A Parent Material Adverse Effect in the context of mergers and acquisitions involving an acquiring company or business is a clause that gives the target the right to walk away from the deal before closing. This right occurs under a set of specific circumstances and relates to events that are often detrimental to the acquiring 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 acquiring company.
A material adverse effect is typically considered to be an extremely high threshold to demonstrate. 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 a target company could walk away from an acquisition citing this Parent Material Adverse Effect clause and avoid paying a reverse termination fee. It is therefore vitally important that traders, arbitrageurs and investors are aware of these elements before making an investment decision and are able to assess their relevance in a given situation.
Parent Material Adverse Effect
The following PREM14A filing with the SEC by Legg Mason (LM) on March 27, 2020 gives a definition to be used and referred to throughout the document. The length of this section an be extensive (not reproduced here) when highlighting each point to be included. For a more through analysis please refer to the Company Material Adverse Effect.
“Parent Material Adverse Effect” shall mean any event, change, circumstance, effect, development or state of facts that, individually or in the aggregate has, or would be reasonably likely to prevent or materially delay or materially impair the ability of Parent and Merger Sub to satisfy its obligations under this Agreement, including the satisfaction of the conditions precedent to the Merger and consummating the Merger and the other transactions contemplated by this Agreement.
