2009 Nixon Peabody MAC Survey

A Nixon Peabody study of current

negotiation trends of Material Adverse
Change clauses in M&A transactions
Contents
Methodology 2
Results 2
Charts
MAC Elements 3
MAC Elements: Miscellaneous 5
MAC Exceptions: Change in Markets 6
MAC Exceptions: Legal Developments 7
MAC Exceptions: Hostilities,
Calamities, and Acts of God 8
MAC Exceptions: Miscellaneous 9
MAC Exceptions: Changes in
Ordinary Course of Business 10
MAC Exceptions: Employee Matters 10
Conclusions 9
We initiated this survey in 2000 in order to help
identify the basic elements of MAC provisions as used
by practitioners and trends in the appearance of these
elements over time. Since the first survey, this annual
exercise has undergone significant expansion in its
scope. In the over-heated seller’s market that developed
after 2000, our surveys initially showed increasingly
seller-favorable formulations with less expansive inclu-
sion language and an increasing list of exclusions. Over
the last two years we have seen some reversal of those
trends, albeit in a more splintered market that is difficult
to characterize as either buyer- or seller-friendly.
By way of explanation, a material adverse change
(“MAC”) or material adverse effect (“MAE”) provision
in an agreement generally serves two separate functions
in an acquisition agreement. In the first, the MAC
or MAE definition serves as a carve-out from various
representations and covenants, defining a threshold
for determining the scope of disclosure or compliance.
An example of this use would be: “The Company’s
contracts are in full force and effect, except as would
have a Material Adverse Effect.” The MAC provision
is also used to delineate the circumstances that, upon
their occurrence, permit a buyer to withdraw from the
transaction without penalty. This latter use is known
in common parlance as the “MAC out” and appears in
the buyer’s conditions precedent to close, i.e., “there
shall not have occurred a Material Adverse Change in
the Company.” The effects of the MAC out are then
tempered by a listing of specific events, the “MAC
exceptions,” that preclude a buyer from backing out of
a deal or renegotiating even if a MAC has occurred.
The elements of MAC clauses are generally heavily
negotiated, with sellers attempting to narrow the MAC
definitional elements and expand the exceptions, and
buyers doing the reverse.
Nixon Peabody’s Annual MAC Survey provides an analysis of MAC
clauses in publicly disclosed M&A transactions. The results generally
reflect a continuation of trends from the prior year.
Methodology
As in prior years, we surveyed agreements with transac-
tion values of $100 million or greater based on agree-
ments dated between June 1 of the prior year (2008)
and May 31 of the current year (2009). This year,
we examined 523 asset purchase, stock purchase, and
merger agreements. The surveyed transactions represent
many significant industries and range in value from
$100 million to $66.8 billion.
In selecting our 523 agreement sample, we generated
a list of deals executed between June 1, 2008, and
May 31, 2009, from publicly available information
submitted to the Securities and Exchange Commission,
and selected agreements from that list. Although this
analysis is not technically scientific, we believe that the
results are statistically representative of the marketplace
climate of M&A transactions during the period.
We also separately analyzed the top 100 deals during the
period examined. The top 100 agreements were derived
from the list of top 100 deals for 2008 and the top 25
deals for Q1 2009 announced in Mergers & Acquisitions:
The Dealmaker’s Journal, excluding those deals that
occurred during the first six months of 2008 and would
have been reported on the previous year’s survey.
Summary of results
In the agreements surveyed, the use of various MAC
definitional elements remained generally steady when
compared to last year’s survey, while there was a slight
decrease in the number of MAC exceptions included in
the agreements surveyed. Survey results confirm that,
during the survey period, the majority of MAC clauses
examined remained more “buyer-friendly” than in the
early years of the survey.
In comparison to the sampling as a whole, we have
seen that the top 100 deals generally followed the same
percentage trends of the MAC definitional elements
and had a slightly higher percentage trend in the MAC
exceptions. These findings show little deviation from
last year’s survey results.
We are hesitant to draw firm conclusions, or to seek to
identify clear cause-and-effect paths, from these results.
Many economists place the peak of the credit crisis
between June and September 2008. This year’s survey,
which covers deals from June 1, 2008, through May
31, 2009, incorporates that peak period. Along with
the credit crisis, however, has come a recessionary slow-
down in economic activity. Those two factors have had
a strong, but not necessarily consistent, effect on M&A
deal flow and structure. The credit crisis has made it
difficult for buyers to close deals, favoring the limited
number of buyers with continued access to credit
and those (including private equity funds flush with
undrawn commitments) who have been willing and
able to invest large amounts of their own funds. This
reduction in the number of eligible buyers has tended
to create a more buy-friendly environment for those still
in the market.
Nixon Peabody Annual MAC Survey 1 2
Results

