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					Seventh Annual MAC Survey
A Nixon Peabody study of current negotiation trends of
Material Adverse Change clauses in M&A transactions
        Nixon Peabody’s Seventh Annual MAC Survey provides an analysis
        of publicly disclosed M&A transactions, and finds a significant
        shift in the landscape as the previously held sellers’ advantage shifts,
        making MAC terms more buyer-friendly.




    As in years before, we are pleased to announce the comple-      definitional elements and include as many exceptions as
    tion of our annual MAC study of agreements with transac-        possible, and buyers doing the reverse. This year we have
    tion values of $100 million or greater based on agreements      again compared our sampling of 528 deals with the top
    dated between June 1 of the prior year and May 31 of the        100 deals during the period examined. The top 100 agree-
    current year. We initiated this annual survey because of        ments were derived from the list of top 100 deals for 2007
    the dramatic stock market decline in 2000 and the events        and the top 25 deals for Q1 2008 announced in Mergers
    of September 11—to track their effects on the negotia-          & Acquisitions: The Dealmakers Journal, excluding those
    tion of MAC provisions in M&A deals. Since that time,           deals that occurred during the first six months of 2007 and
    this annual exercise has undergone significant expansions       would have been reported on the previous year’s survey. In
    of scope and analysis to help identify current negotiation      comparison to the sampling as a whole, we have seen that
    trends and the advantages and disadvantages provided            these top 100 deals generally followed the same percent-
    to transacting parties in mergers and acquisitions. Now,        age trends of the MAC definitional elements and had a
    seven years later the credit crisis has created arguably more   slightly higher percentage trend in the MAC exceptions.
    dire financial circumstances than those under which the         Our findings indicate that, in a deviation from the prior
    MAC survey was created.                                         year’s trend, buyers have successfully limited the number
                                                                    of exceptions to the MAC definition.
    By way of explanation, a material adverse change (“MAC”)
    or material adverse effect (“MAE”) provision in an agree-
    ment generally comprises two elements of an acquisition
                                                                    Impact of Credit Crisis
    agreement. In the first, the MAC or MAE definition de-          This year’s survey reflects deals that took place from June 1,
    scribes the circumstances that would constitute a material      2007, right before the initial onset of the credit crisis that
    adverse change or effect on the target. This definition is      began in July 2007, and includes deals only through May
    used in the representations and warranties of the target or     31, 2008. Accordingly, the deals surveyed do not include
    sellers, i.e., “The company’s contracts are in full force and   the effect of recent events. We anticipate the current un-
    effect, except as would have a Material Adverse Effect.” The    certainty in the market to exist for some time to come, and
    definition is also used to delineate the circumstances that,
    upon their occurrence, permit a buyer to withdraw from
    the transaction without penalty. This latter use is known
    in common parlance as the “MAC out” and appears in the
    buyer’s conditions precedent to close, i.e., “there shall not
    have occurred a Material Adverse Change in the company.”
    The flip side of the coin is the listing of specific events,
    the “MAC exceptions”, that would prohibit a buyer from
    backing out of a deal.

    The elements of MAC clauses generally are negoti-
    ated heavily, with sellers attempting to narrow the MAC



