Despite their popularity, it is widely accepted that it
is notoriously difficult to establish that a material adverse
change (MAC) condition has been triggered.
2011 saw increasing reliance by bidders on conditions in their
deals to protect themselves from the volatile markets and uncertain
economic environment and there is no reason to think 2012 will be
any different. Among the many conditions bidders relied on, 78% of
public M&A deals announced in 2011 included a condition that a
material adverse change (MAC) did not occur in
respect of the target or its business. i
Despite their popularity, it is widely accepted that it is
notoriously difficult to establish that a MAC condition has been
triggered. Various authorities both here, in the UK and the US have
established that it is only significant events which have a
material and sustained effect on the target that can give rise to a
MAC. While those circumstances are rare, they do happen and there
has been a recent example in the US.
Procter & Gamble had agreed to sell its Pringles brand to
Diamond Foods, in return for Diamond Foods' scrip. Given it was
a scrip deal, there was a MAC in respect of Diamond Foods. Before
the deal closed, Diamond Foods was forced to restate its earnings
for the past two years, leading to more than a 50% decrease in
earnings in those years as well as the current year. Diamond Foods
also puts its CEO and CFO on "administrative" leave. The
parties announced a week later that they had mutually agreed to
terminate the deal. While there was no express reference to
reliance on the MAC, the parties did state that no break fees or
other fees would be paid in connection with the termination.
There were no similar examples in Australia in 2011. In fact,
although the overwhelming majority of Australian public M&A
deals included a target MAC, less than a third of deals which
offered scrip consideration to target shareholders included a
bidder MAC. This means that in most of these deals, the target
would have had no right to terminate if the bidder found itself in
the same position as Diamond Foods.
In light of Diamond Foods, and given the uncertain economic
environment, our view is that targets will become more insistent on
a bidder MAC for recommended scrip bids, particularly where the
target allows the bidder a reciprocal target MAC.
Target MACs are increasingly being drafted in broad terms, with
the majority of target MAC triggers in 2011 including forward
looking effects, past events that become known to the bidder and
events affecting the prospects of a target. Bidders will also seek
to include material adverse change triggers with reference to
specific financial tests such as EBITDA or net assets, as most
bidders did throughout 2011 to create greater certainty around the
circumstances that will trigger a MAC.
We also expect that target Boards will seek to continue to limit
the scope of target MAC conditions even though MACs are notoriously
difficult to trigger: in 2011, almost a third of target MACs had an
exception (ie. would not be triggered) for events arising from
general changes in economic or market conditions.
The increasing focus of target boards on bid certainty in an
uncertain economic environment is resulting in a trend towards more
objective conditions. This is also being felt at a regulatory
level, with the Takeovers Panel adopting a narrower interpretation
of objective conditions in takeovers and schemes in relation to the
range of circumstances that can trigger the condition.
The UK Takeovers Panel has adopted an even harsher approach,
only permitting objective conditions which do not inappropriately
transfer risk of unknown events from the bidder to target
shareholders. Australia is still a long way from that position but
it is evident that this is becoming an issue of interest for the
Coming back to Diamond Foods, regardless of how broadly or
otherwise a MAC was drafted, it seems pretty clear that a person
seeking to rely on a MAC in those circumstances would always
succeed. The tricky question is how much less adverse circumstances
could be while still giving rise to a right to terminate.
i Clayton Utz will today release THE REAL DEAL
(2012 edition), a new Clayton Utz publication providing an
unparalleled depth of insight and analysis into public M&A deal
structures, tactics adopted by targets and acquirers, and
developments shaping the future of the Australian M&A market.
The statistics in this article are taken from THE REAL DEAL and
Clayton Utz's survey of all Australian public M&A deals
announced in 2011 with deal value over A$50 million.
Clayton Utz communications are intended to provide
commentary and general information. They should not be relied upon
as legal advice. Formal legal advice should be sought in particular
transactions or on matters of interest arising from this bulletin.
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