When the climate for mergers and acquisitions was heated, acquirers and their lenders, perceiving themselves in a weak position, did not aggressively negotiate some critical items in their agreements. As an example, M&A agreements will usually contain "material adverse change" or "material adverse effect" clauses (MAC clauses) that permit the acquirer to avoid the deal if there is a significant change in conditions. There are many variations of these clauses and many ways they can be negotiated. For example, do they apply only to the target company, to the industry of the target company, or to the economy in general? These "escape clauses" can be heavily negotiated. But, prior to the recent financial crisis, acquirers and their lenders did not insist on strong MAC clauses, giving them less room to avoid a transaction to which they have committed.
With the events leading to the current financial crisis, not surprisingly, many potential acquirers are seeking to avoid deals to which they had earlier agreed. In one of the most recent of these, Hexion Specialty Chemicals Inc. and the private equity firm of Apollo Management LP were prevented by the Delaware Court of Chancery from backing out of their agreement to acquire Huntsman Corp. (Hexion Specialty Chemicals Inc. v. Huntsman Corp. No. 3841-VCL, New Castle County, Delaware) The next day, a Texas state court issued an order barring two banks, Credit Suisse Securities and Deutsche Bank Securities, from delaying or preventing financing of the deal. (Huntsman Corp. v. Credit Suisse Securities (USA) LLC, No. 08-09-09258, Montgomery County, Texas District Court)
The dispute resulted from adverse financial results reported by Huntsman after a Commitment Letter was signed. Hexion, the acquirer, claimed that the acquisition would make both companies insolvent, a claim disputed by Stephen Lamb, the Vice Chancellor of the Delaware court, who called both Hexion and Huntsman "solvent, profitable business." Continued Vice Chancellor Lamb, "The issues in this case relate principally to the cost of the merger and whether the financing structure Apollo and Hexion arranged in July 2007 is adequate to close the deal and fund the operations of the combined enterprise."
This case is another example of the effect the instability in the financial markets is having on ongoing transactions. It is clear that many potential acquirers, such as Hexion, are having second thoughts about deals they struck before the adverse events in the financial and stock markets.