2
we anticipate that MAC clauses in acquisition agreements        in the merger agreement. The buyers argued, among
will be affected by this uncertainty.                           other things, that the recent collapse in the credit markets
                                                                constituted a change in the general economic, business
Survey results confirm that, during the relevant period,
                                                                or market conditions and changes affecting the financial
the previously overheated pro-seller market cooled off
                                                                services industry generally, and accordingly, a MAC had
significantly as a result of less leverage being available to
                                                                occurred. The buyers further noted that the collapse of the
both strategic and financial buyers. MACs serve as a risk-
                                                                securitization market and disruption of the asset-backed
allocation tool, and as access to credit decreases, MACs
                                                                commercial paper market had disproportionately affected
become more highly-negotiated. Sellers wishing to en-
                                                                Sallie Mae, and therefore were not excluded from the
sure certainty of closing will have to balance that desire
                                                                merger agreement’s MAC definition. After a bitter legal
with the real-world lack of available credit. In light of
                                                                battle over whether an actual MAC had occurred, the
the credit crisis, we are seeing MAC terms become more
                                                                case finally settled. The potential for litigation in these
buyer-friendly, and we anticipate the market to stay this
                                                                uncertain times adds to the high level of negotiation with
way through most of 2009.
                                                                respect to the MAC provisions and the need for a delicate
Some immediate effects of the credit crisis are being seen      balance between specificity in the exceptions and breadth
more readily in the increased attempts by buyers to walk        to capture those items that are not readily apparent.
away from signed M&A deals by stating that a MAC
had occurred with respect to the target. There have been        Methodology
several deals that have been litigated over the last year as
                                                                In completing this year’s survey, we examined 528 asset
the markets began to cool in which buyers have attempted
                                                                purchase, stock purchase and merger agreements. The
to use the MAC provision to terminate an existing agree-
                                                                surveyed transactions represent many significant industries
ment. In addition to the Huntsman decision described
                                                                and range in value from $100 million to $27.3 billion.
elsewhere in this survey, SLM Corporation v. J.C. Flowers
II, C.A. 3279-VCS is an example. In this case, the buy-         In selecting our 528 agreement sample, we generated a
ers (J.C. Flowers, JPMorgan Chase and Bank of America)          list of deals executed between June 1, 2007 and May 31,
refused to consummate the proposed acquisition of SLM           2008 from publicly available information submitted to the
(better known as Sallie Mae) on the terms set forth in the      Securities and Exchange Commission and selected agree-
merger agreement because they alleged that a MAC had            ments from that list. Although this analysis is not techni-
occurred. Accordingly, the buyers sought to reduce the          cally scientific, we believe that the results are statistically
purchase price. Sallie Mae brought the action, alleging         representative of the climate of M&A transactions during
it was entitled to collect a $900 million termination fee       that period.
because the buyers refused to close on the terms set forth




                         “In light of the credit crisis, we are seeing MAC terms become
                         more buyer-friendly, and we anticipate the market to stay this way
                         through most of 2009”




                                                                                                Seventh Annual MAC Survey – 3
         Results



    In the agreements surveyed, while the MAC definitional                                credit available to finance transactions, and sellers’ under-
    elements were slightly narrower than in the prior year,                               standing that they must decrease their expectations to get
    we noted a decrease in the number of MAC exceptions                                   a deal done. Sellers are finding that in order to sell their
    included in the agreements surveyed, indicating the ad-                               businesses, they need to agree to additional concessions
    vancement of buyers’ bargaining power during this period.                             including the inclusion of fewer MAC exceptions.
    The current shift towards more buyer-friendly terms noted
                                                                                          Set forth below is a table detailing the prevalence of the
    during the period is likely due at least in part to a lack of
                                                                                          MAC elements in our survey:



                                                                 MAC Elements


                                                                                      2
                          MAC on validity or enforceability of agreement          0

                                MAC on the securities or purchased assets                              23
                                                                                                             36

                               MAC on prospects of the Company/Target                 3
                                                                                  0

        Ability of Target to continue to operate business immediately after       1
       closing in substantially same manner as immediately before closing         0

    Ability of Purchaser to continue to operate business immediately after        1
      closing in substantially same manner as immediately before closing          1

                    MAC on the benefits contemplated by the agreement             1
                                                                                  1

                  Losses over a specified threshold deemed to be a MAC                3
                                                                                      3

                              MAC on Purchaser's ability to close the deal                             23
                                                                                                  19

                                  MAC on Seller's ability to close the deal                                         44
                                                                                                                  41

               MAC on the business, operations, financial condition, etc.                                                                      88
                                                                                                                                                    95
                                                                                                                                                          %
                                                                              0                 20           40           60           80           100


                            % of deals having element/exception               % of Top 100 deals having element/exception




