The global credit crunch has not only dried up financing for many deals, it has prompted numerous private equity firms and companies to try to abandon deals they agreed upon before the economy faltered—with mixed success.
The weapon of choice is the material adverse change clause (also known as the material adverse effect clause), a cornerstone of merger agreements. Such clauses allow potential acquirers to walk away from deals if they can prove a major change in circumstance has happened at the company to be acquired.
And a lot has changed economically in the last six months.
Last year, for example, private equity firm Lone Star tried to abandon its deal to buy Accredited Home Lenders, citing a material adverse change at the mortgage banker. After Accredited filed a lawsuit, the two parties finally settled for a lower price. Mortgage insurers MGIC and Radian, on the other hand, called off their deal altogether,... To get the full story, subscribe now.
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