Matthew DiRisio Discusses the Intricacies of MAE Clauses in the Wake of COVID-19

Historically speaking, private equity firms did not take material adverse effect (MAE) cases to trial to break a deal agreement. However, in the wake of the Coronavirus pandemic, claiming an MAE has become more acceptable than ever, but proving one remains an extraordinary feat. Private equity buyers are testing MAE’s traditional definition and are pivoting to a clause that calls for businesses to operate in the ordinary course between the signing and closing of a transaction.

MAE clauses typically have a long list of what does not constitute an MAE. At the same time, the definition of a material adverse cause (MAC)/MAE is becoming less boilerplate. PE Hub reports, the definition was previously a fairly bare-boned, but now, the exceptions are often far longer than a MAC/MAE definition.

Winston New York Partner Matthew DiRisio says, “that could have a counter-intuitive effect, making a MAC/MAE potentially easier to show.” He adds, “if a party sat there and contemplated 20 things that wouldn't be MACs, if they thought of all these permutations and chose not to [exclude] A, B or C, that might suggest that this is something that could be considered a MAC.”

While MAE’s are being challenged more than ever, private equity buyers are spending more time testing out another strategy as a means to scrap or renegotiate a deal: the interim operating covenant. That is where the focus is – more than trying to fine-tune the MAE definition, Daniel adds.

“Buyers recognize the probable futility in showing that one company is a special snowflake when it comes to the COVID effects,” Matt said. “That’s turned attention to the theory that there has been a breach of the ordinary course covenant between signing and close.”

Read the full article here (subscription required).

View all of our COVID-19 perspectives here. Contact a member of our COVID-19 Legal Task Force here.