When equity and credit markets contract, the number of pending acquisitions that buyers seek to terminate expands. Over the past 12 months some high-profile transactions in which buyers have sought to terminate pending acquisitions, with varying degrees of success, include Sallie Mae, Harmon International and HD Supply (a subsidiary of Home Depot). In these transactions, private equity firms invoked ‘material adverse change’ provisions as the basis for seeking termination prior to closing. But unhappy buyers, like unhappy families, are each unhappy in their own way. In particular, financial buyers have different sensitivities to adverse changes in a target company than strategic buyers.
This article will focus on material adverse change provisions from the point of view of strategic buyers. The article will first review contractual issues. It will then discuss the principal case law in the area. Finally, the article will suggest areas of focus for strategic buyers in negotiating material adverse change provisions.
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