The landscape of corporate America has undergone significant change in the last 24 months. Those changes, and their effects on projected future earnings, are a big risk for both private equity groups ("PEGs") and strategic buyers as they make acquisitions.
To control this risk, buyers often insert "Material Adverse Change" clauses into their purchase agreements (sometimes these are alternatively named "Material Adverse Effect" clauses). The general purpose of these clauses -- and I am drastically paraphrasing here -- is for the buyer to say "if your business significantly changes between signing and closing, then I don't have to buy your business."
How effective are these clauses? What specifical changes in the underlying business must a court see to enforce these clauses?
Matt Kuhn and Josh Nygren, attorneys at Faegre & Benson, have written an excellent summary of the case. It provides a summary, as well as excellent drafting pointers on MACs/MAEs. Of all the law firm write-ups on Hexion that I've read, theirs is the most helpful. You can find their article here.
Recent Delaware litigation provides partial answers to these questons. Buyers have sought to exit their investment, and have used the MAC clause as justification. Meanwhile, the Targets have fought the exit, trying to 'force the marriage'. These disputes ended up in court.
The most prominent case is Hexion v. Huntsman. In that case, Hexion Specialty Chemicals (a platform portfolio company of PEG Apollo Mgmt) was trying to back out of its purchase agreement with would-be add-on Huntsman. It claimed a MAC had occurred. The court rejected this argument, and for its reasoning relied on changes in EBITDA and the carveouts within the purchase agreement.
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