Inside M&A - November/December 2007
November/December 2007
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Drafting Material Adverse Change Clauses in Light of Delaware Case Law
By Jeffrey Rothschild and Abigail Reed
Merger and acquisition contracts typically feature a material adverse change or material adverse affect (together, MAC) clause, which gives the buyer the right to pull out of the deal or renegotiate the terms in the event of an unforeseen material adverse business or economic change affecting the target company or its assets between the execution of the definitive acquisition agreement and the closing of the transaction. A MAC clause also provides the seller with a way of qualifying certain representations and warranties so that relatively insignificant breaches are considered irrelevant (at least for purposes of closing). MAC clauses are highly negotiated in today’s deal environment. As a result, understanding recent trends in the drafting of MAC clauses, and how courts and of practitioners view these clauses, is essential to obtain the most advantageous deal.
Few cases about MAC clauses have been litigated and decided in the Delaware courts. However, Delaware case law has shown that the drafting of MAC clauses matters a great deal. In In Re: IBP, Inc. Shareholders Litigation, 789 A.2d. 14 (Del. Ch. 2001) (IBP v. Tyson), the merger agreement at issue contained a broad MAC clause with no carve-outs, rarely seen in today’s deal environment. Tyson Foods asserted that IBP, the target, had suffered a material adverse effect because IBP’s earnings for the first quarter of 2001 were 64 percent behind its earnings for the first quarter of 2000, but the Delaware Court of Chancery did not see this downturn as affecting IBP in the future on a long-term basis. The court determined that IBP had not suffered a MAC, and as a result of the ruling, Tyson Foods had to complete its purchase of IBP.
The MAC clause at issue in Frontier Oil Corp. v. Holly Corp,. C.A. No. 20502 (Del. Ch. Apr. 29, 2005) was different than the MAC clause at issue in IBP v. Tyson in that it contained carve-outs. In Frontier Oil v. Holly, the parties drafted the MAC clause to exclude certain events, such as general economic, regulatory or political conditions or changes; financial market fluctuations; and general changes in the petroleum industry. These carve-outs are still seen frequently today. However, the MAC clauses at issue in these two cases were similar in a significant way. In both cases, the MAC clause contained a qualifier that a given effect “would reasonably be expected to” have a MAC, requiring the seller to think ahead about the impact of possible future events. The “reasonably expected” qualifier continues to make a frequent appearance in the drafting of MAC clauses today.
Before the signing of the merger agreement at issue, Holly, the buyer, had learned of the possibility of a toxic tort suit involving prior operations of a subsidiary of Frontier Oil, the seller. As a result of this information, the parties renegotiated the merger agreement, strengthening Frontier’s representations and warranties. They also slightly strengthened the definition of a MAC by replacing language referring to a MAC with respect to the “material condition” of a party with language referring to “the results of operations, condition (financial or otherwise) or prospects of a party.”
The court focused on Frontier’s representation regarding litigation. Frontier represented that there was no litigation pending or threatened against Frontier or its subsidiaries, “other than those that would not have or reasonably be expected to have, individually or in the aggregate, a Frontier Material Adverse Effect.” The court stated that “in substance, Frontier represented to Holly that [the toxic tort litigation] would not have [a material adverse effect] and would not reasonably be expected to have [a material adverse effect],” which the court viewed as creating an objective, forward-looking standard for a MAC. After examining the evidence that Holly presented regarding Frontier’s likelihood of success in the toxic tort litigation and the potential costs of the litigation, the court found that Frontier had not suffered a MAC. The court considered the forward-looking basis of the MAC clause in the merger agreement and concluded that the litigation must be viewed as material from the longer-term perspective of a reasonable acquirer to constitute a MAC. According to the court, the evidence presented by Holly did not meet this test.
