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2009 Nixon Peabody MAC Survey

A Nixon Peabody study of current

negotiation trends of Material Adverse
Change clauses in M&A transactions
Methodology 2

Results 2

MAC Elements 3
MAC Elements: Miscellaneous 5 We initiated this survey in 2000 in order to help
MAC Exceptions: Change in Markets 6 identify the basic elements of MAC provisions as used
MAC Exceptions: Legal Developments 7 by practitioners and trends in the appearance of these
MAC Exceptions: Hostilities, elements over time. Since the first survey, this annual
Calamities, and Acts of God 8 exercise has undergone significant expansion in its
MAC Exceptions: Miscellaneous 9 scope. In the over-heated seller’s market that developed
MAC Exceptions: Changes in after 2000, our surveys initially showed increasingly
Ordinary Course of Business 10 seller-favorable formulations with less expansive inclu-
MAC Exceptions: Employee Matters 10 sion language and an increasing list of exclusions. Over
the last two years we have seen some reversal of those
Conclusions 9 trends, albeit in a more splintered market that is difficult
to characterize as either buyer- or seller-friendly.

By way of explanation, a material adverse change

(“MAC”) or material adverse effect (“MAE”) provision
in an agreement generally serves two separate functions
in an acquisition agreement. In the first, the MAC
or MAE definition serves as a carve-out from various
representations and covenants, defining a threshold
for determining the scope of disclosure or compliance.
An example of this use would be: “The Company’s
contracts are in full force and effect, except as would
have a Material Adverse Effect.” The MAC provision
is also used to delineate the circumstances that, upon
their occurrence, permit a buyer to withdraw from the
transaction without penalty. This latter use is known
in common parlance as the “MAC out” and appears in
the buyer’s conditions precedent to close, i.e., “there
shall not have occurred a Material Adverse Change in
the Company.” The effects of the MAC out are then
tempered by a listing of specific events, the “MAC
exceptions,” that preclude a buyer from backing out of
a deal or renegotiating even if a MAC has occurred.

The elements of MAC clauses are generally heavily

negotiated, with sellers attempting to narrow the MAC
definitional elements and expand the exceptions, and
buyers doing the reverse.
Nixon Peabody’s Annual MAC Survey provides an analysis of MAC
clauses in publicly disclosed M&A transactions. The results generally
reflect a continuation of trends from the prior year.

Methodology Summary of results

As in prior years, we surveyed agreements with transac- In the agreements surveyed, the use of various MAC
tion values of $100 million or greater based on agree- definitional elements remained generally steady when
ments dated between June 1 of the prior year (2008) compared to last year’s survey, while there was a slight
and May 31 of the current year (2009). This year, decrease in the number of MAC exceptions included in
we examined 523 asset purchase, stock purchase, and the agreements surveyed. Survey results confirm that,
merger agreements. The surveyed transactions represent during the survey period, the majority of MAC clauses
many significant industries and range in value from examined remained more “buyer-friendly” than in the
$100 million to $66.8 billion. early years of the survey.

In selecting our 523 agreement sample, we generated In comparison to the sampling as a whole, we have
a list of deals executed between June 1, 2008, and seen that the top 100 deals generally followed the same
May 31, 2009, from publicly available information percentage trends of the MAC definitional elements
submitted to the Securities and Exchange Commission, and had a slightly higher percentage trend in the MAC
and selected agreements from that list. Although this exceptions. These findings show little deviation from
analysis is not technically scientific, we believe that the last year’s survey results.
results are statistically representative of the marketplace
climate of M&A transactions during the period. We are hesitant to draw firm conclusions, or to seek to
identify clear cause-and-effect paths, from these results.
We also separately analyzed the top 100 deals during the Many economists place the peak of the credit crisis
period examined. The top 100 agreements were derived between June and September 2008. This year’s survey,
from the list of top 100 deals for 2008 and the top 25 which covers deals from June 1, 2008, through May
deals for Q1 2009 announced in Mergers & Acquisitions: 31, 2009, incorporates that peak period. Along with
The Dealmaker’s Journal, excluding those deals that the credit crisis, however, has come a recessionary slow-
occurred during the first six months of 2008 and would down in economic activity. Those two factors have had
have been reported on the previous year’s survey. a strong, but not necessarily consistent, effect on M&A
deal flow and structure. The credit crisis has made it
difficult for buyers to close deals, favoring the limited
number of buyers with continued access to credit
and those (including private equity funds flush with
undrawn commitments) who have been willing and
able to invest large amounts of their own funds. This
reduction in the number of eligible buyers has tended
to create a more buy-friendly environment for those still
in the market.

