A Company Material Adverse Effect in the context of mergers and acquisitions involving a target company or business is a clause that gives the acquirer the right to walk away from the acquisition before closing. This right occurs under a set of specific circumstances and relates to events that are often detrimental to the target company. Sometimes referred to as Material Adverse Change (MAC) clauses, they are a common feature of public and private acquisition documents. In this particular definition, it is important to note these circumstances relate to the target company. For information relating to the parent clause, please see Parent Material Adverse Effect.
A material adverse effect is typically considered to be an extremely high threshold. The definition in the acquisition or merger agreement (example below) often covers certain widespread events (such as terrorism). The scope of the definition, inclusions and exclusion, can depend on factors such as the type of transaction, industry and negotiating power amongst the parties.
As economic conditions deteriorated during the coronavirus pandemic, many companies and traders reviewed the filing documents to assess whether or not an acquirer could walk away from a takeover citing this clause and avoid paying a termination fee. It is therefore vitally important that traders, arbitrageurs and investors are aware of these elements and are able to assess their relevance in a given situation.
Company Material Adverse Effect
The following DEFM14A filing with the SEC by Fitbit (FIT) on December 12, 2019 shows the extent and coverage of the Effect. The length of this section highlights its importance which must be fully understood by traders and investors.
means any state of facts, circumstance, condition, event, change, development, occurrence, result or effect (each, an “Effect”) that, individually or in combination with any other Effect,
- (i) is or would reasonably be expected to be materially adverse to the business, condition (financial or otherwise), or results of operations of the Company and its Subsidiaries, taken as a whole, or
- (ii) would prevent, materially impair or materially delay the timely performance by the Company of, or has or would have a material adverse effect on the ability of the Company to, timely perform, its obligations under this Agreement; provided, however, that, in the case of clause (i) above, no Effect shall constitute, or be taken into account in determining whether there has been, a Company Material Adverse Effect to the extent that such Effect arises out of or results from:
- (A) changes in general, global economic or business conditions, including any changes in or affecting financial, credit, foreign exchange or capital market conditions;
- (B) changes in conditions generally affecting the industries in which the Company and its Subsidiaries operate;
- (C) changes in political conditions, geopolitical conditions, or the commencement, continuation or escalation of any military conflict, declared or undeclared war, armed hostilities, terrorism, government shutdown, acts of foreign or domestic terrorism, or other national or international calamity, including any material worsening of such conditions threatened or existing as of the date hereof;
- (D) any hurricane, flood, tornado, earthquake or other natural disasters;
- (E) any failure by the Company or any of its Subsidiaries to meet any internal or external projections, forecasts, estimates, budget or expectations of the Company’s revenue, earnings or other financial performance or results of operations for any period, in and of itself (it being understood that the facts or occurrences giving rise or contributing to such failure that are not otherwise excluded from this definition of “Company Material Adverse Effect” may constitute a Company Material Adverse Effect and may be taken into account for the purpose of determining whether a Company Material Adverse Effect has occurred or would reasonably be expected to occur);
- (F) the execution and delivery of this Agreement, the pendency or anticipated consummation of the Transactions or the public announcement of this Agreement or the Merger (including the identity of, or any facts or circumstances relating to, Parent as the acquirer of the Company), or any leaks or rumors related thereto, including the impact thereof on relationships, contractual or otherwise, with officers, employees, customers, manufacturers, suppliers, distributors, partners, or other business relationships of the Company (provided that this clause (F) shall not apply to any representation or warranty to the extent the purpose of such representation or warranty is to directly address the consequences resulting from the execution and delivery of this Agreement or the consummation of the Transactions);
- (G) any legal or related Proceedings made or brought against the Company or the Company Board, relating to, in connection with, or arising out of the Merger or the other Transactions, including the Proxy Statement (provided that this clause (G) shall not apply to the representation and warranty in the last sentence of Section 4.11);
- (H) changes in GAAP or International Financial Reporting Standards or the interpretation thereof;
- (I) changes in Applicable Law or the interpretation thereof, including the imposition of new or increased tariffs;
- (J) any action or failure to take any action which action or failure to act is requested or consented to in writing by Parent, any action expressly required by this Agreement (other than pursuant to Section 6.01(a) (except Section 6.01(a)(ii))), or the failure to take any action expressly prohibited by the terms of this Agreement (other than the failure to take an action that is prohibited under Section 6.01(b), unless Parent unreasonably withholds, conditions or delays its consent to such action); or
- (K) any change in the price or trading volume of shares of Company Common Stock or any other publicly traded securities of the Company or any of its Subsidiaries in and of itself (it being understood and agreed that the facts and circumstances giving rise to such change that are not otherwise excluded from the definition of a “Company Material Adverse Effect” may constitute a Company Material Adverse Effect and may be taken into account for the purpose of determining whether a Company Material Adverse Effect has occurred or is reasonably expected to occur); provided that with respect to any Effect arising out of or resulting from any change or event referred to in clause (A), (B), (C), (D), (H) or (I) above, only to the extent such Effect has, or is reasonably expected to have, a disproportionate adverse effect on the business, condition (financial or otherwise) or results of operations of the Company and its Subsidiaries, taken as a whole, as compared to other companies that operate in the industries in which the Company and its Subsidiaries operate, in which case only the incremental disproportionate effect may be taken into account in determining whether there has been a Company Material Adverse Effect.
