Originally Posted by
tracon
In summary: that journalist may have been somewhat loose with her language, because it's not clear that clause has been triggered. If it has, then AC will have the right to back out of the deal, if it wants to, or use that as a cudgel to negotiate more favourable terms. My reading suggests that the clause has not been triggered. That doesn't mean that AC won't try to renegotiate, and I'd say it's fairly likely they will.
More detail:
Many acquisition agreements contain a "material adverse effect" clause, letting the purchaser off the hook if something major goes wrong with the target, its industry, or the economy in general, between when the deal is agreed to and actually takes place, especially if it's a long period. In the olden days it was "material adverse change", which allowed us to refer to it shorthand as a "MAC clause", which sounded much cooler than "M-A-E clause". But I digress. Wikipedia actually has
an entry on it that may be useful.
The relevant clause in the Arrangement Agreement (essentially, the agreement by which AC will acquire TS), says:
“Material Adverse Effect” means any change, event, occurrence, effect, state of facts and/or circumstance that, individually or in the aggregate with other such changes, events, occurrences, effects, states of facts or circumstances is or would reasonably be expected to be material and adverse to the business, operations, results of operations, assets, properties, financial condition, liabilities (contingent or otherwise) of the Corporation and its Subsidiaries, taken as a whole, except any such change, event, occurrence, effect, state of facts or circumstance resulting from or arising in connection with:
COVID-19 is causing airlines to shut down, as well as huge damage to the economy in general, so it must qualify, right? But there are a number of exceptions, so we had better check those.
I won't quote all of the provisions here since many are not relevant, but here are the ones that may be applicable to this situation:
(a) any change, event, occurrence, effect, state of facts or circumstance affecting generally the airline industry or the segments of the travel, hotel and tourism industries in which the Corporation and its Subsidiaries operate
(b) changes, events or occurrences in general economic, political, or financial conditions in any jurisdiction in which the Corporation or its Subsidiaries operate, including changes in currency exchange rates
[...]
(e) any natural disasters, acts of war (whether declared), uprisings and civil unrest, acts of terrorism or sabotage and outbreaks of disease, including in each of the aforementioned cases, any escalation or worsening thereof;
What that means is that an MAE that's caused by one of those things
is not grounds for AC to terminate the acquisition.
There
is a glimmer of hope for AC: the last bit of this clause says:
but, in the case of (a) through to and including (e) above, only to the extent that any such change, event, occurrence, effect, state of facts or circumstances does not have a materially disproportionate effect on the Corporation and its Subsidiaries, taken as a whole, relative to other entities operating in the airline industry or the segments of the travel, hotel and tourism industries in which the Corporation and its Subsidiaries operate
So if AC wants out of this deal, it's going to have to somehow prove that COVID-19 is having a
materially disproportionate effect on TS,
relative to other companies in the industry. That's likely going to be hard for AC to prove, but I hear they have some sharp legal minds in-house and they've undoubtedly hired good external counsel to advise them on this transaction. They may point to the fact that TS has had to shut down operations entirely, while AC is still flying. Whether it's materially disproportionate to be down 100% vs down 80% or whatever AC is down may be litigated through the courts - AC may declare that it believes an MAE has occurred and is terminating the transaction and then TS may sue. It's also possible that AC uses the threat of doing just that as leverage to beat the price down to a more acceptable level.
Keep in mind that none of this matters if the deal doesn't obtain the required regulatory approvals. It's quite possible that AC and TS will have discussions prior to that, but that nothing will be announced unless and until regulatory approvals are obtained. No sense making a fuss if it's all going to be moot.