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:
- any effect arising out of a change in GAAP (generally accepted accounting principles) or applicable law (In other words, if the Financial Accounting Standards Board made a change regarding the accounting for goodwill that caused media companies to restate their financials, that wouldn’t be a MAE.)
- the announcement, pendency, or consummation of the transactions contemplated by the agreement (In other words, if the merger caused cable providers to drop Starz because they didn’t want to work with Lions Gate, it wouldn’t be a MAE.)
- any changes in the price or volume of the company’s common stock (provided that the events, occurrences, conditions, facts, developments, changes, or effects that caused the decline may be taken into account to determine whether a company MAE has occurred) (Having your stock collapse isn’t necessarily a MAE, but the reason for it may well be.)
- failure by the company to meet published or unpublished revenue or earning projections (provided that the events, occurrences, conditions, facts, developments, changes, or effects giving rise to or contributing to such failure may be taken into account to determine whether a company MAE has occurred (Missing your quarter isn’t necessarily a MAE. However, the reason why you missed is fair game).
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).