Author: Brandon Kaster
Material Adverse Effect (“MAE”) and/or Material Adverse Change (“MAC”) provisions are typically included in the core purchase document in M&A transactions to allocate risk with respect to substantial events or consequences that could have a long-term and adverse impact on the target company’s business. The occurrence of a MAE or MAC often gives the buyer in the transaction the ability to terminate the deal or serves as a vector for a potential indemnity claim if the target company knew, or should have known, that a particular MAE and/or MAC was likely to take place.
Though the impact of COVID-19 is business specific, the consequences of the pandemic should be considered with respect to how parties establish the contours of what constitutes a MAE and/or MAC. Buyers and sellers should endeavor to negotiate explicit MAE/MAC language, including whether the MAE/MAC definition specifically refers to COVID-19 or, more generally, pandemics, epidemics, disease outbreaks and/or health emergencies.
Our team has seen a number of recent purchase agreements specifically exclude the impact of COVID-19 from the definition of MAE or MAC. Alternatively, some agreements have approached this topic by establishing a quantitative level of financial or operational impact that can traced to COVID-19 before the MAE/MAC concept is triggered (for example, if revenues fall below a certain amount or the target company loses a certain number of customers).
Whether excluding COVID-19 completely or using a more nuanced approach, tackling this issue head-on will protect against unexpected results and reduce the likelihood of a dispute between the parties later on.
The Corporate Group at Levenfeld Pearlstein can advise you on the nuances of MAE and MAC provisions, as well as other M&A aspects. Click here for additional information about tips and considerations for getting a deal over the finish line during the COVID-19 pandemic. To learn more about ongoing legal developments, follow along with our Daily 3.