Revisiting MAE MAC Clauses in M&A after Cooper T

In what is now a familiar scenario, a megamerger unravels after post-signing events make the target less attractive to the acquirer, the acquirer develops considerable buyer’s remorse, and the target accuses the acquirer of delaying the deal.  If the acquirer has failed to negotiate a termination right triggered by the unforeseen events and also possesses an obligation to close, then the target may have a viable claim for breach of the merger agreement arising from the acquirer’s intentional delay. 
This fact pattern unfolded after Cooper Tire & Rubber Company announced a proposed $2.5 billion sale of the company to Apollo Tyres Limited (Apollo Tyres) in June 2013. The United Steelworkers (USW) asserted that the proposed merger required a renegotiation of the union’s contract with Cooper. After Apollo Tyres conditioned its participation in negotiations with the USW on Cooper accepting a $9 reduction in the deal price of $36, Cooper filed an action in Delaware. Cooper argued that Apollo Tyres breached a covenant to use its “reasonable best efforts” to obtain approvals required for closing. In Cooper Tire & Rubber Company v. Apollo (Mauritius) Holdings Pvt. Ltd., C.A. No. 8980-VCG (Del. Ch. Nov. 8, 2013), the Delaware Court of Chancery rejected Cooper’s claims that Apollo Tyres breached the merger agreement, but cautioned Apollo Tyres against continuing to use the union issues to renegotiate the deal price. Cooper terminated the merger agreement in December 2013. 
The Cooper fact pattern was reminiscent of the events that unfolded after Hexion Specialty Chemicals, Inc., and its parent, Apollo Global Management, LLC (Apollo), agreed to acquire Huntsman Corp. in 2007. During the period between signing and closing, Huntsman reported disappointing earnings, and Hexion attempted to extricate itself from the transaction by claiming that Huntsman had suffered a material adverse effect and would be insolvent post-closing. In subsequent litigation, the Delaware Court of Chancery found that the changes in Huntsman’s financial performance did not constitute an MAE. Apollo Global Management, LLC v. Huntsman Corp., 965 A.2d 715 (Del. Ch. 2008). 
More recently, the Delaware Court of Chancery found that short-term changes in financial results could conceivably constitute a material adverse effect under an acquisition agreement for purposes of a motion to dismiss against a backdrop of allegations of fraudulently misconduct by the sellers of a privately-held business. Osram Sylvania, Inc. v. Townsend Ventures, LLC, C.A. No. 8123-VCP (Del. Ch. Nov. 19, 2013). 
The acquirer’s typical protection against undesirable risks from significant changes in the target’s business between signing and closing is the material adverse effect or “MAE” clause. As more fully outlined below, these cases suggest that short-term, forward-looking elements of the MAE definition in merger agreements merit more attention by deal practitioners. 
Cooper Tire & Rubber Company v. Apollo (Mauritius) Holdings Pvt. Ltd.
Background
This case arose after labor issues in both the United States and China threatened to unravel Apollo Tyres’ proposed $2.5 billion buyout of Cooper. Workers seized Cooper’s largest Chinese facility in July 2013, rendering it unlikely that Cooper could deliver timely, interim financial statements to Apollo Tyres. In addition, the USW filed an arbitration proceeding in Tennessee, alleging that the merger agreement violated the union’s collective bargaining agreements with Cooper. Thereafter, an arbitrator issued an order, preventing Cooper from consummating the merger absent renegotiation of its agreements with the USW. As a result, Apollo Tyres and Cooper agreed not to close the merger until the union contracts had been renegotiated. Subsequently, Cooper lowered its forecasted profits for 2013 by one-third, largely as a result of the labor issues. Thereafter, Apollo Tyres made some attempts to renegotiate the USW contracts (without Cooper’s input), but eventually halted negotiations because Cooper would not agree to a reduction in the merger price. Cooper estimated the cost of the USW developments to be about $10