Nixon Peabody Annual MAC Survey 1 2


At the same time, the recession has severely impacted results that are nonetheless forced to enter the market­
the operating results of many potential targets, thereby —whether because of credit problems, management
reducing the number of attractive M&A candidates changes, or otherwise—find themselves at the mercy of
and creating a more competitive market for those more aggressive buyers. Unfortunately, it is not always
still in play. On the whole, our experience has been possible to distinguish between these two situations in
that the targets able to maintain or grow their opera- analyzing the documentation of completed transactions
tions generally enjoy significant bargaining power in in our current survey.
the current market, while those with deteriorating
The following table details the prevalence of the MAC
elements in our survey:

MAC Elements

MAC on validity or enforceability of agreement 1


MAC on the securities or purchased assets

MAC on prospects of the Company/Target

Ability of Target to continue to operate business immediately after 0

closing in substantially the same manner as immediately before closing 1

Ability of Purchaser to continue to operate business immediately after 0

closing in substantially the same manner as immediately before closing 2

MAC on the benefits contemplated by the agreement

Losses over a specified threshold deemed to be a MAC

MAC on Purchaser’s ability to close the deal

MAC on Seller’s ability to close the deal

MAC on the business, operations, financial condition, etc.
0 20 40 60 80 100

% of deals having element/exception % of Top 100 deals having element/exception

In conducting our review, in addition to examining the In last year’s survey, we addressed Delaware Chancery
elements of, and exclusions from, MAC definitions, we Court’s decision in Hexion Specialty Chemicals, Inc. et
also sought to evaluate certain uses of MAC provisions al. v. Huntsman Corp., C.A. No. 3841-VCL (Sept. 29,
in acquisition agreements. One example is the language 2008). The Hexion decision, combined with other deci-
that a given event “would reasonably be expected to have sions like the 2007 decision of the Tennessee Chancery
a Material Adverse Effect” on the target, as opposed to Court in Genesco, Inc. v. The Finish Line, Inc., et al., C.A.
simply stating that such event has in fact had such an No. 07-2137-II (September 21, 2007), have brought
effect. This nuance is important because the “would into question the traditional approach to the MAC out.
reasonably be expected to” formulation permits the The Hexion court confirmed that no Delaware court has
buyer to take into account the effects on the target that ever found a MAC to have occurred in the context of a
are foreseeable but are not yet reflected on the balance merger agreement; placed the burden of proof on the
sheet or income statement. For example, notification buyer asserting the MAC to excuse its performance; and
from a major customer that it will cease buying from the interpreted the traditional MAC as requiring a material
target “would reasonably be expected to” result in a loss distortion measured by the target’s past performance,
of sales and resulting profits, but may not yet have had which is likely to cause substantial long-term effects on
that effect at the time of closing. The “would reasonably the earning power of the target. As a result of Hexion,
be expected to” formulation showed up in 22% of the we would expect the traditional MAC out to be supple-
agreements as compared to 15% in the prior year. mented or replaced over time by more specific closing
conditions, such as earnings targets, sales levels, or lack of
On the exclusion side, we found that 48% of the time, customer defections and other “quantifiable” terms that
the exclusions were limited in whole or in part to speci- may unequivocally excuse performance. However, the
fied events that did not “disproportionately affect” the effects of the September 2008 Hexion decision do not yet
target. This qualifier appeared in 51% of transactions appear to be reflected in our 2009 survey results.
surveyed for the prior year and 69% two years ago.
This limitation is intended to ensure that the applicable
exclusions, e.g., changes in law, import restrictions,
disruptions in financial markets, apply only where the
target is caught up with the rest of its industry, but
not to let the seller off the hook if he or she is just less
nimble than its competitors.