Following the Tyson and Frontier Oil decisions, in which buyers were unsucessful in invoking a MAC to exit a deal, merger and acquisition practitioners began drafting agreements where a “material change” was defined more precisely with clearer contract language. For example, a “material change” would occur if a target’s revenues dropped 10 percent. With the trend toward precision in drafting, a host of additional MAC exceptions now appear, limiting a buyer’s ability to back out of a deal. Today’s generally seller-friendly environment has seen a greater frequency of exceptions to MAC clauses. For example, it is now common to see an exception to the MAC clause such that a buyer cannot claim a MAC for changes resulting from general economic, financial, regulatory or market conditions, so long as the changes have not affected the target in a “materially disproportionate” manner as compared to other companies operating in the target’s line of business. However, given the expected downturn in mergers and acquisitions activity and the tightening of the credit market, the trend in deal terms generally and MAC clauses specifically may be more favorable to the buyer.
If a seller has identified areas of concern regarding a target, these concerns should be addressed specifically, either in the MAC clause or as a separate closing condition. It is still best to draft as specifically as possible, with buyers negotiating MAC clauses tailored for the deal, or specific closing conditions that identify, for example, missed financial targets that give an objective standard on which to terminate an acquisition agreement. Given the state of the credit market, buyers and lenders are attempting to gain more flexibility in terminating a transaction if circumstances change between signing and closing. A MAC out in many instances produces the buyer and lender with the best opportunity to terminate a deal.
Cases May Expand on U.S. Material Adverse Change Standard
By Eric Landau and Kristel Robinson
An often troubling aspect of merger or acquisition agreements is that the buyer will usually not actually buy the enterprise in question until several weeks, if not months, after the purchase price has been negotiated and agreed upon. Events and circumstances may arise causing the value of the enterprise to diminish so significantly that the buyer risks acquiring something for which it did not bargain. As a result, most merger or acquisition agreements include provisions known as material adverse change or material adverse effect (together, MAC) clauses. These clauses are intended to allocate risk of loss in value of the enterprise to the seller. The idea is that the seller should bear the risk if an event or circumstance occurs, or becomes known, that materially changes the “bargained-for” agreement. As a general rule, MAC provisions are heavily negotiated, with the buyer seeking a broad MAC clause for maximum flexibility with regard to closing a transaction. Not surprisingly, the seller tends to prefer a narrow MAC clause to ensure that the transaction closes at the agreed-upon merger price, keeping in mind established expectations and market difficulties in subsequently trying to sell an enterprise following a “busted” transaction. In this regard, a seller will frequently seek to include generic exceptions to the MAC clause for known risks and uncertainties as well as general market events and circumstances, including specific exceptions for risks and uncertainties that are applicable either to the enterprise in question or the industry in which it operates.
When events and circumstances occur that affect valuation, determining whether a MAC has occurred is not always clear, even when the change in valuation is significant. The two leading court decisions interpreting the application of MAC clauses—IBP, Inc. v. Tyson Foods, 789 A.2d 14 (Del. Ch. 2001), decided under New York law; and Frontier Oil Corp. v. Holly Corp., C.A. No. 20502, 2005 Del. Ch. LEXIS 57 (Del. Ch. April 29, 2005)—provide some guidance. Under IBP, the inquiry is fact-intensive, and a party seeking to invoke a MAC clause and walk away from a deal faces the high burden of proving that the event or events claimed to be a MAC “substantially threaten the overall earnings potential of the target in a durationally-significant manner. A short-term hiccup in earnings should not suffice; rather the [MAC] should be material when viewed from the longer-term perspective of a reasonable acquiror” (IBP at 68). Further, Frontier Oil, which adopted the standards set forth in IBP as Delaware law, demonstrated the importance of carefully crafting MAC clauses. The case notes that the phrase “would have” or “would reasonably be expected to have” a MAC, as used in the agreement at issue there, created an objective test with a significantly higher threshold than would have existed if the parties had instead used the wording “could” or “might” (Frontier Oil at 124, n.209). This standard requires a buyer to look into not only the current state but also the future, and to produce evidence of a long-term downturn.
Many commentators view the declaration of a MAC not as a basis for “busting” a transaction, but rather as a basis to renegotiate the underlying agreement. One purpose of renegotiation is to obtain a more favorable price in the face of MAC claims. Even when a case does make it to trial, a settlement is generally reached before a judgment is entered. In the 2006 Valassis Communications, Inc. v. ADVO, Inc., C.A. No. 2383-N (Del. Ch.), McDermott represented Valassis Communications, Inc. Valassis asserted the existence of a MAC in a transaction that gave rise to litigation. Despite the commencement of a trial in the Delaware Chancery Court, the parties ultimately renegotiated certain terms of the transaction prior to the trial’s conclusion. These examples demonstrate a general willingness by parties to renegotiate to avoid delay, possible litigation, the uncertainty of court judgments or the “busting” of a transaction altogether. As a result there has not been a tremendous amount of case law interpreting the enforceability of MAC clauses.
