Page 51 - M & A Disputes

take into account the strategic expectations of the buyer when determining whether a MAC occurred.
For example, if the buyer was a short-term speculator, a court may accept a shorter period of impact as
evidence of a MAC, in comparison with a situation in which a long-term strategic buyer invokes a
MAC.

Analyzing a MAC

To invoke the MAC clause, the buyer will need to demonstrate that both a material downturn was suf-
fered by the target, and the material downturn falls within the scope of the merger agreement MAC defi-
nition. If only one (or neither) of these conditions can be demonstrated, then the trier of fact is likely to
rule that the buyer must consummate the transaction.

To determine whether a given adverse change constitutes a MAC, courts generally point to four consid-
erations, namely the following:

 The significance of the event’s impact on the target

 The duration of the event

 Whether the event had a disproportionate impact on the company compared with the rest of the
industry

 Whether the party seeking to avoid the transaction knew of the event prior to entering the merger
agreement

Depending on the specific wording of the MAC clause, the buyer will likely need to address all four fac-
tors in order to assess whether a MAC occurred. Buyers and sellers alike often engage a range of practi-
tioners (such as Certified in Financial Forensics [CFFs], Accredited in Business Valuations [ABVs],
economists, or industry experts) to assist in the analysis of these four factors. More than one practitioner
or industry expert may be needed to address the four factors, which are discussed in greater detail subse-
quently. For example, in the HexionSpec. Chemicals, Inc. v. Huntsman Corp., 965 A.2d 715, 742 (Del.
Ch. 2008), decision, earnings before interest, tax, depreciation, and amortization (EBITDA) projections,
along with the appropriate periods for comparing earnings, were the subject of expert testimony in as-
sessing the considerations previously noted.

At least one other court has looked to a testifying practitioner’s industry, as well as academic experi-
ence, in weighing the impact of the practitioner’s opinions (see Genesco Inc. v. The Finish Line, Inc.,
slip op. at 32 [Tenn. Ch. Dec. 27, 2007]). Also, the court in In re IBP, Inc., Shareholders Litigation, 789
A.2d 14, 70 (Del. Ch. 2001), reviewed analyses from market experts, such as independent market ana-
lysts and the buyer’s financial consultant for the deal, in coming to its decision.

The Significance of the Event’s Impact on the Target Company

Both the party asserting the MAC (typically the buyer) and the party defending against the MAC should
analyze whether the adverse event had or will have a material impact on the target. A common adverse
event is a downturn in the operations of the target, resulting in impaired profitability relative to historical
or expected levels. Common causes of such downturns include the following:

 Loss of a major customer

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