

S-P Sub (Merck)

1B S-P shares 1.5B S-P shares

1.5B S-P shares

1B S-P shares

S-P now worth $100B, has 2.5B shares,so each share is worth $40



• Success?– Avoided triggering CoC clause?

• Any person owning >50% of S-P stock (>1.25B shares)?• Merger in which S-P was not surviving party?

– Did S-P SHs receive the agreed upon consideration?• 1B shares each worth $40 (=$40B); no cash

• Problem: S-P’s SHs need to receive cash – but they are the ones acquiring Merck– Solution 1: S-P pays its SHs a $10B dividend, then reverse merges

(this was not done – perhaps for tax reasons)– Solution 2: S-P merges with a subsidiary & pays SHs cash, then

reverse merges; here’s how it goes…



• Implementing solution 2– Step 1: S-P creates two subsidiaries

• Sub 1 will be used to pay S-P SHs $10B (so S-P moves moves $10B cash to Sub 1)

• Sub 2 will be used to pay M SHs in a reverse merger (so S-P moves 2B S-P shares to Sub 2)

S-P

S-P’s SHs

S-P Sub 1($10B in cash)

1B S-P shares

S-P Sub 2(2B S-P shares)



• Step 2: S-P merges with Sub 1, paying its SHs $10 in cash +1 share of “new” S-P for each share of “old” S-P they owned

S-P

S-P’s SHs

S-P Sub 1

1B old S-P shares

S-P Sub 2

Surviving Company

(S-P)

S-P’s SHs1B “new” S-P shares +

$10B

S-P Sub 2

S-P now worth $30B, has 1B shares,so each share is worth $30



• Step 3: Now Merck merges with Sub 2– M’s SHs get 2 shares of S-P for each M share they had

• Success?– Avoided triggering CoC clause?

• Any person owning >50% of S-P stock (>1.5B shares)?• Merger in which S-P was not surviving party?

– S-P SHs received agreed upon consideration?• 1B shares each worth $30 ($30B); $10B in cash

S-P

S-P’s SHs1B S-P shares + $10B

S-P Sub 2 Merck

M’s SHs2B S-P shares

M’s SHs

S-P

S-P’s SHs

S-P Sub 2 (Merck)

2B S-P shares1B S-P shares

+ $10B

S-P now worth $90B, has 3B shares,so each share is worth $30


• About 2-3% of M&A deals fail to close after they are signed (1.7% in 2007; 3.3% in 2009 [WSJ 8/6/13, p. B5])

• Acquisition agreements usually address anticipated and common risks, attempting to mitigate them and to allocate the risk in an agreeable way between the parties

• We will discuss how agreements address the following risks– SH rejection (SHs try to scrap the deal)– Third-party bid (Y2 bids for X)– Regulatory risk (regulator blocks the deal/party tries to avoid deal by

thwarting regulatory approval)– Risk of adverse change (events make X significantly less valuable)


Risk of SH rejectionThe stakes

• When Y wants to buy 100% of X, it needs a transaction form that does not require individual XS’s approval (to avoid SH hold-outs)

– I.e., merger or asset sale– But first Y needs to get a controlling stake

• Needs XB approval, and often also (group) XS approval

• Common techniques– Tender offer + LFM– Tender offer + top-up + SFM– Tender offer + DGCL §251(h)


Risk of SH rejectionAvoiding individual SH approval

Risk of SH rejectionTender offer + LFM

• Yvonne makes a tender offer for X– Conditioned on at least 50.1% of shares tendered

• SH Sam (24%) opposes the deal, but 51% of XS tender their shares• Yvonne now appoints XB

• XB signs a merger agreement w/Yvonne’s wholly-owned company, S• Merger requires SH vote; 60% vote in favor (51 out of the 60% are

Yvonne’s shares)– To avoid a claim that Yvonne influenced XB as a controller, Yvonne can negotiate

the merger with XB (conditioned on tender offer’s success) before launching the tender offer

– How should Sam challenge this merger?


Risk of SH rejectionTender offer + LFM

X

24%

Other SHs

76%

Before tender offer

Yvonne

S

100%

Yvonne forms S-CoS-Co has a cash-out merger with Target

S X

Yvonne Sam

51% 24%

Other SHs

25%100%

S (X)

Yvonne Sam Other SHs

100%

After the merger

Cash

Cash

X

Yvonne Sam

51% 24%

Other SHs

25%

After tender offer


Sam

Risk of SH rejectionTender offer + top-up + SFM

• Freeze-out merger requires a SH vote which takes time– Faster alternative: tender offer + top-up option from XB that brings Y up to 90%

ownership of X, then a SFM• Example: X has 100 shares (Y owns 0, wants to own 100)

– Announces a tender offer for all of X’s shares, conditioned on at least 85 shares tendered (hopefully threshold low enough to prevent holdout)

– At the same time, Y receives an option from XB that, conditioned on Y acquiring at least 85 shares, allows Y to purchase from X 50 newly-issued shares @ same price as tender offer

– Suppose 85 shares were tendered. Y exercises the top-up option to acquire 50 shares. Now Y owns 135 of 150 shares (90%).