Two current cases may provide further guidance as to the application of MAC standards. On September 21, 2007, Genesco Inc. filed suit against The Finish Line Inc. and Headwind, Inc. (collectively, Finish Line) in the Chancery Court for the State of Tennessee (Case No. 07-2137-II). Genesco sought specific performance of a merger agreement pursuant to which Finish Line was to acquire Genesco. Genesco alleged that Finish Line and its lenders UBS Securities LLC and UBS Loan Finance LLC (collectively, UBS) stalled the deal because, among other things, Finish Line believed that it may have overpaid for Genesco and that the current credit market crunch had made financing for the transaction more expensive. Finish Line, on the other hand, claimed that Genesco was in breach of its merger agreement by unreasonably withholding additional financial information sought by Finish Line and UBS. UBS, which filed a motion to intervene after Finish Line filed a third-party complaint against the lender, alleged that Genesco had suffered a MAC. Notably, neither Finish Line nor UBS publicly cited any real evidence to support the contention that a MAC had occurred. This absence of evidence led many commentators to speculate that Finish Line and UBS were on a “fishing expedition.” Notably, subsequent to the filing of the lawsuit, Finish Line and UBS augmented their allegations by claiming that Genesco had fraudulently induced them to proceed with the merger agreement by concealing its actual financial results and revised financial projections.
Genesco, Inc. v. The Finish Line, Inc., et al. went to trial on December 10, 2007. On December 27, 2007, the Honorable Ellen Hobbs Lyle issued an opinion granting specific performance and ordering Finish Line to complete the merger. Even though Judge Lyle found that a MAC had occurred with regard to Genesco’s financial conditions (Slip. Op. at 33-37), the court held that the Genesco’s financial decline fit within a carve-out to the MAC clause contained in the parties’ merger agreement: “There is, though, the Court finds, one fact that is established by the greater weight and preponderence of the evidence from all of the competing analyses, and that fact is dispositive of the MA[C] issue: Genesco’s decline in performance in 2007 is due to general economic conditions such as higher gasoline, heating oil and food prices, housing and mortgage issues, and increased consumer debt loads” (Slip. Op. at 31). Thus, because Genesco’s decline in performance was held to have been caused by “general economic conditions,” and was not disproportionate to the financial decline of others in its industry, it did not provide Finish Line or UBS with grounds to rescind the agreement (Slip. Op. at 33).
The court further held that Genesco did not commit a fraud, finding that several Finish Line and UBS witnesses lacked credibility. The Court stated that even though Genesco did not provide the data in question before the merger agreement was signed, the “fault [was] with Finish Line’s advisor, UBS and its agents, whom Finish Line was relying on to investigate Genesco” (Slip. Op. at 16). Neither Finish Line nor UBS asked Genesco or its advisors for this information after it was prepared, and “where Finish Line/UBS had the means at its disposal for obtaining the information it now claims was concealed, neither the law nor the parties’ agreements required Genesco or [its advisors] to voluntarily provide the information” (Slip. Op. at 16).
Although the Genesco opinion expands the universe of MAC decisions that practicioners may look to for guidance in crafting MAC provisions, because the case was decided under Tennessee law, it is unclear how far-reaching the impact of this decision will be.
SLM Corporation v. J.C. Flowers II L.P., et al,.C.A. No. 3279, commonly referred to as the Sallie Mae case, will also be closely watched. Filed on October 8, 2007, in the Delaware Court of Chancery, the Sallie Mae case involves the merger agreement for the sale of Sallie Mae to a consortium of investors led by J.C. Flowers II L.P. Valued at approximately $26 billion, the merger transaction has been on shaky ground since July 2007, when Flowers reportedly told Sallie Mae that the buyers were having second thoughts about the deal because of a plan in U.S. Congress to cut subsidies for student loans. Although Flowers does not deny that the buyers knew that subsidy changes were possible when the merger agreement was signed and announced in April 2007, the fund and the other buyers have argued that the new rules, as actually adopted by Congress, would be more costly to Sallie Mae than expected.