At the same time, the recession has severely impacted
the operating results of many potential targets, thereby
reducing the number of attractive M&A candidates
and creating a more competitive market for those
still in play. On the whole, our experience has been
that the targets able to maintain or grow their opera-
tions generally enjoy significant bargaining power in
the current market, while those with deteriorating
results that are nonetheless forced to enter the market­
—whether because of credit problems, management
changes, or otherwise—find themselves at the mercy of
more aggressive buyers. Unfortunately, it is not always
possible to distinguish between these two situations in
analyzing the documentation of completed transactions
in our current survey.
The following table details the prevalence of the MAC
elements in our survey:

MAC Elements

MAC on validity or enforceability of agreement 1

2

3
MAC on the securities or purchased assets
6

2
MAC on prospects of the Company/Target
3

Ability of Target to continue to operate business immediately after 0

closing in substantially the same manner as immediately before closing 1

Ability of Purchaser to continue to operate business immediately after 0

closing in substantially the same manner as immediately before closing 2

0
MAC on the benefits contemplated by the agreement
1

1
Losses over a specified threshold deemed to be a MAC
1

20
MAC on Purchaser’s ability to close the deal
21

40
MAC on Seller’s ability to close the deal
38

83
MAC on the business, operations, financial condition, etc.
79
%
0 20 40 60 80 100

% of deals having element/exception % of Top 100 deals having element/exception

In conducting our review, in addition to examining the
elements of, and exclusions from, MAC definitions, we
also sought to evaluate certain uses of MAC provisions
in acquisition agreements. One example is the language
that a given event “would reasonably be expected to have
a Material Adverse Effect” on the target, as opposed to
simply stating that such event has in fact had such an
effect. This nuance is important because the “would
reasonably be expected to” formulation permits the
buyer to take into account the effects on the target that
are foreseeable but are not yet reflected on the balance
sheet or income statement. For example, notification
from a major customer that it will cease buying from the
target “would reasonably be expected to” result in a loss
of sales and resulting profits, but may not yet have had
that effect at the time of closing. The “would reasonably
be expected to” formulation showed up in 22% of the
agreements as compared to 15% in the prior year.
On the exclusion side, we found that 48% of the time,
the exclusions were limited in whole or in part to speci-
fied events that did not “disproportionately affect” the
target. This qualifier appeared in 51% of transactions
surveyed for the prior year and 69% two years ago.
This limitation is intended to ensure that the applicable
exclusions, e.g., changes in law, import restrictions,
disruptions in financial markets, apply only where the
target is caught up with the rest of its industry, but
not to let the seller off the hook if he or she is just less
nimble than its competitors.
In last year’s survey, we addressed Delaware Chancery
Court’s decision in Hexion Specialty Chemicals, Inc. et
al. v. Huntsman Corp., C.A. No. 3841-VCL (Sept. 29,
2008). The Hexion decision, combined with other deci-
sions like the 2007 decision of the Tennessee Chancery
Court in Genesco, Inc. v. The Finish Line, Inc., et al., C.A.
No. 07-2137-II (September 21, 2007), have brought
into question the traditional approach to the MAC out.
The Hexion court confirmed that no Delaware court has
ever found a MAC to have occurred in the context of a
merger agreement; placed the burden of proof on the
buyer asserting the MAC to excuse its performance; and
interpreted the traditional MAC as requiring a material
distortion measured by the target’s past performance,
which is likely to cause substantial long-term effects on
the earning power of the target. As a result of Hexion,
we would expect the traditional MAC out to be supple-
mented or replaced over time by more specific closing
conditions, such as earnings targets, sales levels, or lack of
customer defections and other “quantifiable” terms that
may unequivocally excuse performance. However, the
effects of the September 2008 Hexion decision do not yet
appear to be reflected in our 2009 survey results.

