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Post Properties and Mid-America: Exceptions in the MAE Clause

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The MAE clause, paraphrased, with carve-outs

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 continue to discuss how Mid-America could walk away from the deal.

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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.

  • the negotiation, execution, or announcement of this Agreement (if senior management from Post Properties left because it didn’t want to be part of Mid-America, it isn’t a MAE)
  • the taking of any action expressly required by or the taking of any action at the written request or with the prior written consent of an executive officer of MAA (Mid-America can’t dump Post Properties for doing what the merger requires)
  • earthquakes, hurricanes, floods, or other natural disasters (the disproportionate effect clause matters here as well)
  • any damage or destruction of any assets or property of Post or any Post Subsidiary caused by casualty that is substantially covered by insurance (self-explanatory)
  • changes in Law or GAAP or any interpretations thereof (if accounting standards changed the rules for depreciation, which caused Post Properties to show a loss, it isn’t a MAE)
  • any Action brought, asserted, or threatened by or on behalf of any holder or holders of capital stock (if a Post Properties shareholder sued because they thought the price is too low, it isn’t a MAE)

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).

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