Page 53 - M & A Disputes

downturn will be cured by the cure date in the merger agreement, it is unlikely that a court will find that
a MAC event has occurred.

Disproportional Impact Relative to the Industry

Depending on the wording of the MAC clause, the practitioner may need to consider whether the ad-
verse event had a disproportionate impact on the target company compared with the target industry.

To determine the impact relative to the industry, the practitioner should first assess the potential impact
of the adverse event on other companies in the target industry by analyzing various performance metrics
(for example, revenue growth, profitability, asset turnover, and so on). The practitioner will compare the
target performance metrics with the performance of other companies within the industry (see Hexion).
Careful consideration should be given to defining the relevant industry. Practitioners may refer to Stand-
ard Industrial Classification codes; direct competitors in marketing-related documents; and valuation
analyses used in determining the deal price, including, for example, comparable companies in defining
the industry.

The practitioner should then analyze whether the impact relative to the industry is disproportional. De-
pending on the specific facts and circumstances, proving a disproportionate impact on the target may be
easier in some instances than others. For example, when a material change in the earnings of a company
can be linked to particular management decisions, it is more likely to be a target-specific event rather
than an industry-wide trend.

Unknown to the Party Seeking to Terminate the Deal

To invoke the MAC clause, the adverse event ordinarily should occur within the contractually defined
period — usually beginning at the signing of the merger agreement. Events that predate the merger
agreement would likely be considered as factors in the parties’ decision making. However, the buyer
may assert that it was unaware of presigning events and may seek to avoid the merger agreement by al-
leging fraud, material misrepresentation, or mistake.

As previously discussed, the timing of when the MAC allegedly occurred is an important consideration.
If the adverse event occurred prior to the parties entering into the agreement, a MAC is difficult to
prove, short of material representation or fraud on the part of the seller. The practitioner should consider
whether

 the adverse event occurred after the signing of the agreement but prior to the closing, or

 the adverse event occurred before the signing of the merger agreement, and the seller did not in-
form the buyer.

The latter instance frequently results in allegations of fraud claims set forth by the buyer. The buyer may
have little else to prove beyond the fraud and its adverse impact on the target in order to successfully in-
voke the MAC clause. The practitioner is typically engaged in these situations to quantify damages or
perform analyses to calculate the overpayment caused by seller’s fraud; however, the practitioner may
provide assistance in obtaining and evaluating evidence surrounding the fraud claims, as well.

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