“As a result of Hexion, we would expect the traditional MAC out

to be supplemented or replaced over time by more specific closing
conditions, such as earnings targets, sales levels, or lack of customer
defections and other ‘quantifiable’ terms that may unequivocally
excuse performance.”

Nixon Peabody Annual MAC Survey 3 4

Lastly, we observed that leaving the term “material
adverse change” undefined is increasingly rare, with 3%
of the surveyed deals not defining what constituted a
MAC, as opposed to 7% on last year’s survey.

The following table details the findings in our survey

in respect of the miscellaneous definitional matters
described above:

MAC Elements: Miscellaneous

No MAC out

Disproportionate Effects Language

MAC out with no definition
of “MAE” or “MAC” 3

Reasonable expectation of event to have
a material adverse effect/change 22

0 20 40 60 80 100

% of deals having element/exception % of Top 100 deals having element/exception

Exceptions relating to change in markets
There were some changes from 2008 to 2009 in the as an exception, as opposed to 33% on our previous
prevalence of MAC exceptions for market conditions year’s survey. The MAC exception of “change in securi-
surveyed. MAC exceptions for “changes in exchange ties markets” remained unchanged at 45% of all deals
rates” and “changes in interest rates” continued to increase surveyed. The inclusion of other exceptions (“changes in
in frequency, perhaps due to concerns surrounding a general conditions of the specific industry” and “changes
further weakening of the U.S. dollar. In other MAC in the economy or business in general”) declined in M&A
exceptions relating to change in markets, of the total deals transactions for the period surveyed.
examined, 41% included a MAC exception for “changes
in trading price or trading volume of Company’s stock” The following table details the prevalence of MAC
exceptions found in our survey that relate to “Changes
in Markets”:

MAC Exceptions: Change in Markets

Change in exchange rates

Change in interest rates

Change in trading price or trading 54

volume of Company’s stock 41

Change in securities markets

Change in general conditions of 65

the specific industry 57

Change in the economy or 73

business in general 65
0 20 40 60 80 100

% of deals having element/exception % of Top 100 deals having element/exception

Nixon Peabody Annual MAC Survey 5 6


Exceptions relating to changes in legal developments

For the period surveyed, the results relating to the of the agreements in this year’s survey, down from 3%
exceptions concerning changes in legal developments in the previous year. Results tend to indicate that sellers
did not deviate significantly from last year’s results. are unwilling to take risks with respect to changes in
The MAC exception for “changes in applicable taxes/ law or regulations, successfully insisting that buyers
tax law” remained in 3% of the deals surveyed, while make themselves comfortable with the legal landscape
the exception for “changes in interpretation of laws by in which the target company operates.
courts or government entities” increased a mere 6%,
from 27% to 33%. The MAC exception for “changes The following table details the prevalence of MAC
in laws or regulations” seems to have reached its peak exceptions found in our survey that relate to “Changes
in our prior year’s survey. This MAC exception steadily in Legal Developments”:
grew from 42% to 59% two years ago and to 63% last
year. This year, the MAC exception for “changes in laws
and regulations” stands at 60% of the deals surveyed.
The exception for “changes resulting from bankruptcy
or actions of a bankruptcy court” appeared in only 1%

