The COVID-19 pandemic has served as a dramatic reminder that extraordinary events that affect acquirers and target companies can arise between the signing and closing of a merger agreement. The pandemic led, on a global basis, to the government-ordered closing of most businesses and stay-at-home orders for most people, plunging stock markets, extreme liquidity concerns, and a loss of lives on a horrific scale.

After the pandemic emerged, virtually every party to a then-pending merger agreement investigated whether it or its counterparty had a right to terminate the agreement based on the pandemic and its dramatic effects. Merger agreements almost invariably include as a condition to the buyer's obligation to close that, between the signing and closing of the transaction, no event has occurred that had or would reasonably be expected to have a "material adverse effect" (MAE) on the target company. Through negotiation of the definition of "MAE" in this closing condition (particularly, negotiation of the types of events that will be specified as not constituting an MAE notwithstanding their effect on the target), the parties allocate between them the risk of an extraordinary event occurring pending closing that may materially adversely affect the target. In the minds of many, the COVID-19 pandemic appeared to be the quintessential MAE: an unanticipated (almost unprecedented) event that was not the fault of the parties in any way, having catastrophic effects on businesses. If this did not constitute an MAE, the thinking went, what ever would?

The Delaware courts' precedents in determining whether an MAE occurred have focused on the specific language of the definition of "MAE" that was negotiated by the parties and set forth in their merger agreement. The definition often runs several pages and usually expressly excludes most types of events that have broad applicability—such as changes in general economic or industry conditions, changes in law, and force majeure events (except, in some cases, to the extent that any such events had or would be reasonably be expected to have a disproportionate effect on the target company as compared to others in its industry). Thus, in most cases, the risk of occurrence of an event with broad applicability, even if it has a material and adverse effect on the target, is generally allocated to the buyer (i.e., the buyer still must close if such an event occurs, in some cases except to the extent there is a disproportionate effect on the target that is material). Correspondingly, the risk of occurrence of an event that is specific or idiosyncratic to the target company and which has a material and adverse effect on the target—such as, say, a discovery that the company's only product causes cancer—is generally allocated to the target (i.e., the buyer is not obligated to close if such an event occurs).