Recently the courts of Delaware, the leading jurisdiction for U.S. corporate law, for the first time allowed a purchaser to walk away from an acquisition in light of a Material Adverse Change, commonly known as a "MAC" (or Material Adverse Effect / MAE). This is significant not only because it is commonly recognized to be the first time the Delaware courts have established a MAC, removing doubt among U.S. practitioners whether a MAC could be successfully called at all, but also because the Delaware court's thinking is influential around the world and the reasoning is rather detailed (246 pages).
Why is this relevant?
From its detailed analysis it emerges that according to the Delaware courts an acquiror that intends to call a Material Adverse Change still has a very high threshold to meet absent any specific metrics in the MAC clause. However, the interesting fact remains that the leading U.S. courts for corporate law have, first, determined that a MAC can successfully be called at all and, second, given guidance on how to measure a MAC. Though worded differently, the essential requirements of durational significance and very substantial materiality are along the same lines as the UK Takeover Panel's decision in WPP's offer for Tempus. Given Delaware's standing in the legal world, and the limited case law about MACs, future MAC disputes in other jurisdictions, and by extension MAC negotiations, may be informed by this decision.
Test for a MAC
The court in first instance, the Court of Chancery, had ruled that the decline in performance must be material when viewed from the longer-term perspective of a reasonable acquiror, which is measured in years. Also, the court held that the underlying causes for the downturn in performance must be durationally significant. The court accepted and analyzed the common MAC condition agreed between Fresenius and Akorn: the change must be material, and it should essentially be either (i) a business-specific change or (ii) an industry-wide change that disproportionately affects the target. In other words, loss of value as a result of a temporary issue will not suffice.
The court rejected Akorn's argument that a common MAC condition as agreed here implies an anti-sandbagging nature in that any knowledge Fresenius had about the risk from which the MAC resulted remains for Fresenius' account. Hence, the court found that no such knowledge is relevant when establishing whether a MAC has occurred.
Background
Fresenius, the German healthcare group, had entered into a merger agreement to acquire US-based Akorn. The merger agreement provided for a MAC condition, which means that Fresenius had a walk-away right if a MAC occurred in respect of Akorn. After signing the merger agreement, Akorn's financial results did deteriorate dramatically. For example, annual operating income was about 100% lower year-over-year. There were also other reasons for Fresenius to terminate the merger agreement, including non-satisfaction of the bringdown condition, but those are in addition to the MAC being called.
Recently the courts of Delaware, the leading jurisdiction for U.S. corporate law, for the first time allowed a purchaser to walk away from an acquisition in light of a Material Adverse Change, commonly known as a "MAC" (or Material Adverse Effect / MAE). This is significant not only because it is commonly recognized to be the first time the Delaware courts have established a MAC, removing doubt among U.S. practitioners whether a MAC could be successfully called at all, but also because the Delaware court's thinking is influential around the world and the reasoning is rather detailed (246 pages).
Why is this relevant?
From its detailed analysis it emerges that according to the Delaware courts an acquiror that intends to call a Material Adverse Change still has a very high threshold to meet absent any specific metrics in the MAC clause. However, the interesting fact remains that the leading U.S. courts for corporate law have, first, determined that a MAC can successfully be called at all and, second, given guidance on how to measure a MAC. Though worded differently, the essential requirements of durational significance and very substantial materiality are along the same lines as the UK Takeover Panel's decision in WPP's offer for Tempus. Given Delaware's standing in the legal world, and the limited case law about MACs, future MAC disputes in other jurisdictions, and by extension MAC negotiations, may be informed by this decision.
Test for a MAC
The court in first instance, the Court of Chancery, had ruled that the decline in performance must be material when viewed from the longer-term perspective of a reasonable acquiror, which is measured in years. Also, the court held that the underlying causes for the downturn in performance must be durationally significant. The court accepted and analyzed the common MAC condition agreed between Fresenius and Akorn: the change must be material, and it should essentially be either (i) a business-specific change or (ii) an industry-wide change that disproportionately affects the target. In other words, loss of value as a result of a temporary issue will not suffice.
The court rejected Akorn's argument that a common MAC condition as agreed here implies an anti-sandbagging nature in that any knowledge Fresenius had about the risk from which the MAC resulted remains for Fresenius' account. Hence, the court found that no such knowledge is relevant when establishing whether a MAC has occurred.
Background
Fresenius, the German healthcare group, had entered into a merger agreement to acquire US-based Akorn. The merger agreement provided for a MAC condition, which means that Fresenius had a walk-away right if a MAC occurred in respect of Akorn. After signing the merger agreement, Akorn's financial results did deteriorate dramatically. For example, annual operating income was about 100% lower year-over-year. There were also other reasons for Fresenius to terminate the merger agreement, including non-satisfaction of the bringdown condition, but those are in addition to the MAC being called.