So far this year, deal parties are approaching M&A with cautious optimism. This series of Cooley M&A blog posts include some brief observations that offer some M&A highlights over the past year and our thoughts for the year to come.
Uncertain Times Cast Focus on Deal Certainty
Public-target M&A deals and most larger, private-target M&A deals do not close at the same time they sign, usually because stockholder approval, regulatory approval and/or a third party consent is required. During times of regulatory uncertainty or economic turmoil, such as in the most recent financial crisis of 2008, there is increased focus by buyers on the operating covenants and other provisions in merger agreements designed to protect them if something bad or unexpected happens to the target’s business during the pre-closing period.
Therefore, defining what constitutes a “material adverse change” that will let a buyer walk away from a signed deal may be subject to more negotiation than ever before. In addition to the “no MAC” out, parties are likely to focus on antitrust or other covenants relating to a party’s required efforts to obtain regulatory approvals, including through litigation and other affirmative “fix” obligations such as divestiture. Termination rights (and fees) tied to a party’s inability to obtain required approvals will also likely be more tailored and scrutinized. Buyers and sellers who are contemplating signing a deal in 2017 should pay more attention to these deal certainty provisions, particularly if industry regulations or changes in the tax treatment or other primary economic premise for the deal is on the horizon.