Hexion v. Huntsman: Elaborating the Delaware MAC Standard

By Robert T. Miller
February 16, 2009
In any large corporate acquisition, there is a delay between the time the parties enter into a merger agreement and the time the agreement is consummated, i.e., the time that the purchase price is paid and ownership of the subject business changes hands. Reasons for the delay depend on the details of the transaction but typically include obtaining clearance under the federal antitrust laws and other needed government approvals and obtaining required shareholder votes approving the deal. This delay between signing and closing creates the possibility that, during the interim period, the business or financial condition of one of the parties may deteriorate. When this happens to the target company in a cash deal, or to either company in a stock-for-stock deal, the counterparty may no longer want to proceed with the transaction. One contractual protection counterparties typically have in such cases is the material adverse eff ect (MAE) or material adverse change (MAC) clause in the business combination agreement. Although the details can vary considerably depending on how the agreement is drafted, the basic idea is that it is a condition precedent to the counterparty’s obligation to consummate the transaction that the party has not suff ered a MAC. Hence, if between signing and closing, a party has suff ered a MAC, the counterparty may costlessly cancel the deal and walk away; if the party has not suff ered a MAC, the counterparty has to pay the full purchase price and close the transaction....