4
In conducting our review, in addition to examining the         In addition, when we reviewed certain exclusions from
elements of, and exclusions from, MAC definitions, we          MAC definitions, such as changes in markets or the
also sought to evaluate certain uses of MAC provisions         target’s industry, we found that 51% of the time, such
in acquisition agreements. One example is the language         exclusions were qualified such that they only applied to
that a given event “would reasonably be expected to have a     the extent that such events disproportionately affected the
Material Adverse Effect” on the target, as opposed to sim-     target, as opposed to such qualifications appearing in 69%
ply stating that such event has in fact had such an effect.    of transactions surveyed for the prior year. Interestingly,
This nuance is important because the “would reasonably         in these buyer-favorable times, the foregoing examples
be expected to” formulation puts the onus on the seller        trended toward sellers’ favor. An example of such a carve-
to think thoroughly through the effects of certain events.     out from the MAC definition would be “changes resulting
For example, if there were a threatened litigation, no event   from general economic, financial, regulatory, or market
actually affecting the target’s balance sheet would have oc-   conditions, provided that such changes shall not have af-
curred. However, if the case were a strong one, it could       fected the target in a materially disproportionate manner
reasonably be expected to have an MAE. Although we saw         as compared to other companies operating in the target’s
the pendulum swing back to the buyer, interestingly, the       line of business.” The “disproportionate effects” language
“would reasonably be expected to” formulation showed up        is a sophisticated tool for the buyer to push back on what
in only 15% of the agreements as compared to 52% in            would typically be a seller’s negotiation victory. This may
the prior year. One possible reason for this result is sell-   be directly related to the credit crisis, as we’ve unfortu-
ers’ desire for increased deal certainty by eliminating this   nately come to realize, changes in the market are not an
forward-looking language.                                      unlikely occurrence and sellers appear largely unwilling to
                                                               assume the risk.




                   “Sellers are finding that in order to sell their business, they need
                   to agree to additional concessions including the inclusion of fewer
                   MAC exceptions”




                                                                                             Seventh Annual MAC Survey – 5
        Results


    A recent Delaware Chancery Court decision addressed the                           the chemical industry taken as a whole. Hexion had
    analysis to be undertaken with respect to the “dispropor-                         argued that Huntsman had suffered an MAE principally
    tionate effects” language. On September 29, 2008, the                             as compared to other chemical companies. However, the
    Delaware Chancery Court rendered its decision in Hexion                           Court found that, as compared to prior years, Huntsman’s
    Specialty Chemicals, Inc. et al v. Huntsman Corp., C.A.                           financial condition, business and results of operations,
    No. 3841-VCL (Sept. 29, 2008). In general, Hexion, a                              while decreasing, had not suffered an MAE. Accordingly,
    portfolio company of Apollo Global Management, agreed                             its position as compared to other chemical companies was
    to acquire Huntsman, a chemical company, pursuant to                              irrelevant. Notably, the Court reaffirmed that absent clear
    a merger agreement executed in July 2007. The merger                              language, the burden of proof with respect to an MAE
    agreement included a “no MAE” condition to closing. The                           rests on the party seeking to excuse its performance, and
    merger agreement defined “Material Adverse Effect” to                             that Delaware courts have never found a material adverse
    exclude events resulting from changes in general economic                         effect to have occurred in the context of a merger agree-
    or financial market conditions, except to the extent such                         ment.
    event has had a disproportionate effect on Huntsman and
                                                                                      Lastly, we observed that leaving the term “material adverse
    its subsidiaries, taken as a whole, as compared to others
                                                                                      change” undefined is still pretty rare, although not as rare
    in the chemical industry. In holding that no MAE had
                                                                                      as on our previous survey where 1% of the deals did not
    occurred, the Court found that the exception to the MAE
                                                                                      define what constituted a MAC, as opposed to 7% on this
    definition had to first be tested before testing the excep-
                                                                                      year’s survey.
    tion to the exception. The Court found that Huntsman
    had not suffered an MAE, and accordingly, determined                              Set forth below is a table detailing the findings in our
    that the Court need not reach the question of whether                             survey in respect of the miscellaneous definitional matters
    its performance had been disproportionately worse than                            described above:




