How Mid-America could walk away
In this part of the series, we’ll look at the MAE (material adverse effect) clause of the Post Properties (PPS) and Mid-America Apartment (MAA) merger agreement. We’ll see how Mid-America could walk away from the deal.
Analyzing the MAE clause
As a general rule, MAE clauses follow a uniform format. Pretty much anything that has a material adverse effect on a company will be considered an MAE, although there are exceptions to that rule.
Please note that the MAE clause is paraphrased below to limit the legalese. You should still read and understand the actual language in the merger agreement.
“‘Post Material Adverse Effect’ means any event, circumstance, change or effect (a) that is material and adverse to the business, assets, properties, financial condition or results of operations of Post and the Post Subsidiaries taken as a whole or (b) that will or would reasonably be expected to, prevent or materially impair the ability of the Post Parties to consummate the Mergers in the manner contemplated hereby; provided, however, that for purposes of clause (a) ‘Post Material Adverse Effect’ shall not include any event, circumstance, change or effect to the extent arising out of or resulting from.”
The exceptions are listed below. My comments are in italics.
- any failure of Post Properties to meet any internal projections or forecasts or any estimates of earnings, revenues (provided, that any event, circumstance, change or effect giving rise to such failure may be taken into account in determining whether there has been a Post Material Adverse Effect) (in other words, missing your quarter isn’t a MAE, however the reason why you missed is fair game)
- any events, circumstances, changes, or effects that impact the multifamily residential real estate REIT industry generally (an example would be a change in the laws concerning tenant rights)
- any changes in the US or global economy or financial markets generally, including changes in interest or exchange rates (the financial crisis wouldn’t have been considered a MAE)
- any changes in the legal, tax, political, or regulatory conditions (similar to the above, if Congress makes REIT incomes taxable at the corporate level, it isn’t a MAE)
- the commencement, escalation, or worsening of a war (whether or not declared) or armed hostilities or the occurrence of acts of terrorism or sabotage (note the disproportionate effect clause: another 9/11 wouldn’t be a MAE, but a terrorist bombing of a Post Properties apartment complex would be)
Other merger arbitrage resources
Other important merger spreads include the merger between Valspar (VAL) and Sherwin-Williams (SHW). 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 REIT sector can look at the Vanguard REIT ETF (VNQ).