MAC Exceptions: Legal Developments

Change in applicable taxes/tax law

Changes resulting from bankruptcy or 3

actions of a bankruptcy court

Change in interpretation of laws
by courts or govt. entities 33

Change in laws or regulations

0 20 40 60 80 100

% of deals having element/exception % of Top 100 deals having element/exception

Exceptions for changes resulting from terrorism, acts of war,
changes in political conditions, and national and international
calamities remain unchanged
In this year’s survey, we notice a decline in MAC excep- MAC exception, our survey showed a 6% decrease in
tions for “changes resulting from terrorism, acts of war, the number of agreements containing such exception,
changes in political conditions, and international calami- from 25% in our prior year’s survey to 19% in this
ties.” For example, the frequency of MAC exceptions for year’s survey. The exception for “change in political
changes due to acts of terrorism in the United States or conditions” stands at 25%, ten percent lower than in
abroad fell 4%, from 59% of last year’s surveyed agree- our previous survey, and the exception for “interna-
ments to 55% in this year’s survey period. Similarly, tional calamity directly or indirectly involving the U.S.”
the number of agreements that contained exceptions decreased 3% from 7% in our prior year’s survey to 4%
for changes due to “acts of war or major hostilities” and in this year’s survey. The decreases in the exceptions
“natural calamities” fell 3% and 6%, respectively, to 55% for “acts of God” and “international calamity directly
for “acts of war or major hostilities” and 6% for “natural or indirectly involving the U.S.” may be explained by
calamities.” This may reflect an increased comfort level the absence of marked natural disasters occurring in
with these risks on the part of buyers and sellers in the the U.S. and abroad as compared to our prior period’s
absence of significant economic consequences from either survey, which seemed to have factored in the occur-
terrorism or foreign war since September 2001. rence of events such as the Southeast Asian tsunami and
Hurricane Katrina.
In addition, this year’s survey showed marked decreases
in all exceptions for “acts of God,” “change in political The following table details the prevalence of MAC
conditions,” and “international calamity directly or exceptions found in our survey that relate to “Changes
indirectly involving the U.S.” For the “acts of God” arising from Hostilities, Calamities, and Acts of God”:

MAC Exceptions: Hostilities, Calamities, and Acts of God

International calamity directly or 2
indirectly involving U.S. 4

National calamity

Change in political conditions

Acts of God

Acts of terrorism

Acts of war or major hostilities
0 20 40 60 80 100

% of deals having element/exception % of Top 100 deals having element/exception

Nixon Peabody Annual MAC Survey 7 8


Conclusions and notable comparisons with the top 100

Just as in last year’s survey, MAC exceptions appeared or government entities,” “change in trading price or
with slightly greater frequency within the top 100 deals trading volume of Company’s stock,” and “change in
in comparison to total deals surveyed. The exceptions GAAP.” This may indicate that sellers have slightly
making up these categories generally appeared about greater negotiating power in larger transactions or may
10–14% more often in the top 100 deals in comparison reflect a greater impact of accounting and regulatory
to the total deals surveyed. Notable examples of this changes on larger public companies. On the other hand,
are MAC exceptions relating to the general categories within the top 100 deal category, most exceptions to
including “changes in interpretation of laws by courts MAC showed a decline from the prior year.

The following shows the remaining results of our survey:

MAC Exceptions: Miscellaneous

Litigation resulting from any law relating to the 15

agreement or the transactions contemplated 11

Any action required to be taken under any law or 9

any existing contract by which the target is bound 9

Failure by the target to meet revenue or earnings projections

Changes in GAAP

Changes caused by the taking of any action required

or permitted or in any way resulting from
or arising in connection with the agreement

Expenses incurred in connection with transaction

Effect of announcement of transaction

Developments arising from any facts that were 6

expressly disclosed to the parent/public 7
0 20 40 60 80 100

% of deals having element/exception % of Top 100 deals having element/exception

MAC Exceptions: Changes in Ordinary Course of Business

Delay or cancellation of orders
for services or products 2

Adverse effect resulting in
seasonal reduction in revenues 1

Commencement of a proceeding 0
in bankruptcy with respect to a
material customer 0

Reduction of customers or
decline In business 7

0 20 40 60 80 100
% of deals having element/exception % of Top 100 deals having element/exception

MAC Exceptions: Employee Matters

Changes in the target’s 1

relationship with any labor
organizations/unions 2


Employee attrition

0 20 40 60 80 100

% of deals having element/exception % of Top 100 deals having element/exception

Nixon Peabody Annual MAC Survey 9 10

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For additional information about

our MAC Survey, please contact:
Phillip B. Taub, Partner
Department Head, Business and Finance Department

James L. Kelly, Partner

Team Leader of Leveraged Buyouts

Roger E. Berg, Partner

Private Equity Group

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Mergers & Acquisitions Practice Group Leader
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