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Fourth annual MAC survey29/03/2006. Source: Nixon Peabody.
 Nixon Peabody's Fourth Annual Material Adverse Change Survey provides an expanded analysis of publicly disclosed US M&A transactions and points to increasingly favourable terms for buyers, in a reversal of last year's seller-friendly trend.
The annual survey was initiated following the dramatic stock market decline in 2000 and the events of September 11 to track their effect on the negotiation of MAC provisions in M&A transactions. Since that time, the annual exercise has undergone a gradual expansion of its scope of analysis to help identify current negotiating trends and the concomitant advantages and disadvantages provided to transacting parties.
A material adverse change (MAC) or materially adverse effect (MAE) provision is generally composed of two parts. In the first part, the MAC provision defines what circumstances would constitute a material adverse change or effect for purposes of that particular agreement. The occurrence of any delineated circumstances generally provides the buyer with an opportunity to withdraw from the transaction. The second part of the MAC provision typically sets forth exceptions to the defined MAC circumstances, such that the buyer may not withdraw when the exceptions occur. As a result, the elements of MAC clauses generally are heavily negotiated, with sellers attempting to narrow the MAC definition and include as many exceptions as possible, while buyers make an effort to minimize the excepted circumstances and expand the MAC definition.
While last year's study sampled sixty-five selected transactions, this survey significantly expands the scope with a sample of over three hundred randomly selected transactions. From those surveyed, there were MAC clauses contained in 260 agreements, of which 65% were stock purchases and 22% were asset purchases, with stock mergers and cash mergers each comprising 5%. The surveyed transactions represent all significant industries and range in value from middle-market transactions up to $14.2 billion, with an average transaction size of $615 million. As a result of the increased sample size, this year's survey may be said to provide a significantly more precise analysis of the pervasive trends in M&A agreements. Although this analysis is not intended to be a scientific study, we believe that the results are fairly representative of emerging trends regarding M&A transactions.
In the M&A agreements surveyed this year, MAC definitions were slightly narrower than in previous years, which indicates a slight advantage gained by sellers compared to those of previous years. Conversely, a sharp decline is found in the frequency of this year's MAC clause exceptions compared to those of previous years, showing a clear advantage for buyers. Despite the survey's finding of narrower MAC definitions, the more precipitous declines found in almost all categories of MAC exceptions signifies a greater negotiating advantage held by buyers with regard to MAC clauses in the sampled M&A agreements.
Slight Decline in MAC Definitions
From the 260 surveyed agreements containing MAC clauses, 117 (45%) contained a MAC definition regarding an impact on the seller's ability to consummate the contemplated transaction. This represents a marked decrease from last year's survey, which showed the inclusion of this MAC element in 67% of the agreements surveyed. This year also saw the decreased inclusion of a MAC definition regarding an impact on the buyer's ability to consummate the transaction. In the agreements sampled this year, only 139 (53%) contained a MAC definition in this regard, while last year's survey showed the inclusion of this element in 65% of the surveyed transactions. However, while last year's survey showed an approximately equal number of agreements that included either of these two MAC elements, this year's buyers appear to have gained an edge with the inclusion of a definition regarding an impact on the buyer's ability to consummate the transaction in 7% more of the agreements than those that included the same definition with regard to the seller.
Fewer MAC Clauses Include Exception for Decline in Economy or Business
While last year's survey showed the inclusion of a MAC exception for a decline in the economy or business in general in 71% of the agreements, this year's sample shows only 52% of MAC provisions that included this exception. This is similar to the results obtained two years ago when the 2003 MAC Survey showed the inclusion of this exception in 53% of agreements. Similarly, this year's survey showed a decrease from last year in the percentage of agreements that included a MAC exception for the decline in general conditions of the industry in question. While last year's sampling found this exception in 71% of agreements, this year's survey showed it in only 48% of agreements. Despite the improving business climate over the past several years, the trends nevertheless are surprising given our regular experience with transactions containing these exceptions.
