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Parsing Oracle-NetSuite Material Adverse Effect Clause: Part 1


Dec. 4 2020, Updated 10:52 a.m. ET

The merger and the MAE clause

The MAE (material adverse effect) clause is one of the first things arbitrageurs look at in a merger agreement. In the merger deal between Oracle (ORCL) and NetSuite (N), the MAE clause lays out the circumstances under which Oracle can back out of the transaction.

Note that some companies refer to an MAE clause as a material adverse change, or MAC, clause. But they’re more or less the same thing. In fact, arbitrageurs always call it the MAE clause, regardless of how it’s actually characterized in the merger agreement.

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The MAE clause, paraphrased

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 I’ve paraphrased the MAE clause below to limit the legalese. You should still read and understand the actual language in the merger agreement.

“Company Material Adverse Effect” means (i) a material adverse effect on the business, financial condition or results of operations of the Company and its Subsidiaries, taken as a whole, or (ii) would materially delay or materially impair Merger Subsidiary’s ability to make, or to purchase or pay for shares tendered pursuant to, the Offer, or the Company’s ability to consummate the Merger, excluding in the case of clause (i) above, any such material adverse effect resulting from or arising out of:

This excerpt is standard MAE language. The carve-outs follow in the next two parts of this series. But in this case, there’s a disproportionate effect clause. So if these carve-outs affect either company in a disproportionate way compared to other companies in NetSuite’s industry, then it’s still an MAE.

Merger arbitrage resources

Other important merger spreads include the deals between Cigna (CI) and Anthem (ANTM) and between 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 interested in trading in the technology sector can look at the iShares Global Technology ETF (IXN).


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