                                                                    4
                                            No MAC out
                                                                    4

                                                                                                        51
                        Disproportionate Effects Language
                                                                                                                            80

                                                                        7
            MAC out with no definition of "MAE" or "MAC"
                                                                1

                Reasonable expectation of event to have a                        15
                           material adverse effect/change                   9
                                                                                                                                         %
                                                            0                    20           40             60        80          100


                         % of deals having element/exception                    % of Top 100 deals having element/exception




6
Decrease in exceptions relating to
change in markets
This year marked a decrease in MAC exceptions for all                      previous year’s survey. The inclusion of other exceptions
types of change in markets categories surveyed, other than                 (“changes in the economy or business in general” and
“changes in exchange rates” which saw a slight increase                    “changes in trading price or trading volume of the compa-
that could be attributable to the concerns surrounding                     ny’s stock”) also experienced declines in M&A transactions
the weakening U.S. dollar. To cite a few examples, of the                  for the period surveyed. Again, these decreases, while not
total deals examined, 70% included a MAC exception for                     substantial, are further evidence of the trend towards more
“changes in general conditions of the specific industry”, as               buyer-favorable terms.
opposed to 75% in the prior year, 16% included a MAC
                                                                           Set forth below is a table detailing the prevalence of MAC
exception for “changes in interest rates”, as opposed 17%
                                                                           exceptions found in our survey which relate to “Changes
in the prior year, and 45% included “changes in the securi-
                                                                           in Markets”:
ties markets” as an exception, as opposed to 51% on our




                                           MAC Exceptions: Change in Markets



                                       Change in exchange rates             12
                                                                                 17

                                         Change in interest rates                16
                                                                                      22

                                                                                           33
   Change in trading price or trading volume of Company's stock                                       54

                                    Change in securities markets                                 45
                                                                                                              64

            Change in general conditions of the specific industry                                                  70
                                                                                                                             84

                                                                                                                        75
                  Change in the economy or business in general                                                                    89
                                                                                                                                             %
                                                                    0         20            40         60               80             100

                         % of deals having element/exception            % of Top 100 deals having element/exception

                                                                                                            Seventh Annual MAC Survey – 7
         Results



    Exceptions relating to changes in legal
    developments
    For the period surveyed, the results relating to the excep-                          years, occurring in 63% of the agreements surveyed this
    tions concerning changes in legal developments were                                  year (as compared to 59% in 2007 and 42% in 2006)
    mixed. The MAC exceptions for “changes in applicable                                 and the “changes resulting from bankruptcy or actions of
    taxes/tax law” and “changes in interpretation of laws by                             a bankruptcy court” appeared in 3% of the agreements
    courts or government entities” decreased. Only 27% of                                surveyed this year, up from 0 in the previous year. Despite
    the agreements surveyed contained the MAC exception                                  the buyer-favorable climate, it appears that sellers remain
    “changes in interpretation of laws by courts or govern-                              unwilling to take the risks with respect to changes in law or
    ment entities”, marking a 5% decrease from the prior year,                           regulations; therefore it is up to the buyers to get comfort-
    a contrast to the 11% increase between 2006 and 2007.                                able with the legal landscape in which the target company
    However, the MAC exceptions for “changes in laws or                                  operates.
    regulations” has continued to increase over the past several
                                                                                         Set forth below is a table detailing the prevalence of MAC
                                                                                         exceptions found in our survey which relate to “Changes
                                                                                         in Legal Developments”:



                                              MAC Exceptions: Legal Developments


                                                                                     3
                                     Change in applicable taxes/tax law
                                                                                    2

                                                                                    3
    Changes resulting from bankruptcy or actions of a bankruptcy court          0

                                                                                                     27
              Change in interpretation of laws by courts or govt entities
                                                                                                                 47

                                                                                                                            63
                                         Change in Laws or Regulations
                                                                                                                                     78
                                                                                                                                                      %
                                                                            0                20           40           60           80          100