– Y conducts SFM to freeze-out remaining 10% SHs• XB often conditions top-up on Y’s promise to execute SFM immediately.

Why?



• Problems with top-up options: authorized share limit– The lower the tender offer threshold required to exercise the top-up option,

the more shares need to be issued in the top-up– E.g., in our example, 50 shares were required for 85% threshold; if

threshold was 50%, then 400 shares would be required– To issue an option, enough authorized shares need to exist; in our example,

X had to have at least 150 authorized shares– Why is that a constraint? Can’t X just increase authorized shares?



• Problems with top-up options: “appraisal dilution”– Hypo: X has 100 shares; Y makes a tender offer for $10/share– Sam, a SH, correctly believes that X is worth $2,000 ($20/share); he does

not tender, and intends to seek appraisal– 85 shares are tendered; Y executes top-up and buys 50 shares at $10/share

(paying $500); then Y executes SFM– X now worth $2,500 and has 150 shares; each share worth $16.67– Appraisal: even if court accepts that X was worth $2,000 pre-top-up, value

drops from $20/share to $16.67/share because of the top-up– Solution: Y can concede that appraisal value would exclude shares issued &

consideration received in top-up


Risk of SH rejectionTender offer + DGCL §251(h)

• Recognizing that top-ups make the SH vote meaningless when control was acquired in a tender offer, DGCL §251(h) allows to execute a tender offer + merger “combo” without a SH vote by X’s SHs, under the following conditions:– X is a public firm (traded on a national exchange or has >2,000 SHs)– Merger agreement expressly invokes section 251(h) and contemplates a merger

with Y/S taking place immediately following a tender offer by Y/S– At time X’s board approves the merger agreement, Y owns less than 15% of X– Tender offer was for all shares entitled to vote on a merger– Following tender offer, Y owns enough shares to win a SH vote on the merger– SHs in merger receive same consideration as SHs who tendered in tender offer


Risk of third-party bidWhy limit third-party bids?

• Hypo: Target currently has a market value of $100K– Kelly spots hidden value (believes X is worth $150K)– Costs $10K to fully investigate X & prepare an acquisition offer– Should Kelly spend $10K & make an offer to acquire X?– What’s the highest price Kelly would offer for X’s shares?

• Kelly spends the $10K & offers to acquire X for $135K– Craig, X’s CEO, tells Larry of Kelly’s offer– Larry trusts Kelly’s business acumen & knows she spent some effort (at a cost

of about $10K) to discover X’s value– He doesn’t know exactly what she found, but if she spent $10K & then offered

$135K for the company, then she found X is worth >$145K


Risk of third-party bidWhy limit third-party bids?

• Therefore, Larry offers to buy X for $145K– That’s what Craig was hoping for when he told Larry of Kelly’s offer– Should Kelly offer $146K?– Make an ‘exploding offer’? (i.e., offer withdrawn if not accepted immediately)

• Is Craig harmed by Kelly’s rescinding of the offer? Doesn’t the offer still provide a good signal that would make Larry bid for X?

• Usually not feasible for M&A deals– Knowing Craig’s incentives, would Kelly invest the $10K?

• To get Y to bid for X, X has to limit it’s ability to be opportunistic by agreeing to a “lock-up”


• Goals of a “lock-up”– Reducing likelihood that Y2 acquires X

• No shop/go shop: limit X’s ability to negotiate with other potential acquirers• Allow Y to take away “crown jewels” of X if Y2 acquires X

– Compensating Y if X walks away from the deal• Termination fee• Or, again, a “crown jewels” provision

• Lockup example (Van Gorkom): Pritzker demanded that TransUnion not solicit other bids & not furnish inside info to other bidders (TransUnion’s board rejected the latter demand)– This is known as a “window shop” clause

Risk of third-party bidHow to limit third-party bids


Risk of third-party bidShopping clauses

• Deal terms re dealing with other bids:– “No shop” clause: XB agrees not to solicit other bids or negotiate

with other bidders• At odds with XB’s fiduciary duty to get best deal for SHs (Revlon duties)

– “Window shop” clause: XB agrees not to solicit other bids, but may negotiate with unsolicited bidders

• Often comes with limitations on X providing info to Y2

• Still runs risk of violating Revlon duties– “Go shop” clause: allows XB to solicit other bids for a specified

period• If XB finds better deal, X pays termination fee & accepts better deal• Provides XB with evidence this was best price available