“As a result of Hexion, we would expect the traditional MAC out

to be supplemented or replaced over time by more specific closing
conditions, such as earnings targets, sales levels, or lack of customer
defections and other ‘quantifiable’ terms that may unequivocally
excuse performance.”

Nixon Peabody Annual MAC Survey 3 4

 Lastly, we observed that leaving the term “material
adverse change” undefined is increasingly rare, with 3%
of the surveyed deals not defining what constituted a
MAC, as opposed to 7% on last year’s survey.

The following table details the findings in our survey

in respect of the miscellaneous definitional matters
described above:

MAC Elements: Miscellaneous

13
No MAC out
13

46
Disproportionate Effects Language
48

3
MAC out with no definition
of “MAE” or “MAC” 3

20
Reasonable expectation of event to have
a material adverse effect/change 22

%
0 20 40 60 80 100

% of deals having element/exception % of Top 100 deals having element/exception

Exceptions relating to change in markets
There were some changes from 2008 to 2009 in the
prevalence of MAC exceptions for market conditions
surveyed. MAC exceptions for “changes in exchange
rates” and “changes in interest rates” continued to increase
in frequency, perhaps due to concerns surrounding a
further weakening of the U.S. dollar. In other MAC
exceptions relating to change in markets, of the total deals
examined, 41% included a MAC exception for “changes
in trading price or trading volume of Company’s stock”
as an exception, as opposed to 33% on our previous
year’s survey. The MAC exception of “change in securi-
ties markets” remained unchanged at 45% of all deals
surveyed. The inclusion of other exceptions (“changes in
general conditions of the specific industry” and “changes
in the economy or business in general”) declined in M&A
transactions for the period surveyed.
The following table details the prevalence of MAC
exceptions found in our survey that relate to “Changes
in Markets”:

MAC Exceptions: Change in Markets

32
Change in exchange rates
25

33
Change in interest rates
26

Change in trading price or trading 54

volume of Company’s stock 41

53
Change in securities markets
45

Change in general conditions of 65

the specific industry 57

Change in the economy or 73

business in general 65
%
0 20 40 60 80 100

% of deals having element/exception % of Top 100 deals having element/exception

Nixon Peabody Annual MAC Survey 5 6

Results

Exceptions relating to changes in legal developments

For the period surveyed, the results relating to the
exceptions concerning changes in legal developments
did not deviate significantly from last year’s results.
The MAC exception for “changes in applicable taxes/
tax law” remained in 3% of the deals surveyed, while
the exception for “changes in interpretation of laws by
courts or government entities” increased a mere 6%,
from 27% to 33%. The MAC exception for “changes
in laws or regulations” seems to have reached its peak
in our prior year’s survey. This MAC exception steadily
grew from 42% to 59% two years ago and to 63% last
year. This year, the MAC exception for “changes in laws
and regulations” stands at 60% of the deals surveyed.
The exception for “changes resulting from bankruptcy
or actions of a bankruptcy court” appeared in only 1%
of the agreements in this year’s survey, down from 3%
in the previous year. Results tend to indicate that sellers
are unwilling to take risks with respect to changes in
law or regulations, successfully insisting that buyers
make themselves comfortable with the legal landscape
in which the target company operates.
The following table details the prevalence of MAC
exceptions found in our survey that relate to “Changes
in Legal Developments”:

