{"id":15901,"date":"2020-05-07T16:07:26","date_gmt":"2020-05-07T14:07:26","guid":{"rendered":"https:\/\/www.legalmondo.com\/?p=15901"},"modified":"2020-05-07T16:07:26","modified_gmt":"2020-05-07T14:07:26","slug":"covid-19-usa-mac-mae-clauses-ma-agreements","status":"publish","type":"post","link":"https:\/\/www.legalmondo.com\/fr\/2020\/05\/covid-19-usa-mac-mae-clauses-ma-agreements\/","title":{"rendered":"COVID-19 | USA &#8211; MAC\/MAE Clauses in M&#038;A Agreements"},"content":{"rendered":"<p>The COVID-19 pandemic\u2019s dramatic disruption of the legal and business landscape has included a steep drop in overall M&amp;A activity in Q1 2020.\u00a0 Much of this decrease has been due to decreased target valuations, tighter access by buyers to liquidity, and perhaps above all underlying uncertainty as to the crisis\u2019s duration.<\/p>\n<p>For pending transactions, whether the buyer can walk away from the deal (or seek a purchase price reduction) by invoking a material adverse change (MAC) or material adverse effect (MAE) clause \u2013 or another clause in the purchase agreement \u2013 due to COVID-19 has become a question of increasing relevance.\u00a0 MAC\/MAE clauses typically allow a buyer to terminate an acquisition agreement if a MAC or MAE occurs between signing and closing.<\/p>\n<p>Actual litigated cases in this area have been few and far between, as under longstanding Delaware case law<a href=\"#_ftn1\" name=\"_ftnref1\">[1]<\/a>, buyer has the burden of proving MAC or MAE, irrespective of who initiates the lawsuit.\u00a0 And the standard of proof is high \u2013 a buyer must show that the effects of the intervening event are sufficiently large and long lasting as compared to an equivalent period of the prior year.\u00a0 A short-term or immaterial deviation will not suffice.\u00a0 In fact, Delaware courts have only once found a MAC, in the December 2018 case <em>Akorn, Inc. v. Fresenius Kabi AG<\/em>.<\/p>\n<p>And yet, since the onset of the COVID-19 pandemic, numerous widely reported COVID-19 related M&amp;A litigations have been initiated with the Delaware Court of Chancery.\u00a0 These include:<\/p>\n<ul>\n<li>Bed, Bath &amp; Beyond suing 1-800-Flowers (Del. Ch. April 1, 2020) to complete its acquisition of Perosnalizationmall.com (purchaser sought an extension in closing, without citing specifically the contractual basis for the request);<\/li>\n<li>Level 4 Yoga, franchisee of CorePower Yoga, suing CorePower Yoga (Del. Ch. Apr 2, 2020) to compel CorePower Yoga to purchase of Level 4 Yoga studios (after CorePower Yoga took the position that studio closings resulting from COVID-19 stay-at-home orders violated the ordinary course covenant);<\/li>\n<li>Oberman, Tivoli &amp; Pickert suing Cast &amp; Crew (Del. Ch. Apr 6, 2020), an industry competitor, to complete its purchase of Oberman\u2019s subsidiary (Cast &amp; Crew maintained it was not obligated to close based on alleged insufficiencies in financial data provided in diligence);<\/li>\n<li>SP VS Buyer LP v. L Brands, Inc. (Del. Ch. Apr 22, 2020), in which buyer sought a declaratory judgment in its favor on termination); and<\/li>\n<li>L Brands, Inc. v. SP VS Buyer L.P., Sycamore Partners III, L.P., and Sycamore Partners III-A, L.P (Del. Ch. Apr 23), in which seller instead seeks declaratory judgment in its favor on buyer obligation to close.<\/li>\n<\/ul>\n<p>Such cases, typically signed up at an early stage of the pandemic, are likely to increase.\u00a0 Delaware M&amp;A-MAC-related jurisprudence suggests that buyers seeking to cite MAC in asserting their positions should expect an uphill fight, given buyer\u2019s high burden of proof.\u00a0 Indeed, Delaware courts\u2019 sole finding of a MAC in <em>Akorn <\/em>was based on rather extreme facts: target\u2019s (Akorn\u2019s) business deteriorated significantly (40% and 20% drops in profit and equity value, respectively), measured over a full year.\u00a0 And quite material to the Court\u2019s decision was the likely devastating effect on Akorn\u2019s business resulting from Akorn\u2019s deceptive conduct <em>vis-\u00e0-vis<\/em> the FDA.<\/p>\n<p>By contrast, cases before and after <em>Akorn<\/em>, courts have not found a MAC\/MAE, including in the 2019 case <em>Channel Medsystems, Inc. v. Bos. Sci. Corp.<\/em>\u00a0 There, Boston Scientific Corporation (BSC) agreed to purchase Channel Medsystems, Inc., an early stage medical device company.\u00a0 The sale was conditioned on Channel receiving FDA approval for its sole product, Cerene. In late December 2017, Channel discovered that falsified information from reports by its Vice President of Quality (as part of a scheme to steal over $2 million from Channel) was included in Channel\u2019s FDA submissions.\u00a0 BSC terminated the merger agreement in May 2018, asserting that Channel\u2019s false representations and warranties constituted a MAC.<\/p>\n<p>The court disagreed.