Pardon the interruption between my posts here. I’ve been working my tail off during this pandemic— teaching, writing, cooking, cleaning, and caring for my kiddos. While the coronavirus (and subsequent quarantine) have kept me home, I’ve kept myself quite busy.
However, I haven’t forgotten about my readers. The following is a portion of a piece that I’ve been working on with my amazing colleague Charlie Korsmo, now posted on Columbia Law School’s Blue Sky Blog.
I first have to tell you a few words about Charlie. In addition to his expertise in corporate law, Charlie was a child actor who worked with the likes of Robin Williams, Dustin Hoffman, Warren Beatty and Madonna—he co-starred in “Hook” and “Dick Tracy.”
Now, he’s stuck with me.
Like you, we’ve been practicing social distancing for the past few weeks. But, we’re not the only ones trying to distance ourselves from others. Many acquirers, individuals and entities, are currently trying to distance themselves from deals that they entered into before this pandemic. They are experiencing world-historic levels of buyer’s remorse.
Imagine buying a big-screen TV at full price in March only to see it on sale for 50% off in April. Now imagine agreeing to pay $6 million for a chain of yoga studios just before the government shuts down exercise classes to slow the spread of a highly infectious disease. Or agreeing to pay billions for the stock of a “shared workplace” company just before that same infectious disease makes the idea of a shared workplace seem about as appealing as the idea of shared dentures.
So, as you can imagine, many acquirers who agreed to merger deals in the months prior to the ongoing coronavirus pandemic are now faced with new and uncertain economic realities. Some are probably looking around desperately for a way out of the deals they struck in more optimistic times.
So far, the biggest news has been SoftBank withdrawing its $3 billion tender offer for shares in WeWork, whose problems long pre-date the current virus crisis. But an avalanche of broken deals may be coming, with the first of them already starting to show up in the Delaware courts.
Though not at issue in the WeWork debacle, one obstacle acquirers are likely to face is the Material Adverse Change—or “MAC”—clause (sometimes also known as the Material Adverse Effect (MAE) clause). MAC clauses of one form or another are found in almost every merger agreement, allowing the buyer to walk away from the deal if, prior to closing, the target company suffers a “material adverse change.”
What constitutes a material adverse change? Well, it depends.
There is no single, agreed upon standard definition, and the parties to a merger agreement can define it any way they want. In practice, most MAC clauses don’t really define the term directly at all. Instead, they include a long list of exclusions for things that are not to be treated as MACs. What is and isn’t excluded from the definition of a MAC determines which party bears which kinds of risks.
The upshot is that MAC clauses tend to exclude “force majeure” events like natural disasters, war, terrorism, and…you guessed it: epidemics.
As you might expect, these days, some merger agreements—such as the one governing Morgan Stanley’s purchase of E*Trade—specifically exclude “the COVID-19 pandemic.” If the MAC clause excludes pandemics, it will obviously pose an obstacle to backing out of a deal on the grounds that the coronavirus pandemic constitutes a MAC.
Are buyers stuck?
I always instruct my law students to answer these questions with an “it depends” response.
In our CLS blog post, we analyze the MAC clauses at issue in the first two buyer’s remorse cases to reach the Delaware courts—Level 4 Yoga, LLC v. CorePower Yoga, LLC, and Bed Bath & Beyond, Inc. v. 1-800-Flowers.com.
Take a look here to learn more.
The short answer: It depends.