Neil E. McCullagh is a lawyer who works with banks on a wide range of issues, including loans, insolvency, training sessions, creditor rights, bankruptcy and collections. In this follow-up, we focus on significant adverse changes or "MAC" clauses. We summarize the principles of interpretation of these clauses and then provide guidance to lenders who are considering convening them under COVID-19. The company`s own factors relative to the sector as a whole. As noted above, a standard definition of the MAC (in acquisition agreements and acquisition financing agreements that survive the MAC in the acquisition agreement) excludes the effects of industry conditions, unless the industry conditions indicated disproportionately affect the company. Therefore, a change should normally be based on "company-specific" effect factors to form an MAC. The Tribunal found in Akorn that the reduction in the objective was due to company-specific conditions. The objective (Akorn) argued that there was no MAC because its decline was the result of "headwinds" across the industry, including an increase in new competitors due to FDA efforts to authorize generic drugs. The court found that "everyone – including the purchaser – was aware of these "industrial counter-vents" and also knew that if the headwinds were greater than expected, Akorn "would probably be below average compared to its competitors." However, the Tribunal found that "the risk allocation set out in the merger agreement ,…

the causes of Akorn`s negative performance were in fact commercial risks attributed to Akorn. The unexpected newcomers, who competed with Akorn`s three high-end products, "were Akorn-specific problems because of their assortment of products…. [D]the problems were endogenous risks specific to Akorn`s business. In addition, the Tribunal found that these problems were industry-wide, disproportionately affected "Akorn" and therefore, under the merger agreement, were risks attributed to Akorn. The court referred to Akorn`s much higher underperformance than his peers compared to consensus analyst estimates as evidence of the disproportionate impact of these problems on Akorn. Whether the magnitude of the effect was significant is viewed from a longer-term perspective, and the effect is expected to significantly threaten the target company`s overall performance potential in a "significant" way, measured in years, not months. The court stated that "in assessing the magnitude of a decline, a company`s performance in general should be assessed on the basis of its results for the same quarter of last year, minimizing the effects of seasonal variations. For such a decline to be a DEA, poor results must continue in the future. The Tribunal also indicated that a short-term revenue endorser should not be sufficient to constitute a DMA. Most courts have considered a decrease in space profits of 40 percent or more than MAE. A 50 per cent decline in results over two consecutive quarters would likely be a DEA.

"However, unprecedented precedents do not rule out a buyer being able to demonstrate that a smaller percentage of modifications represented a DEA. Nor does it rule out that a buyer cannot prove that a larger change in size was a percentage mae. In order to assess whether the effects of COVID-19 on the borrower may constitute a material adverse change, lenders should first carefully analyze the language of the MAC clause in question, paying particular attention to the consideration of the following systemic risks.

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