MAC in Delaware Chancery
Knowing how to get out of a deal is often as important as knowing how to get in. When a company blows up, it's easy to find a representation that went awry. But when things turn sour because of legislation or macro economic issues, you've got to look at the MAC clause.
The MAC, or material adverse change, clause sets the conditions under which a deal may be terminated without penalty. MAC exceptions, which are often appended to such clauses, outline specific circumstances under which the MAC doesn't apply, meaning the deal must proceed even if there is a material change.
During the deal frenzy of the past several years, sellers have had the upper hand in negotiating deal terms, a trend that has extended to the MAC clause. To win deals, buyers have agreed to loose MAC clauses with lots of exceptions, or in some cases have foregone MACs altogether.
The litigation currently pending in Delaware between SLM (Sallie Mae) and J.C. Flowers & Co. will, if it goes that far, shape the understanding of MAC clauses for the next few years. J.C. Flowers and its partners have sought to walk away from the deal, in part on the basis that new Federal legislation will decrease the earning of the company. SLM has of course insisted that the deal must go through, and issued a press release saying that "core earnings" at the company will be negatively impacted by only 1.8 to 2.1 percent annually over the next 5 years. The issue is whether the MAC clause is triggered by the adverse impact of the new Federal legislation. The clause reads as follows:
"Material Adverse Effect" means a material adverse effect on the financial condition, business, or results of operations of the Company and its Subsidiaries, taken as a whole, except to the extent any such effect results from: ... (b) changes in Applicable Law provided that, for purposes of this definition, "changes in Applicable Law" shall not include any changes in 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 described under the heading "Recent Developments" in the Company 10-K, in each case in the form proposed publicly as of the date of the Company 10-K) or interpretations thereof by any Governmental Authority..."
As the highlighted language shows, SLM and JC Flowers were acutely aware of the potential impact of the new Federal legislation on the earnings of Sallie Mae. This was not a thunderbolt from out of the blue.
SLM's position is that the "core earnings" of the company will only be reduced by 1.8 to 2.1 percent MORE than what was already presented in the 10-K. This sets the bar well under the 10% figure which most lawyers and judges would agree is "material". As the M&A Law Prof Blog points out, the Delaware courts set a high bar for proving a MAC. Under these cases the party asserting a MAC has the burden of proving that the adverse change will have long-term effects and must be materially significant.
Of course the issue may be settled before any trial. Justine Strine has been pressing the sides to settle. A renegotiated price is the likely outcome, as SLM will not likely want to remain in the public eye after this battle.