MAC Exceptions: Legal Developments

6
Change in applicable taxes/tax law
3

Changes resulting from bankruptcy or 3

actions of a bankruptcy court
1

43
Change in interpretation of laws
by courts or govt. entities 33

67
Change in laws or regulations
60

%
0 20 40 60 80 100

% of deals having element/exception % of Top 100 deals having element/exception

Exceptions for changes resulting from terrorism, acts of war,
changes in political conditions, and national and international
calamities remain unchanged
In this year’s survey, we notice a decline in MAC excep-
tions for “changes resulting from terrorism, acts of war,
changes in political conditions, and international calami-
ties.” For example, the frequency of MAC exceptions for
changes due to acts of terrorism in the United States or
abroad fell 4%, from 59% of last year’s surveyed agree-
ments to 55% in this year’s survey period. Similarly,
the number of agreements that contained exceptions
for changes due to “acts of war or major hostilities” and
“natural calamities” fell 3% and 6%, respectively, to 55%
for “acts of war or major hostilities” and 6% for “natural
calamities.” This may reflect an increased comfort level
with these risks on the part of buyers and sellers in the
absence of significant economic consequences from either
terrorism or foreign war since September 2001.
In addition, this year’s survey showed marked decreases
in all exceptions for “acts of God,” “change in political
conditions,” and “international calamity directly or
indirectly involving the U.S.” For the “acts of God”
MAC Exceptions: Hostilities, Calamities, and Acts of God
International calamity directly or
indirectly involving U.S.
National calamity
Change in political conditions
Acts of God
Acts of terrorism
Acts of war or major hostilities
0 20
% of deals having element/exception
MAC exception, our survey showed a 6% decrease in
the number of agreements containing such exception,
from 25% in our prior year’s survey to 19% in this
year’s survey. The exception for “change in political
conditions” stands at 25%, ten percent lower than in
our previous survey, and the exception for “interna-
tional calamity directly or indirectly involving the U.S.”
decreased 3% from 7% in our prior year’s survey to 4%
in this year’s survey. The decreases in the exceptions
for “acts of God” and “international calamity directly
or indirectly involving the U.S.” may be explained by
the absence of marked natural disasters occurring in
the U.S. and abroad as compared to our prior period’s
survey, which seemed to have factored in the occur-
rence of events such as the Southeast Asian tsunami and
Hurricane Katrina.
The following table details the prevalence of MAC
exceptions found in our survey that relate to “Changes
arising from Hostilities, Calamities, and Acts of God”:
2
4
6
6
33
28
20
19
57
55
61
57
%
40 60 80 100
% of Top 100 deals having element/exception
Nixon Peabody Annual MAC Survey 7 8
Conclusions

Conclusions and notable comparisons with the top 100

Just as in last year’s survey, MAC exceptions appeared
with slightly greater frequency within the top 100 deals
in comparison to total deals surveyed. The exceptions
making up these categories generally appeared about
10–14% more often in the top 100 deals in comparison
to the total deals surveyed. Notable examples of this
are MAC exceptions relating to the general categories
including “changes in interpretation of laws by courts
or government entities,” “change in trading price or
trading volume of Company’s stock,” and “change in
GAAP.” This may indicate that sellers have slightly
greater negotiating power in larger transactions or may
reflect a greater impact of accounting and regulatory
changes on larger public companies. On the other hand,
within the top 100 deal category, most exceptions to
MAC showed a decline from the prior year.

The following shows the remaining results of our survey:

MAC Exceptions: Miscellaneous

Litigation resulting from any law relating to the 15

agreement or the transactions contemplated 11

Any action required to be taken under any law or 9

any existing contract by which the target is bound 9

32
Failure by the target to meet revenue or earnings projections
28

68
Changes in GAAP
54

Changes caused by the taking of any action required

28
or permitted or in any way resulting from
33
or arising in connection with the agreement

4
Expenses incurred in connection with transaction
4

44
Effect of announcement of transaction
42

Developments arising from any facts that were 6

expressly disclosed to the parent/public 7
%
0 20 40 60 80 100

% of deals having element/exception % of Top 100 deals having element/exception

MAC Exceptions: Changes in Ordinary Course of Business

3
Delay or cancellation of orders
for services or products 2

1
Adverse effect resulting in
seasonal reduction in revenues 1

Commencement of a proceeding 0
in bankruptcy with respect to a
material customer 0

8
Reduction of customers or
decline In business 7

%
0 20 40 60 80 100
% of deals having element/exception % of Top 100 deals having element/exception

MAC Exceptions: Employee Matters

Changes in the target’s 1

relationship with any labor
organizations/unions 2

3
Lay-offs
2

10
Employee attrition
6

%
0 20 40 60 80 100

% of deals having element/exception % of Top 100 deals having element/exception

Nixon Peabody Annual MAC Survey 9 10

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For additional information about

our MAC Survey, please contact:
Phillip B. Taub, Partner
Department Head, Business and Finance Department
617-345-1165, PTaub@nixonpeabody.com 

James L. Kelly, Partner

Team Leader of Leveraged Buyouts
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Private Equity Group
212-940-3015, RBerg@nixonpeabody.com

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