Material Adverse Change Clauses and Acquisition Dynamics

Material-Adverse-Change clauses (MACs) are present in over 90% of acquisition agreements. These clauses are the outcome of extensive negotiation and exhibit substantial cross-sectional variation in the number and types of events that are excluded from being ‘material adverse events’ (MAEs). MAEs are the underlying cause of more than 50% of acquisition terminations and 60% of acquisition renegotiations. Moreover, these renegotiations lead to substantial changes in the price offered to target shareholders (13-15%). We find that acquisitions with fewer MAE exclusions are characterized by wider arbitrage spreads (i.e., the difference between the price offered to target shareholders and the current market price of the target’s shares) during the acquisition period and are associated with higher offer premiums. We conclude that material adverse change clauses have an economically important impact on the dynamics of corporate acquisitions and stock prices during the acquisition period.