The disagreement turns on how much the smaller subsidies, which Congress approved in early September 2007, will adversely affect Sallie Mae’s long-term profits. Sallie Mae contends that the reductions will cut “core earnings” by 1.8 percent to 2.1 percent annually over five years. Flowers disagrees, and has stated that the impact of the subsidy cuts, combined with rising borrowing costs in the credit markets, will reduce “core earnings” by more than 14 percent in 2009, and by 20 percent in 2012.
According to Flowers, the legislation as passed and its effect on Sallie Mae’s earnings amount to a MAC, and defendants should be allowed to walk away from the deal, if that is their decision, without paying the contractually agreed-upon $900 million break-up fee. Sallie Mae disagrees and has sued for a declaration that no MAC has occurred, a declaration that defendants have repudiated the merger agreement and an award of money damages in an amount that is no less than the $900 million dollar break-up fee. Sallie Mae argues that, because the MAC provisions of the merger agreement specifically exclude contemplated legislation similar to that which Congress ultimately approved, Flowers must show that the legislation is materially worse than the proposed legislation fully disclosed in Sallie Mae’s public filings, in order to prove that a MAC has occurred within the agreement’s terms. Sallie Mae also argues that the problems in the credit markets are also excluded from the definition of a MAC, by the provision in the merger agreement excluding adverse changes in “general economic business, regulatory, political or market conditions.”
Flowers and the other buyers argue that defendants must only show that the legislation as passed is incrementally worse than the previously disclosed proposed legislation. Indeed, the relevant provision of the merger agreement states that the MAC exclusions do not include “changes in the Applicable Law relating specifically to the education finance industry that are in the aggregate more adverse to the Company and its subsidiaries, taken as a whole, than the legislative and budget proposals” that were previously disclosed. Notably, this provision does not contain a materiality qualifier. As a result, the plain language of the agreement’s MAC clause seems to support Flowers’ argument. In light of the emphasis on word choice seen in Frontier Oil, a written decision in this case could provide practitioners with much-needed guidance and clarification in this important area of the law.
Although no firm trial date has been set in the Sallie Mae case, Vice Chancellor Leo E. Strine, Jr., who is presiding over the case, has set a tentative trial date of July 2008.
Use of Material Adverse Change Clauses in the United Kingdom
By Nicholas Azis and Charlotte Azurdia
Material adverse change (MAC) clauses are frequently used in the context of mergers and acquisitions (M&A) in UK transactions, but their structure and content differ depending on whether the transaction is of private or public nature. In both contexts, the purpose of a MAC clause is to give the buyer or bidder the right to walk away from an acquisition following material and adverse business or economic developments in or affecting the target, in the time period between agreeing to a deal (whether by signing an acquisition agreement or by making an announcement for a bid) and the deal’s completion.
Private Transactions
In private company M&A, a MAC clause may take the form of either a condition to completion or, more likely, a warranty that no MAC has occurred since a specific date (the buyer will try to negotiate that the warranty is repeated at completion in order to give itself a termination right capable of being exercised if the warranty, when repeated at completion, is not true). A typical MAC clause will contain similar exceptions as would apply in a U.S. transaction (e.g., change in economic conditions or financial or securities markets, natural disasters).
MAC clauses in an acquisition agreement will be interpreted in accordance with the principles of English contract law, but there is very little case law on the subject (although rulings by The Panel on Takeovers & Mergers offer some indication as to the approach the UK courts might take towards MAC clauses). Generally, UK courts determine the intention of the parties by looking at the contract as a whole, but they will only enforce a general clause if it is clear that it unequivocally expresses the intention of the parties and is free of ambiguity. To ensure, therefore, that a MAC clause can be more safely relied upon, it is advisable for a buyer in a UK transaction to express MAC in terms of an event resulting in a quantified reduction in value of target assets or an increase in liabilities, which can be objectively measured, or by reference to specific circumstances occurring that would have an effect on the target in particular.
