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Summary
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 Addresses
standard M&A contractual condition
- Variously referred to as:
- Material adverse change
- MAC clause
- Material adverse effect
- MAE clause
When
invoked by buyer, rarely litigated to finality
- Either clearly a MAC, and deal terminates, or
- Buyer threatens to terminate and
renegotiates price
Recent
cases |
Notable Cases
Holly Corp /
Frontier Oil (Del Ch 2005)
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Buyer subsidiary was sued over toxic torts after
signing
- Buyer
sued for damages claiming seller repudiated
- Instead, seller won $1 in damages
- Deal terminated
 Holly
was to merge with Frontier Oil
- Merger agreement was executed in March 2003
- Holly shareholders were to receive FTO stock and
cash, together with a CVR tied to specific litigation recoveries
- $450 million total value
-
HOC stock chart
FTO stock chart
- Brought toxic tort suit over extraction of oil
on campus of Beverly Hills High School (90210)
- Frontier press release
6.10.03
- Holly became aware of threat of this litigation
during later stages of merger negotiation
- Frontier convinced Holly that Frontier
wasn't exposed to liabilities of its subsidiary
- MAE clause was revised for Holly's benefit to add
a
"would not reasonably be expected to have" standard
and to add "prospects" to the MAE litany
- Brockovich litigation was expressly acknowledged
to be "threatened litigation" subject to the MAE clause
- Brockovich litigation revealed that Frontier had
guaranteed subsidiary's performance and indemnified school district
- Old documents were uncovered in litigation
which weren't reviewed in pre-signing M&A diligence
- Litigation exposure increased as more plaintiffs
joined suit
- Post-signing, Wall Street put a much higher value
on key Holly assets
- Could have added $100 million to Holly's value
- Frontier would assert this motivated Holly to
renege
- Gave Frontier an incentive to seek contractual
damages rather than contractual break-up fee
- As value of Holly was now higher
Contractual
outs
- Court identified three exit strategies in merger
agreement
- Inaccurate representations, including MAE clause
- Fiduciary out, triggering break-up fee ($15 mm)
- Mutual termination
- Shareholders could also have voted deal down
- Proxy statement was never sent to shareholders
Initially,
both companies acted as if merger was on
- Holly didn't bid for a refinery because of
antitrust issues from its prospective combination with Frontier
- Frontier borrowed $220 million to fund cash
portion
of merger payout
- In June 2003 Holly board rejected invoking MAE clause
- Instead Board instructed management to
"raise concerns with Frontier"
- "clear that, ... , Holly likely would not proceed
to closing on the Merger Agreement in accordance with its express terms"
- "not to suggest that Holly had repudiated the
Merger Agreement ... instead, it still had multiple options available to it"
- Parties unsuccessfully discussed alternatives
- Put proposal
- Canoe proposal
- July 29 proposal
- Denver tentative agreement
- All-cash counter proposal
- Frontier's lawyers then prepared a script for a
telephone call
with Holly management 8.19.03
- Crafted by Frontier lawyers to get Holly
management to make statements to support claim that Holly repudiated
- Frontier asserted that such statements were made
- Frontier sued claiming repudiation
8.20.03
- Holly sends MAE notice 8.21.03
- Frontier abandons taking steps to complete merger
- Holly counterclaims
- Disputed Frontier's characterization of 8.19.03
call
- Claimed wrongful repudiation
- Claimed breach of representations re:
guarantee of sub's obligations
Delaware
Chancery decision (2005)
SEC_CODE_REF_0090001192884
- Holly didn't repudiate merger agreement
- Scripted 8.19.03 call was "a somewhat strange
(perhaps calculated) way" to demand adequate assurances
- 8.19.03 call wasn't "clear and unequivocal"
- Holly didn't breach covenant of good faith
- Was instead exploring its options until Frontier
sued
- "Frontier relieved Hollys directors of that
burden"
- Frontier wrongfully repudiated
- By abandoning merger and bringing suit for
damages
- But Holly suffered no actual damages from this
breach
- Entitled to an award of nominal damages of $1.00
- Court suggests different outcomes were possible
- If Frontier had accepted the "all-cash proposal"
(n 202)
- If Frontier had straightforwardly sought
adequate assurances (n 203)
- Brockovich
litigation wasn't an MAE
- Holly didn't meet its burden of proof
- Despite court's acknowledging that litigation
could prove catastrophic
- Exposure was too speculative, based on Holly's
evidence
- Costs of defense, by itself, were insufficient
- Frontier's failure to disclose its
indemnification obligations
didn't violate material contracts representation
- Materiality assessed at time of signing agreement
- Material adverse effect and material
are "analytically distinct"
- Frontier not entitled to merger agreement
break-up fee
- Holly board never took formal action
to withdraw its recommendation
- Frontier didn't terminate "pursuant to §
7.4(b)"
Deal
announced 3.31.03
Agreements
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IBP v Tyson Foods (Del Ch 2001) 
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Opinion
- Buyer failed to prove that adverse
developments at IBP triggered material adverse change provision in merger
agreement
- Instead, Tyson's desire to back out was
merely
buyer's regret
- Tyson ordered to complete the $4.7
billion acquisition
- Briefs
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NorthPoint
Communications / Verizon (2000)
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Bankruptcy
trustee sues in California
- For $1 billion in actual damages, $3 billion
punitive
- Settled for $175 million
7.23.02
- Verizon had sued in Delaware for declaratory relief
- NorthPoint lawsuit funded by bondholders
- To combine their DSL businesses
- Valued at $ 1.3 billion
-
Merger Agreement
- Verizon to invest $800 million in
NorthPoint for 55% stake;
advances $150 million
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Commentary
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Surveys
(Nixon Peabody)
Summary outline -- Fried Frank (2002) Client
mailings
Articles
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Precedent Proxy Disclosures
Related Topics
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