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Parsing the AGL-Southern Material Adverse Effect Clause: Part 3

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The MAE clause, paraphrased

Continuing from Part 4 of this series, the Material Adverse Effect clause lays out the conditions under which The Southern Company (SO) can back out of its deal with AGL Resources (AGL).

As a general rule, MAE clauses follow a similar format. Pretty much anything that has a material adverse effect on the company will be 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.

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“’Company Material Adverse Effect’ means any fact, occurrence, change, effect, or circumstance, individually or in the aggregate with all other facts, occurrences, changes, effects, and circumstances that (a) has had, or would reasonably be expected to result in, a material adverse effect on the business, assets, liabilities, properties, or results of operations or financial condition of the Company and the Company Subsidiaries, taken as a whole, or (b) would, or would reasonably be expected to, prevent or materially impair or delay the ability of the Company to perform its obligations under this Agreement or consummate the Transactions; except that with respect to clause (a), in no event will any of the following, either alone or in combination, constitute a ‘Company Material Adverse Effect’ or be taken into account in determining whether a Company Material Adverse Effect has occurred or would reasonably be expected to occur.”

This is standard MAE language. he carve-outs follow. My comments are included in italics.

  • any change from weather conditions or customer usage (an unusually warm winter or cool summer that depresses demand is not an MAE)
  • effects arising from changes in Laws or accounting principles (if the government changes depreciation schedules that cause AGL Resources to show a loss, it isn’t an MAE)
  • effects arising from the announcement of the execution of this Agreement (if a key employee resigns or a major customer departs due to the merger, it isn’t an MAE)
  • any Transaction Litigation (this could be a customer, a shareholder, or something else; it’s not an MAE)
  • actions taken pursuant to this Agreement or at the request of Southern Company (self-explanatory)
  • changes in the market price of Company Common Stock or any failure to meet projections, forecasts, or revenue or earnings predictions for any period (it being understood that the facts giving rise or contributing to any such change or failure will be taken into account) (in other words, missing your quarter isn’t an MAE, but the reason why you missed it is fair game)

Other merger arbitrage resources

Other important merger spreads include the Freescale-NXP transaction. The merger of Freescale Semiconductor (FSL) and NXP Semiconductors (NXPI) is expected to close by the end of the year. For a primer on risk arbitrage investing, read Merger arbitrage must-knows: A key guide for investors.

Investors who are interested in trading in the utilities space should look at the Utilities Select Sector SPDR ETF (XLU).

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