Delaware Court Provides Further Guidance on Material Adverse Effect Clauses

Posted by Scott J. Davis, Mayer Brown LLP, on Thursday October 16, 2008 at 2:48 pm
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Editor’s Note: This post is from Scott J. Davis of Mayer Brown LLP. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

The Delaware Chancery Court’s decision in Hexion Specialty Chemicals, Inc. v. Huntsman Corp. represents a strong statement by the Delaware courts that they will not tolerate efforts by buyers who have changed their minds about deals, or have been pressured by their lenders to change their minds, to avoid their contractual obligations on the basis of contrived arguments. Following previous Delaware cases, the Court rejected the buyer’s claim that a material adverse effect excused its obligation to close, holding that the buyer had not met its burden of showing “the occurrence of unknown events that substantially threaten the overall earnings potential of the target in a durationally-significant manner.”

My partner William Kucera has written a memorandum discussing the court’s reasoning and offering detailed suggestions and observations for drafting MAE clauses in future deals. In particular, it discusses provisions — other than MAE clauses — on which buyers could rely as a means to avoid closing a transaction. Against the backdrop of the decision, the memo also explains the continued relevance of MAE clauses in deals and describes how threats by the buyer to invoke such a clause have played out in a number of recent transactions.

The memorandum is available here.

  1. Hexion v. Huntsman Decision from Delaware Chancery – Clarifies “Material Adverse Effect” and “Knowing and Intentional” Standards under Delaware Law; Orders Broad Injunctive Relief to Huntsman

    Comment by Robert Stoy — October 23, 2008 @ 12:54 am


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