Risk of third-party bidTermination fees

• Types of termination fees– Termination fee: fee paid by X if it walks away from deal

• Typical motivation: Y2 offered a better price– Reverse termination fee (“RTF”): fee paid by Y if it walks

• Typical motivation: financing difficulties, change in X’s business/economic conditions that makes X less valuable

• Reverse termination fees do not address 3rd party risks; rather, they address risk of adverse change

– Termination fees are often a % of deal value (e.g., 3%)


Risk of third-party bidOther common techniques

• Specific performance– Parties must execute deal; paying damages/termination fee is insufficient– Presents Revlon duty concerns; specific obligations are more often subject to

specific performance, such as: “force the vote” clause (requires XB to bring deal to SH vote even if it decides to recommend another offer)

• If SHs vote against deal, X pays termination fee but has “out”• If SHs vote to approve deal, X doesn’t have an “out”• Why is this more acceptable than a “no shop” clause?

• Topping rights– If X gets a superior offer, it must give Y several days advanced notice before it

terminates; in that time, Y may get back with an offer that would make Y2’s offer not superior


Regulatory riskMain concerns

• Many transactions require regulatory approval– E.g., antitrust, banking, energy, telecom, foreign investments

• Merger agreement needs to address 2 related issues– Who bears risk that deal will not receive approval?

• Bargaining power• Efficient to place risk on party that can thwart approval

– Ensuring parties’ best efforts to obtain regulatory approval• Agree on max concessions each party will make to get approval?• Drafting obligations in way that makes concession allocation

enforceable (ADS v. Blackstone)


Regulatory riskAlliance Data Systems v. Blackstone [Del. Ch. 2009]

• Case is an exercise in contractual interpretation– Offers glimpse into what a merger agreement contains– Illustrates how private equity deals are structured


http://www.blackstone.com/index.html

http://www.alliancedata.com/

Regulatory riskAlliance Data Systems v. Blackstone

Deal structureBlackstone Group

(LP)

BCP V (LP)

Investors

Aladdin Solutions

Aladdin Merger Sub

Other investments

Alliance Data Systems

World Financial

A word about how private

equity is structured

ADS’s SHs



Deal structureBlackstone Group

(LP)

BCP V (LP)

Aladdin Solutions

Aladdin Merger Sub

Banks

Alliance Data Systems

BCP V creates AS & AMS

BCP V & banks give contractual commitments:

• $1.8B in equity LBO

• $6B in debt (77% debt)

ADS’s SHs

$81.75/share;total: $7.8B



The Merger AgreementBlackstone Group

(LP)

BCP V (LP)

Aladdin Solutions

Aladdin Merger SubAlliance Data

Systems

World Financial

(a) Parties to the merger agreement

(in pink)

(c) Credit-card company - needs OCC approval

(b) BCP V guarantees AS’s payment of $170M reverse termination fee



• Blackstone rejects OCC’s demands from it– OCC refuses to approve deal– Agreement’s deadline passes; Aladdin terminates it

• ADS claims Aladdin breached Agreement by failing to make Blackstone accommodate OCC demands– Sues Aladdin & BCP V to collect the reverse termination fee

• Relevant provisions in the merger agreement– §6.5.1: covenant by Aladdin to use its reasonable best efforts to secure

necessary regulatory approvals– §6.5.6: covenant by Aladdin to keep Blackstone from preventing or impeding

the completion of the merger– §5.2: representation by Aladdin that it had the power to fulfill its obligations

under the merger agreement– Implied covenant of good faith & fair dealing



• §6.5.1: reasonable best efforts to secure regulatory approvals– Court: clause applied only to Aladdin, not Blackstone– Best practices include a covenant by acquirer that its parent will also work

toward completion of the transaction– Elsewhere in the agreement, different language makes Aladdin liable for

Blackstone’s conduct• Antitrust approval in §6.5.1: Aladdin covenants that it “shall, and shall cause

each other member of the Parent Group… to take any action which it is capable of taking [to get antitrust approval].”

– Known as “hell or high water” obligation• §6.5.6: covenant by Aladdin to keep Blackstone from preventing or impeding

the completion of the merger



• §6.5.6: Covenant to keep Blackstone from preventing or impeding the completion of the merger– Court: this is a negative covenant holding Aladdin liable for affirmative action

by Blackstone that thwarts merger’s closing– Affirmative covenants require a bound party to take action; negative covenants

forbid action• What is the relevant action?• ADS: Engaging the OCC & rejecting its proposals• Court: No; Blackstone was not obligated to engage with the OCC



• §5.2: representation by Aladdin that it had the power to fulfill its obligations under the merger agreement– ADS: This represents that Aladdin controls Blackstone– Court: No. This represents that Aladdin can make Blackstone behave according

to the narrow obligations it covenanted to (antitrust approval & not acting to thwart deal)

