While parties to large purchase or merger transactions typically include Material Adverse Effect (MAE) clauses in their agreements, there is little by way of detailed parameters in the law for what establishes such a material adverse effect. The clause can be used in various contexts but, in general, its purpose is to shift certain risks between the parties, providing buyers with a mechanism to avoid closing on a transaction if there is a significant enough change in the business of the target or underlying assets.
Although there is no one definitive benchmark to establishing an MAE, parties to purchase or merger transactions with New York or Delaware choice of law provisions, which underlie a substantial amount of commercial litigation, can find some guidance from a recent decision on MAE-related claims.
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