Dykema On Demand
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Featured ArticleMAC Clauses Get SpecificWith M&A deals growing larger every year, buyers are negotiating specific contingencies and thresholds in their buyout agreements. As multi-billion dollar merger and acquisition (M&A) deals become increasingly common, the stakes are rising for both buyers and sellers. In October 2007, private-equity firms Kohlberg Kravis Roberts (KKR) and Texas Pacific Group set a new leveraged-buyout record, acquiring utility company TXU for $45 billion in equity and debt. In the final weeks before the deal closed, the buyers reportedly considered paying a $1 billion breakup fee to walk away from the deal. With such sums of money on the line, buyers in M&A deals are looking more closely at the terms of buyout agreements—especially material adverse change (MAC) clauses intended to provide a back door out in case something goes wrong before the deal closes. “The courts have set high standards as to what will or won’t constitute a material adverse change,” said Dykema attorney Delisa Russell in a Dykema on Demand Podcast. “It’s very difficult for a buyer to use a boilerplate MAC clause as protection.” To achieve greater flexibility to cancel or renegotiate M&As that go sour, buyers are learning to word MAC clauses precisely and carefully. Setting Benchmarks Buyers in M&A transactions traditionally have used MAC clauses to define negative events or actions that allow the buyer to walk away or renegotiate the deal without incurring a breakup penalty. But courts impose limits on how far buyers may stretch the definition of “materially and adversely.” Most notably, in 2001 the Delaware Chancery Court ruled in IBP Inc. v Tyson Foods Inc. that a two-quarter decline in financial performance did not represent a material adverse change. Standard MAC-clause language falls short when buyers seek to back out of a deal because of disappointing profits, market conditions or changing regulations. “Even acts of terrorism or war generally will not allow the buyer to back out of an agreement,” Russell said. “A buyer can’t simply rely on a boilerplate MAC clause.” Recent cases illustrate the consequences of inattention to MAC terms; buyers sometimes pay handsomely to get out of bad deals (See “Costly Breakups.”). To avoid such situations, Russell advises negotiating specific terms addressing foreseen events. Buyers can carve out certain regulatory or legislative events that might change their assessments of the target company’s value, or they can set detailed financial benchmarks. “The agreement can include a monetary threshold,” Russell said. “The parties can agree on a threshold, applied to earnings, revenues or any other monetary issue, and anything beyond that threshold would be a material adverse change.” Such thresholds can even apply to conditions outside the company. For example, private equity firms Silver Lake Partners and ValueAct Capital conditioned their buyout of software company Acxiom on favorable debt markets. When they terminated the deal in early October, they cited the agreement’s terms and paid a reduced breakup fee. “The parties need to find common ground in trying to determine sufficient closing conditions and carve-outs,” Russell says. “The more specific the buyer can be, the better positioned it will be if it comes down to litigation or the need to renegotiate.” For more information, please contact Delisa Russell at drussell@dykema.com. |
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