On October 1, 2018, the Delaware Court of Chancery held for the first time that a buyer can terminate a merger agreement based on the existence of a Material Adverse Effect. In this alert, available by clicking here, we will examine key takeaways from this decision and implications for drafting and dispute resolution. Some of the highlights include:

  • Decision reaffirms the basic test for establishing a material adverse effect as set forth in IBP and Hexion: the downward departure from the company’s prior performance must be “material when viewed from the longer-term perspective of a reasonable acquirer,” because it is “consequential to the company’s long-term earnings power.”
  • Court suggests a benchmark of a 40% drop in quarterly year-over-year financial performance as sufficient to establish the materiality of a drop in financial performance for purposes of a material adverse effect.
  • Court also suggests a benchmark of a 20% drop in seller’s equity value as sufficient to establish whether a departure from a representation is quantitatively material.
  • Court provides a roadmap for attempting to establish the durational significance of a drop in earnings: look at analysts’ views of the impact of the drop in earnings over the long term and provide compelling expert testimony on the subject.
  • Court holds that a buyer’s knowledge of certain risks or events discovered or confirmed in due diligence is not relevant in the absence of a carve-out in the MAE clause carving out from consideration the assertion of an MAE based on risk factors or events discovered in due diligence.

Please click here to read the alert.