• Implied covenant of good faith & fair dealing– Requires a party to refrain from unreasonable conduct which has the effect of

preventing other party from receiving fruits of the bargain– Court: applies when contract lacks specific language governing an issue &

obligation advances purposes reflected in contract’s express language; here, language is clear


Risk of adverse changeCommon protections

• Party’s condition may change between signing the deal & closing it (transferring the shares/assets)

• Protecting X: risk that X will increase in value– Earn-out: additional payment based on X’s future performance relative

to baseline set in merger agreement• When parties can’t agree on price, earn-outs that apply to post-closing

performance may be used (in such cases, Y may have post-closing covenants to prevent manipulation of X’s profits)

• Protecting Y: risk that X will decrease in value– Earn-out: low base price, the rest tied to future performance– Material Adverse Change (MAC)/Material Adverse Event (MAE) clause:

Y has an “out” from deal if X suffered a material adverse change


Risk of adverse changeTypical MAC clause structure

• General rule: Y can walk away from deal if X suffered MAC– Absence of a MAC is a condition precedent to Y’s obligation to close the deal

(Hexion)– X represents & warrants that no material adverse effect occurs (IBP)

• Exceptions (carve-outs): events that aren’t MACs; e.g.:– Changes in general conditions of the specific industry– Changes in general political, economic or financial conditions– Changes in law/interpretation of law by courts/government entities– Changes in GAAP or regulatory accounting requirements– Actions/omissions taken with the prior written consent of other party

• Practical note: litigation on MACs is rare; typically, invoking MAC is a step in renegotiating the deal– But law influences the negotiations (since it determines what happens if parties

can’t settle)


Risk of adverse changeHexion v. Huntsman [Del.Ch. 2008]

• Hexion (Y) alleges three MACs occurred to Huntsman (X)1. Huntsman had disappointing earnings from time of signing the

merger agreement (7/2007) to time of trial2. Increase in Huntsman’s net debt since signing, despite

expectations that debt would be reduced3. Underperformance in Huntsman’s Textile Effects & Pigments lines

of business• Economic background: Huntsman suffered from -

– High oil prices increased cost of petroleum derivatives (Huntsman’s raw materials)

– Weak dollar increased cost of inputs (Huntsman sells products in dollars, but pays for inputs in foreign currency)


Risk of adverse changeHexion v. Huntsman

1. Huntsman had disappointing earnings– Court examines business performance using EBITDA (earnings before interest,

taxes, depreciation & amortization)• First-half EBITDA down 19.9% year-over-year• Huntsman optimistic about 2009; Hexion pessimistic• Current analyst estimates project 2009 EBITDA that is essentially flat from

2007 to 2009• Court: Not a MAC

– Drop in earnings seems like a temporary dip & is not large enough– Significant drop compared to Huntsman’s projections, but §5.11(b) disclaims

Huntsman projections



2. Increase in Huntsman’s net debt since signing, despite expectations that debt would be reduced

– At time of signing, Huntsman had a net debt of $4.1B– Huntsman projected @ time of signing that by end of 2008 its debt would be

~$3B (this includes ~$800M from divestiture of assets)– Ended 2008 with debt increasing by ~$250M (~6% increase)– So debt was $4.35B instead of projected $3B (~ 45% increase)

• Court: Not a MAC (2 of 4 Hexion models at signing assumed debt of $4.1B)

3. Underperformance in Huntsman’s Textile Effects & Pigments lines of business

• Court: MAC clause addressed impact to entire business; impact on specific divisions doesn’t matter

– Also, bad performance in these divisions seems to be short-term



• General points court makes in analyzing MACs– Burden of proof is by default on party claiming MAC, regardless of the

form the MAC has (representation, condition precedent, etc.)– Must show that MAC occurred before exceptions are examined

• I.e., showing a disproportionate impact of event on T only matters if there’s also a showing that event was a MAC

– Very high threshold for what constitutes a MAC


Risk of adverse changeInteractions between clauses

• Interaction: MAC & RTF– Many deals have both a MAC & a RTF

• MAC – Y can terminate contract if MAC occurs• RTF – Y’s liability for breaching contract capped at fee

– All else equal, is Y more likely to invoke a MAC when deal has a RTF, or when deal doesn’t cap damages for Y’s breach of contract?

• Interaction: MAC & regulatory risk– When addressing regulatory risk, parties may bargain for right to refuse to

accommodate regulators– One way of doing so is via a MAC clause (instead of agreeing on maximum

concessions party must offer)• Example (Delta/Northwest merger): each party may terminate deal if a

regulator requires asset divestiture or other actions that would have a MAC on one of the parties or combined entity


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