Decreasing Exceptions Related to Company's Stock and Securities Market in General
This year's survey showed a significant decrease in MAC exceptions for a decline in the trading price of the target company's stock as compared to previous years. Of the 260 sampled agreements with MAC provisions, only 13 (5%) contained an exception for a decline in the trading price or volume of the company's stock. In the 2003 and 2004 surveys, this exception was found in MAC clauses in 27% and 30% of the agreements, respectively. This year's M&A transactions have also seen a slight decrease in the inclusion of MAC exceptions for a decline in the securities market as a whole. While last year's survey found this exception in 21% of agreements, this year's sample found an exception for a decline in the securities market only 17% of the time. These decreases may reflect the larger percentage of asset purchase transactions reviewed in this year's survey as well as increased confidence in the strength of the securities market after its second consecutive year of exhibiting stability. Regardless, the decline in these exceptions is generally thought to be favorable to buyers in M&A transactions.
Fewer MAC Clauses Include Exception for Company's Failure to Meet Revenue or Earnings Projections
In a sharp decline from last year's MAC survey, only 5% of MAC clauses in this year's sample included a MAC exception for failure by the company to meet revenue or earnings projections. This decline from last year's frequency of 17% could likewise be attributed to generally favorable economic conditions and the positive revenue and earnings results that often follow.
Increased Inclusion of Exceptions for Acts of War and Terrorism
Exceptions for acts of war, major hostilities, and terrorism have more than doubled compared to their inclusion in the agreements surveyed last year, and were notably the only category of exceptions that saw an increase in this year's MAC clauses. While only 8% of agreements included these MAC exceptions in the 2004 sample, this year's survey found exceptions for war, major hostilities, and terrorism included in over 19% of the M&A agreements. This significant increase likely stems from the frequency of terrorist incidents around the world and the United States' increased military involvement in conflicts abroad.
Decreased Inclusion of Exceptions for Change in Laws or Regulations
This year marks a shift away from last year's increase in the number of transactions that excepted changes of laws or regulations from their MAC definitions. While last year's survey recorded the frequency of this exception increasing to 53% of the surveyed transactions from the previous year's 32%, this year's transactions included the exception in only 25% of agreements. A similar decrease was found with regard to the exception for change in interpretation of laws by courts or government entities, which was included at a frequency of 9%, compared to last year's 25%. In addition, this year's agreements showed a decrease in exceptions for a change in GAAP to 18%, compared to last year's frequency of 37%. Again, the reduced use of these exceptions are indicative of improved leverage for buyers in negotiating these transactions.
Other Notable Declines in MAC Exceptions
There were other notable declines in exceptions for circumstances related to the transaction and agreement. Most prominently, the number of exceptions for any change or effect resulting from or arising in connection with the agreement has declined by half from last year. Only 26% of the surveyed transactions contained such an exception this year, while last year's survey showed this exception in 52% of agreements. There was also a notable decline in the frequency of MAC exceptions relating to the effect of the announcement of the transaction. Only 31% of this year's MAC clauses contained such an exception, compared to last year's 43%. Declines were also found in exceptions regarding expenses incurred in connection with the transaction as well as in exceptions regarding the effect of actions or omissions taken with prior written consent or request of either party. While last year's agreements contained an exception for expenses incurred in connection with the transactions with a frequency of 13%, the agreements surveyed this year contained such an exception only 2% of the time. The MAC clauses in the agreements surveyed this year showed a precipitous decrease in the frequency of exceptions relating to the effect of actions or omissions taken with prior written consent or request of either party. While this exception was found in 25% of MAC clauses surveyed last year, this year's sample found this clause included in only 8% of agreements.
Nixon Peabody LLP is one of the largest multipractice law firms in the United States, with offices in fourteen cities and more than six hundred attorneys collaborating across fifteen major practice areas. The firm's size, diversity, and state-of-the-art information systems enable us to offer a comprehensive, integrated range of legal services to individuals and organizations of all sizes in local, state, national, and international matters.
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