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How Could TIAA Walk Away from the Deal?

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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 Everbank (EVER)-TIAA merger agreement and see how TIAA 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.

“Material Adverse Effect means, with respect to Parent, the Company or the Surviving Corporation, as the case may be, a material adverse effect on (i) the business, properties, assets, liabilities, results of operations or condition (financial or otherwise) of such party and its Subsidiaries, taken as a whole (provided, that, with respect to this clause (i), Material Adverse Effect shall not be deemed to include the impact of.”

The exceptions are listed below. My comments are in italics.

  • changes in US GAAP (generally accepted accounting principles) or regulatory accounting requirements (in other words, if there was a “Basel IV” that changed regulatory capital calculations and made Everbank insufficiently capitalized, that would not be a MAE)
  • changes in Laws of general applicability to companies in the industries in which such party and its Subsidiaries operate, or interpretations thereof by courts or Governmental Entities, (similar to the above, if banking regulators or Congress instituted new regulations that hurt the profitability of banks, that wouldn’t be a MAE)
  • changes in global, national, or regional political conditions (including the outbreak of war or acts of terrorism) or in economic or market (including equity, credit and debt markets, as well as changes in interest rates) conditions affecting the financial services industry generally and not specifically relating to such party or its Subsidiaries, (in other words, the financial crisis would not be considered a MAE)
  • public disclosure of the execution of this Agreement, public disclosure or consummation of the transactions contemplated hereby (including any effect on a party’s relationships with its customers or employees) or actions expressly required by this Agreement (if key members of Everbank leave because of the merger, it isn’t a MAE)

Merger arbitrage resources

Other important merger spreads include the Valspar (VAL) and Sherwin-Williams (SHW) deal and the Whitewave (WWAV) and Danone deal. 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 financial sector should look at the S&P SPDR Financial ETF (XLF).

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