\u00a0 While <em>Channel<\/em> and <em>Akron <\/em>both involved a fraud element, Chanel successfully resubmitted its FDA application, such that the fraudulent behavior \u2013 the court found \u2013 would not cause the FDA to reject the Cerene device.\u00a0 BSC also failed to show sufficiently large or long-lasting effects on Channel\u2019s financial position.\u00a0 <em>Channel<\/em> thus reaffirmed the high bar under pre-<em>Akron<\/em> Delaware jurisprudence for courts to find a MAC\/MAE (<em>See e.g.<\/em> <em>In re IBP, Inc. S\u2019holders Litig.<\/em>, 789 A.2d 14 (Del. Ch. 2001); <em>Frontier Oil Corp. v. Holly Corp.<\/em>, 2005 WL 1039027 (Del. Ch. Apr. 29, 2005); <em>Hexion Specialty Chemicals v. Huntsman Corp.<\/em>, 965 A.2d 715 (Del. Ch. 2008)).<\/p>\n<p>Applied to COVID-19, buyers may have challenges in invoking MAC\/MAE clauses under their purchase agreements.<\/p>\n<p>First, it may simply be premature at this juncture for a buyer to show the type of longer-term effects that have been required under Delaware jurisprudence.\u00a0 The long-term effects of COVID-19 itself are unclear.\u00a0 Of course, as weeks turn into months and longer, this may change.<\/p>\n<p>A second challenge is certain carve-outs typically included in MAC\/MAE clauses.\u00a0 Notably, it is typical for these clauses to include exceptions for general economic and financial conditions generally affecting a target\u2019s industry, unless a buyer can demonstrate that they have disproportionately affected the target.<\/p>\n<p>A buyer may be able to point to other clauses in a purchase agreement in seeking to walk away from the deal.\u00a0 Of note is the ordinary course covenant that applies to the period between signing and closing.\u00a0 By definition, most targets are unable to carry out business during the COVID-19 crisis consistent with past practice.\u00a0 It is unclear whether courts will allow for a literal reading of these clauses, or interpret them taking into account the broader risk allocation regime as evidenced by the MAC or MAE clause in the agreement, and in doing so reject a buyer\u2019s position.<\/p>\n<p>For unsigned deals, there may be some early lessons for practitioners as they prepare draft purchase agreements.\u00a0 On buyer walk-away rights, buyers will want to ensure that the MAE\/MAC definition includes express reference to \u201cpandemics\u201d and \u201cepidemics\u201d, if not to \u201cCOVID-19\u201d itself.\u00a0 Conversely, Sellers may wish to seek to loosen ordinary course covenant language, such as by including express exceptions for actions required by the MAC or MAE and otherwise ensure that they comply with all obligations under their control.\u00a0 Buyers will also want to pay close attention to how COVID-19 affects other aspects of the purchase agreement, including seeking more robust representations and warranties on the impact of COVID-19 on the target\u2019s business.<\/p>\n<p>&nbsp;<\/p>\n<p><a href=\"#_ftnref1\" name=\"_ftn1\">[1]<\/a> Although the discussion of this based Delaware law, caselaw in other U.S. jurisdictions often is consistent Delaware. <em>\u00a0<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"<p>The COVID-19 pandemic\u2019s dramatic disruption of the legal and business landscape has included a steep drop in overall M&amp;A activity in Q1 2020.\u00a0 Much of this decrease has been due to decreased target valuations, tighter access by buyers to liquidity, and perhaps above all underlying uncertainty as to the crisis\u2019s duration. For pending transactions, whether [&hellip;]<\/p>\n","protected":false},"author":15,"featured_media":15902,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[484,252],"tags":[1424],"class_list":["post-15901","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-ma","category-litigation","tag-usa"],"acf":[],"_links":{"self":[{"href":"https:\/\/www.legalmondo.com\/fr\/wp-json\/wp\/v2\/posts\/15901","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.legalmondo.com\/fr\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.legalmondo.com\/fr\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.legalmondo.com\/fr\/wp-json\/wp\/v2\/users\/15"}],"replies":[{"embeddable":true,"href":"https:\/\/www.legalmondo.com\/fr\/wp-json\/wp\/v2\/comments?post=15901"}],"version-history":[{"count":3,"href":"https:\/\/www.legalmondo.com\/fr\/wp-json\/wp\/v2\/posts\/15901\/revisions"}],"predecessor-version":[{"id":15912,"href":"https:\/\/www.legalmondo.com\/fr\/wp-json\/wp\/v2\/posts\/15901\/revisions\/15912"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.legalmondo.com\/fr\/wp-json\/wp\/v2\/media\/15902"}],"wp:attachment":[{"href":"https:\/\/www.legalmondo.com\/fr\/wp-json\/wp\/v2\/media?parent=15901"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.legalmondo.com\/fr\/wp-json\/wp\/v2\/categories?post=15901"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.legalmondo.com\/fr\/wp-json\/wp\/v2\/tags?post=15901"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}