The COVID-19 pandemic has served as a dramatic reminder that extraordinary events that affect acquirers and target companies can arise between the signing and closing of a merger agreement. The pandemic led, on a global basis, to the government-ordered closing of most businesses and stay-at-home orders for most people, plunging stock markets, extreme liquidity concerns, and a loss of lives on a horrific scale.
After the pandemic emerged, virtually every party to a then-pending merger agreement investigated whether it or its counterparty had a right to terminate the agreement based on the pandemic and its dramatic effects. Merger agreements almost invariably include as a condition to the buyer’s obligation to close that, between the signing and closing of the transaction, no event has occurred that had or would reasonably be expected to have a “material adverse effect” (MAE) on the target company. Through negotiation of the definition of “MAE” in this closing condition (particularly, negotiation of the types of events that will be specified as not constituting an MAE notwithstanding their effect on the target), the parties allocate between them the risk of an extraordinary event occurring pending closing that may materially adversely affect the target. In the minds of many, the COVID-19 pandemic appeared to be the quintessential MAE: an unanticipated (almost unprecedented) event that was not the fault of the parties in any way, having catastrophic effects on businesses. If this did not constitute an MAE, the thinking went, what ever would?
