Material
Adverse
Effect
AN EXTRAORDINARY
AND PROFOUNDLY NEGATIVE EVENT
WITH SIGNIFICANT CONSEQUENCES
SUMMARY
Material adverse effect is the highest materiality standard in mergers and acquisitions.
APPLICATION
The term is principally used in staggered sign/close deals to (i) limit representations and warranties and (ii) make it easier for sellers to satisfy closing conditions.
GENERALLY DEFINED
In general, an MAE is a unique event that has or is reasonably likely to have a significant and profoundly negative impact on either: (i) a target’s business, including its finances and results of operations, or (ii) a seller’s ability to complete a contemplated transaction.
An MAE definition usually has several carve-outs meant to ensure that events outside the target company’s control, like warfare or changes in law and accounting standards, do not otherwise constitute an MAE. Yet there are carve-outs to the carve-outs to establish fairness: if something outside the target’s control has a disproportionate impact on the target as compared to its competitors, an MAE might still exist.
IMPORTANCE
As a term that potentially prevents disclosure and forces parties to close deals, MAE is the focus of considerable negotiation.
Jonathan Conigliari is a mergers and acquisitions attorney and the founder of Conigliari PC. He advises a variety of clients on strategic transactions, significant investments, and general counsel matters involving corporate law, special situations, and contracts. You can contact him via email or at +1 310-708-4881.
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