Public Transactions
In public company M&A, it is standard practice for a UK offer document to contain a MAC clause (expressed as a condition to the offer), the wording of which is largely standardised, as follows: “[save as publicly disclosed] no adverse change or deterioration having occurred in the business, assets, financial or trading position or profits or prospects or operational performance of any member of the Group which in any case is material in the context of the wider Group taken as a whole.” However, unlike in the private company context, there are no negotiated exceptions since the UK regulation prescribes the circumstances when a condition may or may not be invoked.
The City Code on Takeovers and Mergers (the City Code) are the rules by which UK takeover activity is regulated. Rule 13 of the City Code provides that for a bidder to invoke a MAC condition so as to cause a bid to lapse, the condition must not be subject to the subjective judgment of the directors of the bidder, nor should satisfaction of the condition be in the bidder’s hands. Further, the circumstances that give rise to the right to invoke the condition must be of material significance to the bidder in the context of the offer.
The Takeover Panel ruled on the subject of a MAC condition during the course of WPP plc’s offer for Tempus Group plc, which was announced in August 2001. WPP argued that following the events of September 11, 2001, a material adverse change had occurred. The Takeover Panel took the view that those events, although exceptional, unforeseeable and a contributor to the decline that had already affected the advertising industry, did not undermine the rationale for the terms and the price of WPP’s offer, which were Tempus’ long-term prospects. As a result, the Takeover Panel held WPP to its offer. The Takeover Panel stated in this instance that to meet the material significance test “requires an adverse change of very considerable significance striking at the heart of the purpose of the transaction in question, analogous to something that would justify frustration of a legal contract.”
Another example in which the Takeover Panel considered a bidder trying to invoke a MAC condition involved the 2005 bid by the private equity firm Terra Firma Investments for East Surrey Holdings. In this transaction, Terra Firma wanted to acquire East Surrey Holdings for its productive Phoenix Gas distribution business in Northern Ireland. Terra Firma’s offer was based on what it thought was a price agreement made in 2004 between East Surrey Holdings and the Northern Ireland energy regulator. However, after the bid’s launch, the regulator said that the price agreement was not in place, and that the agreement was in any event subject to review. Terra Firma applied to the Takeover Panel to withdraw its offer by invoking the MAC condition, but the Panel ruled that the regulatory changes “were not of sufficient substance” to invoke the MAC condition. However, that ruling supports the suggestion that a MAC condition can be invoked successfully if it is of sufficient magnitude and strikes at the heart of the purpose of the deal. In the East Surrey Holdings example, the magnitude of the event was simply not great enough.
Since these two cases, the Takeover Panel has issued a statement clarifying that in order to invoke a MAC condition, there is no need for a bidder to positively demonstrate “frustration” in the legal sense. Instead, a stringent objective test must be satisfied. The bidder must demonstrate that the relevant circumstances are of very considerable significance, striking at the heart of the purpose of the transaction. Some commentators argue that as the decision stands, a MAC condition could only be invoked in the most extreme circumstances.
Use of Material Adverse Change Clauses in Belgium
By Patrice Corbiau and Geert Dierickx
The material adverse change (MAC) clause was recently introduced in Belgium by the Anglo-Saxon approach of negotiating corporate and financial transactions. A MAC clause seeks to allow the buyer in an acquisition or project financing transaction to withdraw from the transaction or renegotiate the transaction price if there is a MAC in the business, assets or profits of the target company between the date of agreeing to purchase the company and the closing of the transaction. A MAC clause offers significant protection to the buyer against events that are seriously detrimental to the target company. Accordingly, the scope and wording of MAC clauses are key negotiated parts of acquisition agreements. The use of a MAC clause in transaction agreements with respect to Belgian companies is now very common.
An important transaction providing for a MAC clause in the share purchase agreement was the acquisition of the Dutch bank ABN AMRO by the consortium constituted by Banco Santander, Royal Bank of Scotland and the Belgian bank FORTIS. Some members of the consortium intended to request the application of the MAC clause as a result of a fall in the target’s share price. However, pursuant to publicly available information, the parties in that case decided not to pursue the application of the MAC clause.