                           % of deals having element/exception              % of Top 100 deals having element/exception




8
Exceptions for changes resulting from terrorism, acts of war, changes in political
conditions and national and international calamites remain unchanged
MAC exceptions for changes resulting from terrorism, acts                    In contrast, this year’s survey showed a continued increase in
of war, changes in political conditions, and international                   the exceptions for changes caused by acts of God (as before,
calamities generally remained unchanged or, in the cases                     we have tabulated events of weather and natural disasters in
where there was a change, slightly decreased, in the period                  the “acts of God” category). Over the prior two years we saw
surveyed in contrast to 2006 and 2007, when there was                        a sharp increase in this category, rising from 9.5% in 2006
an across-the-board increase of these types of MAC excep-                    to 23% in 2007, and we saw another increase, to 25%, this
tions. For example, the frequency of MAC exceptions for                      year. This increase may be explained by the natural disasters
changes due to acts of terrorism in the United States or                     that have occurred over the last few years, nationally and
abroad fell only 1% from 61% of surveyed agreements in                       internationally, including the Southeast Asian tsunami and
2007 to 60% in 2008; whereas between 2006 and 2007,                          Hurricane Katrina. With the occurrence of other events such
the frequency of this exception increased by 26%. Simi-                      as the rash of hurricanes affecting the southern U.S. and the
larly, the number of agreements that contained exceptions                    Chinese earthquake occurring earlier this year, this category
for changes due to “acts of war or major hostilities” and                    may be one that we continue to see develop.
“natural calamities” remained constant in this year’s sur-
                                                                             A table detailing the prevalence of MAC exceptions found in
veyed agreements, 60% and 12%, respectively. This may
                                                                             our survey which relates to “Changes arising from Hostilities,
be due in part to the longevity of the wars in Iraq and
                                                                             Calamites and Acts of God” follows:
Afghanistan and acceptance by buyers and sellers of this
being the new reality.


                                                                             7
      International calamity directly or indirectly involving U.S.
                                                                         2

                                                                                 12
                                               National Calamity
                                                                                 12

                                                                                                38
                                  Change in political conditions
                                                                                                      47

                                                                                        25
                                                     Acts of God
                                                                                               36

                                                                                                                59
                                                Acts of Terrorism
                                                                                                                        75

                                                                                                                60
                                  Acts of war or major hostilities
                                                                                                                       74
                                                                                                                                        %
                                                                     0            20           40          60           80        100


                               % of deals having element/exception               % of Top 100 deals having element/exception

                                                                                                                Seventh Annual MAC Survey – 9
          Conclusions



     Conclusions and notable comparisons
     with the top 100
     Generally, MAC exceptions appeared with slightly greater                    about 14-20% more often in the top 100 deals in compari-
     frequency within the top 100 deals in comparison to total                   son to the total deals surveyed. The outcome of the current
     deals surveyed, indicating that sellers have slightly greater               crisis in the financial markets will influence whether sellers
     negotiating power in larger transactions. However, given                    will retain greater bargaining power in larger deals.
     the fact that exceptions to MAC within the top 100 deals
                                                                                 As we are witnessing every day, the financial markets in the
     experienced a significant decline from the prior year, this
                                                                                 U.S. and abroad remain in constant flux. We expect the
     observation should not be taken as a continuation of the
                                                                                 number of transactions to be down during the next year.
     prior year’s trend but as an indication that even though
                                                                                 It remains to be seen whether the buyer-friendly trend will
     buyers’ bargaining power has increased, sellers can argu-
                                                                                 continue or whether the lack of available credit will cause
     ably ask for the inclusion of more MAC exceptions on
                                                                                 sellers to demand more MAC exceptions in an effort to
     those deals that command higher purchase prices. No-
                                                                                 obtain more certainty of closure. We will be monitoring
     table examples of this are MAC exceptions relating to the
                                                                                 the trends over the next year.
     general categories “changes in markets” and “national and
     international hostilities, calamities and acts of God”. The                 The following chart shows the remaining results of our
     exceptions making up these categories generally appeared                    survey:




