The MAE clause with carve-outs, paraphrased
In this part of the series, we’ll look at the MAE (material adverse effect) clause of the Starz (STRZA) merger agreement with Lions Gate Entertainment (LGF) and discuss how Lions Gate could back out of the deal.
As a general rule, all MAE clauses follow a uniform format. Pretty much anything that has a material adverse effect on the company will be considered an MAE, although there are exceptions to that rule.
Please note that we’ve included only an excerpt of the MAE clause below to limit the legalese. You should still read and understand the actual language in the merger agreement. The carve-outs follow, with my comments in italics.
“‘Company Material Adverse Effect'” means any event, occurrence, fact, condition, change, development or effect that, individually or in the aggregate, (A) is materially adverse to the business, assets, properties, liabilities, results of operations or condition (financial or otherwise) of the Company and its Subsidiaries, taken as a whole; provided, however, that none of the following shall be deemed in and of themselves, either alone or in combination, to constitute, nor shall any of the following be taken into account (in either case, after giving effect to any event, occurrence, fact, condition, change, development or effect resulting therefrom) in determining whether there has been or will be, a Company Material Adverse Effect…”
Note this is standard MAE language. The carve-outs follow:
- general economic conditions attributable to the US economy or financial markets, (including changes in interest rates, credit, exchange rates, or price levels) (In other words, a recession would not be considered a MAE.)
- general political conditions or changes therein (including acts of terrorism or war, weather conditions, or other force majeure events) (There’s a disproportionate effect clause here. An act of terror like 9/11 wouldn’t be considered a MAE. However, an act of terror that destroyed Starz’s headquarters would be.)
- financial or security market fluctuations or conditions (In other words, a stock market crash or a financial crisis wouldn’t be considered a MAE.)
- changes in, or events affecting, the industries in which the company and its subsidiaries operate (In other words, legislation that limits intellectual property protection wouldn’t be considered a MAE.)
Merger arbitrage resources
Other important merger spreads include the deals between Cigna (CI) and Anthem (ANTM) and KLA-Tencor (KLAC) and Lam Research (LRCX). 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 technology sector can look at the iShares Global Tech ETF (IXN).