For that reason, sellers are particularly anxious to grab every advantage they can. This is borne out by a recent Nixon Peabody study that found the seller’s market of the past several years has further tilted MAC clauses in their favor. “It comes and goes, depending on whether you have a buyer’s market or a seller’s market,” says Martha M. Anderson, a partner in the law firm’s mergers-and-acquisitions practice. And the reality, says Darrell W. Crate, CFO of Affiliated Managers Group in Pride’s Crossing, Massachusetts, is that “we are in a time where it is a frothy credit market, and sellers have more power than buyers.”
To protect that advantage, sellers have increasingly wrapped themselves in “exceptions” — outlying events that the parties agree will not be considered a MAC for purposes of the contract. According to Nixon Peabody, both the number and type of exceptions in MAC clauses were significantly higher in the year ending in June 2006 than in the preceding 12 months. Among the more common were acts of war or terrorism, changes in laws or regulations, and the impact that the announcement of the deal itself has on the seller’s business. For instance, in one pending deal, the effort of a consortium led by the Royal Bank of Scotland to purchase ABN AMRO carries a clause specifically excluding any material adverse change suffered by ABN AMRO as a result of the breakup of its previous agreement to sell its subsidiary, LaSalle Bank, to Bank of America.
Sellers have also been helped by the courts, which have made it clear that there is an increasing burden on buyers to enumerate exactly what will be considered material adverse changes. In 2005, for example, Holly Corp.’s effort to invoke the MAC clause was denied by the Delaware Chancery Court because the company didn’t specifically enumerate that a specific event (in this case, initiation of a “toxic tort” case against target Frontier Oil by famed consumer activist Erin Brockovich) would constitute an adverse change in the target’s status. (Holly was allowed to escape the merger, but on grounds unrelated to the MAC.)
In another case, a Massachusetts court rejected a shareholder lawsuit in 2000 challenging Excell Data Corp.’s acquisition of Cambridge Technology Partners. Excell shareholders claimed that Cambridge management had falsely claimed it was on track to meet analysts’ expectations in an upcoming earnings report, despite knowing it would fail to do so. The judge ruled, however, that Cambridge had not triggered the MAC clause, because “[b]y the parties’ express agreement, Cambridge’s warranties only covered the accuracy of representations about its current operations, not its future prospects.”
With the playing field so tilted toward sellers, the burden on acquisitive CFOs is significant when it comes to the MAC-clause negotiation. The CFO of the acquiring company must be closely involved in drafting the MAC clause, Anderson says, since he or she understands the seller’s operations so well. “The CFO has got to be in touch with the legal team and communicate to its members what is driving the deal,” she says, adding that they must also ensure that purchase-price adjustments, financial and tax provisions, and similar terms are accurate and workable given the manner in which the company reports its financials.