The Cameron-Schlumberger merger and the MAE clause
Continued from part 4 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:
- any weather-related or other force majeure event or outbreak or escalation of hostilities or acts of war (whether or not declared) or terrorism (Note the disproportionate effect clause. A war that affects everyone is not an MAE, but an earthquake that causes an environmental disaster would be.)
- changes in Applicable Law or in GAAP or in accounting standards, or any changes in the interpretation or enforcement of any of the foregoing, or any changes in general legal, regulatory or political conditions (If the government decided to add a surtax on the price of oil that caused demand to fall, that isn’t an MAE.)
- any change in such person’s credit ratings (This is an unusual provision, but it is related to the price of energy.)
- any decline in the market price, or change in trading volume, of the capital stock of such person, or any failure to meet any internal or public projections (it being understood that the exceptions shall not prevent or otherwise affect a determination that the underlying cause of any such change is a Material Adverse Effect) (Missing your quarter isn’t an MAE. However the reason why you missed is fair game.)