It is premature to generalize any Belgian trends related to MAC clauses, since such contractual provisions were qualified as MAC clauses only recently. Before the introduction of MAC clauses in Belgium, contracts provided for simple conditions precedent and subsequent describing the specific situation to be fulfilled. In order to better understand the factors to be taken into account when using and drafting MAC clauses governed by Belgian law, some general rules applicable to Belgium contracts must be explained.
No Theory of Hardship
The Belgian Supreme Court has systematically rejected the theory of hardship. Pursuant to the theory of hardship, a party obligated under a contract would be allowed to modify that contract (without any specific clause allowing it to do so) when contractual performance is rendered much more difficult as a result of certain circumstances, even if the circumstances do not constitute force majeure that renders the performance impossible. Pursuant to the Belgian Supreme Court’s rulings, good faith in contracts does not prevent the obligee from insisting on specific performance of the contractual obligation, even if new and unforeseeable events make the performance of the obligation more difficult for the obligated party. The major reason for rejecting the theory of hardship under Belgian law is the belief that acceptance would undermine legal and contractual certainty. As such, in order to prevent problems in the event of changed circumstances during the performance of the contract, parties must insert contractual language (such as a MAC clause) by which they agree to renegotiate the transaction or to withdraw from the transaction.
Freedom to Contract Under Conditions; the Object Requirement
In principle, parties are generally free to subject contracts to conditions. Such contractual conditions may be conditions precedent (i.e., upon the fulfillment of which the contract comes into force), or conditions subsequent (i.e., upon the occurrence of which the contract is otherwise terminated). However, pursuant to Article 1108 of the Belgian Civil Code, a contract is valid only if four elements are included in the contract: consent, capacity, an object and a cause. By looking at the complete agreement, one can consider whether the contractual elements are satisfied. The most relevant factor in drafting a MAC clause is satisfying the “object” requirement.
Under Belgian law, the object of the contract must be determined, or be determinable, possible and lawful. Extending the object requirement to MAC clauses, the more determined or determinable the specific language of a MAC clause is, the more clearly it satisfies the object requirement under the Belgian Civil Code.
Enforceability of MAC Clauses
MAC clauses are interpreted under Belgian contract law and supported generally by the freedom to contract. As discussed above, so long as the required contractual elements are present and the intention of the parties is determinable, a MAC clause will be enforceable. It is therefore recommended that the specific conditions triggering a MAC clause should be described in as much detail as possible. Making the conditions of a MAC clause specific should limit disputes and facilitate enforcement.
In order to exclude and/or limit disputes, it is therefore recommended not to use too general language, because a broad MAC clause may not always provide sufficient protection to the buyer and/or lender. If possible, a MAC clause must provide for objectively identifiable facts, such as a 5 percent fall in market share, or a decrease of 10 percent of the turnover related to a specific period. Further, it is more appropriate for a MAC clause to provide for a renegotiation of the contract, rather than an immediate termination, in case of a MAC. If one of the parties to the transaction wishes to protect itself from a specific event, that should be provided in a separate contractual clause, rather than relying on a general MAC clause.
Statutory Warranties
Notwithstanding the protections provided by a MAC clause, it is worth noting that in principle under Belgian law, sellers provide additional statutory warranties to buyers for matters that the buyer was not aware of at the time the purchase agreement closed. Pursuant to the general provision of Article 1641 of the Belgian Civil Code, in principle a seller must warrant that the buyer is protected against so-called hidden defects making the goods unfit for their purpose or reducing their usefulness to such an extent that the buyer would not have bought them or would have paid a lower price had it known about them. With regard to a MAC in the business, assets or profits of the target company between the date of agreeing to purchase the company and the closing of the transaction, the buyer is still afforded some protection pursuant to the “culpa in contrahendo” principle. Under that principle, parties to an agreement have the duty to inform each other during the pre-contractual process. The duty to inform implies that a party that has information to which the other does not have access must take the initiative of sharing it so the other party can contract with sufficient knowledge of the facts. Sometimes the duty to inform is extended to a duty to advise or assist. So, under Belgium law, if the buyer is able to characterize a MAC as a hidden defect or a “culpa in contrahendo” satisfying its Belgian legal requirements, the buyer is still afforded some protection for a MAC, even without the contractual protection of an enforceable MAC clause.
