Material Adverse Effect - Found!

M&A lawyers (including me) have spilled an enormous amount of ink regarding what constitutes a material adverse effect, or material adverse change (a "MAE" or "MAC") and various inclusions, exclusions, etc.  The existence of a MAC often allows the termination (or renegotiation to avoid termination) of a transaction.  However, in practice, courts are adverse to actually finding that a MAC has occurred.

In a recent blog post here, Steven Davidoff (a/k/a the Deal Professor) posits that the likely earnings restatement of Diamond Foods likely constitutes a MAC in its purchase of Pringles from Procter and Gamble.

The MAC in question arises in the context of a public-public deal; however, there are clearly ramifications for venture-backed companies. In negotiating the sale of a venture-backed company, lawyers (and principals) pay significant attention to deal certainty and avoiding termination risk. A startup cannot afford to announce a deal (even if privately to its employees and customers) and have it not close. And investors (who may already be counting their IRR) are typically unwilling to have the transaction renegotiated during the interregnum between signing and closing. So everyone pays particular attention to the MAC-out, and any data on what could cause it to be triggered will fuel future negotiations.

 

Comments (2)

Mia - February 12, 2012 9:27 PM

Thank you so much for the post, it was interesting reading.

oakley glasses - May 9, 2012 2:35 AM

Thanks for sharing such a nice post regards….

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