                                               MAC Exceptions: Employee Matters


             Changes in the Target's relationship with any       1
                               labor organization/unions         0

                                                  Lay-offs        1
                                                                 0

                                       Employee attrition             13
                                                                            20
                                                                                                                                   %
                                                             0         20             40           60            80          100



                          % of deals having element/exception          % of Top 100 deals having element/exception




10
                            MAC Exceptions: Changes in Ordinary Course of Business


                                                                                   3
                Delay or cancellation of orders for services or products
                                                                               1

                                                                                   2
             Adverse effect resulting in seasonal reduction in revenues
                                                                                   3

                       Commencement of a proceeding in bankruptcy              0
                               with respect to a material customer             0

                                                                                           11
                         Reduction of customers or decline In business
                                                                                                     21
                                                                                                                                                         %
                                                                           0                    20             40    60                      80    100


                            % of deals having element/exception                % of Top 100 deals having element/exception




                                                 MAC Exceptions: Miscellaneous


          Litigation resulting from any law relating to the agreement or                        15
                                          the transactions contemplated                                   27

                    Any action required to be taken under any law or                   7
                    any existing contract by which the Target is bound         1

                                                                                                               35
         Failure by the Target to meet revenue or earnings projections
                                                                                                                    52

                                                                                                                              60
                                                     Changes in GAAP
                                                                                                                                             76

Changes caused by the taking of any action required or permitted or in                                                   56
   any way resulting from or arising in connection with the agreement                                                                   70

                                                                                       5
                     Expenses incurred in connection with transaction
                                                                                   2

                                                                                                                                   64
                                Effect of announcement of transaction
                                                                                                                                              78

     Developments arising from any facts that were expressly disclosed                 5
                                                  to the Parent/public             2
                                                                                                                                                         %
                                                                           0                    20             40    60                      80    100

                            % of deals having element/exception                % of Top 100 deals having element/exception


                                                                                                                    Seventh Annual MAC Survey – 11
Nixon Peabody LLP is a full service, international law firm with more       For additional information about our
than 700 attorneys collaborating across 25 major practice areas in 18       Seventh Annual MAC Survey, please
office locations, including Boston, Chicago, London, Los Angeles, New       contact:
York, San Francisco, Silicon Valley, Shanghai, and Washington, D.C.

                                                                            Dominick P. DeChiara, Partner
                                                                            Chair, Private Equity Practice
                                                                            (212) 940-3772
                                                                            ddechiara@nixonpeabody.com


                                                                            Philip B. Taub, Partner
Private Equity
                                                                            Chair, Private Company
Nixon Peabody is recognized as leader in private equity in both deals       Transactions Practice
closed and funds negotiated or structured. Our practice includes more       (617) 345-1165
than 65 attorneys who provide strategic advice and legal counsel to         ptaub@nixonpeabody.com
private equity, distressed and venture capital funds, hedge funds, port-
folio companies, and institutional investors. We advise clients on a
broad scope of transactions including, leveraged buyouts, control and
non-control investments, business combinations, divestitures, growth
financings, joint ventures and other strategic investments.
Our knowledge of business issues, industry opportunities, and market
conditions, combined with our extensive experience, enables us to
deliver efficient, cost-effective and value-added solutions at all stages
of a transaction.


Mergers & Acquisitions
Nixon Peabody is a leading advisor to public and private companies on
corporate transactions. Our results-oriented team is focused on mak-
ing transactions fast, smooth, and cost efficient. We take an integrated,
cross-disciplinary approach, which spans practices from tax, securities,
corporate governance, and labor to real estate, intellectual property,
environmental, antitrust, and other regulatory fields.
Our ability to see the big picture and think strategically enables us
to develop creative solutions even when faced with considerable ob-
stacles. We gain a thorough understanding of our clients’ economic,
structural, and transactional objectives, help to prioritize them, iden-
tify and overcome any stumbling blocks, and assure that clients’ goals
are achieved.




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