Yearly Archives: 2021

The MAE cases arising from the COVID-19 pandemic have focused attention on the exceptions found in typical MAE definitions. As is well known, such definitions commonly except from the definition events related to certain systematic risks, such as changes in business, market or industry conditions, changes in law, or force majeure events. Cases such as AB Stable and KCake in Delaware and Fairstone in Canada have involved the interpretation of such exceptions in two ways—one simple and one complex—both of which I discuss in a new paper forthcoming in the Journal of Corporation Law and in a shorter related article in Business Law Today.

The simpler issues involved whether a pandemic is a “natural disaster” or “calamity” (AB Stable) or perhaps an “emergency” (Fairstone) under an exception in the MAE definition for force majeure events. Courts have had little trouble resolving such issues using traditional methods of contract interpretation. Some of the literature surrounding such decisions has confused force majeure clauses with exceptions in MAE definitions for force majeure events (the former excuse a seller from performing, while the latter require a buyer to perform and so are almost functional opposites), but that is a relatively minor issue.

Much more important is the fact that the recent MAE cases have exposed a latent ambiguity in the typical MAE definition. Such definitions define a capitalized “Material Adverse Effect” to be any event that has, or would reasonably be expected to have (the exact language varies), an (uncapitalized) material adverse effect on the target, except for certain excepted events (perhaps subject to exclusions for events affecting the company disproportionately). It is counterintuitive, though patently correct under the plain language of the typical MAE definition, that a Material Adverse Effect is not a material adverse effect but an event that causes a material adverse effect. The definition is thus inherently causal. The tacit assumption underlying the definition is that, for a given event, we can say unambiguously whether that event causes (e.g., “would reasonably be expected” to result in) a material adverse effect on the target or not. In the recent MAE cases, however, the causal background to the alleged material adverse effect was more complex. The claim, for example, was that a first event (the pandemic) caused a second event (governmental lockdown orders), which second event caused the material adverse effect on the company. If the MAE definition allocates the risk of both events to the same party, then of course that party bore the risk of any resulting material adverse effect. But what happens if the MAE definition allocates the risk of one event (such as the pandemic) to the target but the risk of the other event (such as lockdown orders) to the acquirer (under an exception for changes in law)?

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