The Cameron-Schlumberger merger and the MAE clause
Continued from part 3 of this series.
The MAE (material adverse effect) clause is one of the first things arbitrageurs look at in a merger agreement. In the case of the merger deal between Cameron (CAM) and Schlumberger (SLB), the MAE clause lays out the circumstances under which Schlumberger can back out of its deal with Cameron.
Note that some companies refer to it as a material adverse change, or MAC, clause, but it’s more or less the same thing. In fact, arbitrageurs always call it the MAC clause regardless of how it’s actually characterized in the merger agreement.
The MAE clause, paraphrased
As a general rule, MAE clauses follow a similar format. Just about anything that has a material adverse effect on the company is considered an MAE, but there are exceptions to that rule.
Please note that the MAE clause has been paraphrased here to limit the legalese. You should still read and understand the actual language in the merger agreement.
“‘Material Adverse Effect’” with respect to any person shall mean (i) a material adverse effect on or material adverse change in the business, assets, liabilities, financial condition or results of operations of such person and its Subsidiaries, taken as a whole, other than any effect or change relating to or resulting from [exceptions follow]…or (ii) a material adverse effect on or material adverse change in the ability of the person to perform its obligations under this Agreement or to consummate the Merger and the other transactions contemplated by this Agreement.”
Exceptions to the Material Adverse Effect Clause:
- changes or conditions affecting the economy or financial markets in general, including changes in interest or exchange rates (In other words, the financial crisis was not an MAE.)
- changes or conditions in the industries in which the person operates, including changes in or changes, effects, events, or occurrences generally affecting the prices of oil, gas, natural gas, natural gas liquids, or other commodities (In other words, if oil collapses, it isn’t an MAE.)
- the announcement or the existence of, or compliance with, or taking any action required or permitted by this Agreement or the transactions contemplated hereby or any litigation referred to in Section 8.14 (If a major client company left Cameron because it didn’t want to deal with Schlumberger, it isn’t an MAE.)
- taking any action by such person at the written request of Merger Sub, Schlumberger US, or Schlumberger, in the case of Cameron, or of Cameron, in the case of Merger Sub, Schlumberger US, or Schlumberger (Obviously, Schlumberger cannot tell Cameron to do something and then use any unintended consequences as an excuse to back out of the merger.)