Material Adverse Change Clauses Under Italian Law
By Filippo Mazza
In Italy, material adverse change (MAC) clauses are commonly used in many corporate transactions including, without limitation, merger and sale agreements, initial public offering documents, finance agreements and general contractual agreements. Despite the frequency with which such provisions are implemented, MAC clauses as such are not statutorily regulated under Italian law. Nor has Italian local case law specifically dealt with their enforcement.
In order to understand the use and enforceability of MAC clauses in Italy, it is necessary to analyze them under general principles of Italian contract law.
Freedom to Contract
Article 1322 of the Italian Civil Code sets forth the general principle of freedom to contract under Italian law. Accordingly, MAC clauses as a general matter should be valid and enforceable under Italian law. However, the applicable Italian legal principles and standards used to determine the enforceability of a MAC clause will vary depending on the wording and intended scope of the MAC clause that is being enforced. A MAC clause being enforced as a contractual condition will be evaluated under Italian law differently than a MAC clause being enforced to terminate a contract.
MAC Clauses as Conditions
Articles 1353-1361 of the Italian Civil Code govern generally the enforceability of contractual conditions. Pursuant to these provisions, MAC clauses enforced as a condition to performance under the contract will be evaluated with respect to the following factors:
- The MAC clause should not be impossible, unlawful or contrary to law or to the public order.
- In case of condition precedent, the triggering of the MAC clause should not depend on the mere will of one party to the contract.
- Throughout the period when the condition should be satisfied, the buyer (if condition precedent) or the seller (if condition subsequent) should be entitled to carry out seizures, attachments or other activities to conserve the assets.
The MAC condition is deemed to have occurred by operation of law if the condition created by such MAC clause does not occur as a result of action, or inaction, on behalf of the party having a contrary interest to such condition being satisfied.
Once satisfied, the legal effects of the condition are deemed retroactive to the time of execution of the contract, unless otherwise agreed by the parties.
The legal effects of a condition being satisfied do not apply automatically but need to be either acknowledged by or notified to the other party, and can also be waived if desired.
MAC Clauses as Termination Clauses
Article 1456 of the Italian Civil Code governs generally the enforceability of contractual termination rights. Pursuant to this provision, upon the occurrence of a termination event, the contract is deemed legally terminated upon notice by the applicable party of its intent to exercise the termination right. Italian case law deems ineffective those termination clauses making generic reference to all (or substantially all) obligations and covenants contained in a contract. Accordingly, it can be inferred that a MAC clause being enforced as a termination clause will be deemed unenforceable if it is overly generic or unspecific.
MAC Clauses in Takeover Documents
MAC clauses are also often used in offering documents in connection with a proposed takeover or a tender offer. Except for certain subjective conditions that are controlled solely by the bidder, generally under Italian law the bidder in a voluntary takeover is free to make an offer subject to as many conditions and relating to such matters as it considers appropriate (however, in mandatory bids, conditions must be objective, such as applicable regulatory clearances). The Italian Stock Exchange Commission (Consob) has clarified that conditions preventing the target from taking frustrating action or those relating to MACs are valid, provided that the events triggering the lapsing or termination of the offer satisfy a qualitative and quantitative test.
Drafting Guidelines for MAC Clauses
Since under Italian law a MAC clause may be deemed unenforceable if it is overly generic or unspecific (especially when enforced as a termination clause), making specific conditions trigger a MAC clause is recommended. Triggering conditions based on objective events are usually easier to enforce than those based on subjective events. Because the buyer is more likely to seek enforcement of a MAC clause, when drafting a MAC clause the buyer must consider what protections and remedies it will most likely seek. If the buyer wants the MAC clause to provide the greatest protection as a termination clause, the MAC clause should be carefully crafted so that it is triggered by breach of specific material covenants only. Alternatively, if the buyer wants the MAC clause simply as a contractual condition, conditions precedent are preferred to conditions subsequent, because conditions precedent are more easily enforceable. In any case, if a condition subsequent is to be agreed upon, it is recommended that the parties specify when and how the unwinding of the contract takes place, both between the parties and vis-à-vis third parties possibly involved in the execution and performance of the contract.
