Page 52 - M & A Disputes

 Regulatory or statutory changes

 Lawsuits

 Natural disasters

At the same time, some courts have determined that inchoate risks to a target’s future business, as op-
posed to prior events, are not a basis for finding a MAC. For example, in S.C. Johnson & Son, Inc. v.
Dowbrands, Inc., 167 F. Supp. 2d 657 (D. Del. 2001), the court held that a lawsuit, which threatened to
invalidate one of the target’s patents, did not constitute a MAC. Similarly, in Frontier Oil Corp. v. Holly
Corp., No. Civ. A. 20502, 2005 WL 1039027 (Del. Ch. Apr. 29, 2005), an inchoate risk even of major
litigation, without evidence showing the certainty of an unfavorable decision, was deemed too specula-
tive to constitute a MAC. Moreover, a single triggering event is not required to invoke a MAC clause.

The practitioner should analyze the significance of the event’s impact on the target by comparing actual
earning streams and revised forward-looking normalized earnings streams as a result of the event. The
practitioner will compare these actual and prospective earnings streams with historical earnings and pro-
jected earnings based on the parties’ expectations at the time the agreement was signed.

The practitioner will have to consult the wording of the agreement to garner a basis for concluding
whether the event’s impact on the target qualifies as a material impact. For example, parties may include
a definition of materiality in the acquisition agreement or thresholds for what will be considered in cal-
culating postclosing working capital and other adjustments. Such definitions of thresholds may be in-
structive regarding what the parties deem to be material. Absent any specific definition of materiality in
the agreement, the practitioner may consider the accounting literature and whether the event would have
an impact that would influence a buyer in making a judgment or decision.

Duration of the Event

The adverse event should have an impact on the target over a commercially reasonable period into the
future, which, as Vice Chancellor Strine stated in his 2001 opinion in In re IBP, "one would think would
be measured in years rather than months."

The practitioner should analyze the duration of the event by comparing the forecasted benefit stream re-
flective of the adverse event with the forecasted benefit stream prior to the event being known or know-
able.

For the durational significance test, the practitioner should analyze whether the long-term earnings po-
tential and, thus, the duration of the event have been impacted over a substantial amount of time. Multi-
ple factors can affect the analysis regarding whether the event is durationally significant. First, as previ-
ously stated, the investment strategy of the buyer may be taken into account. If the buyer is a short-term
speculator, a shorter-duration event may be sufficient to demonstrate that a MAC has occurred. Howev-
er, if the buyer is a long-term strategic investor, a longer-duration event may be required in order to
show that a MAC has occurred. Second, if a seller’s business is normally a cyclical business, this will
greatly affect the MAC analysis. For example, if the seller’s business tends to be slower in the winter
and pick up during the summer months, any alleged MAC based on a downturn in the winter will likely
have to be shown to be materially different from any winter slowdown suffered by the seller’s business
in the past. Third, all MAC analyses will be dependent on the cure date set forth in the merger agree-
ment. If the seller’s business suffers a material downturn, but the seller is able to demonstrate that the

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