Guhan Subramanian is Joseph H. Flom Professor of Law and Business at Harvard Law School and H. Douglas Weaver Professor of Business Law at Harvard Business School and Caley Petrucci is a graduate of Harvard Law School. This post is based on their recent paper, forthcoming in the Columbia Law Review. Related research from the Program on Corporate Governance includes Are M&A Contract Clauses Value Relevant to Target and Bidder Shareholders? by John C. Coates, Darius Palia, and Ge Wu (discussed on the Forum here); and The New Look of Deal Protection by Fernan Restrepo and Guhan Subramanian (discussed on the Forum here).
The COVID-19 pandemic has brought new attention to the period between signing and closing in M&A transactions. Transactional planners heavily negotiate the provisions that govern the behavior of the parties during this window, not only to allocate risk between the buyer and seller, but also to manage moral hazard, opportunistic behavior, and other distortions in incentives. COVID-19, however, has exposed an important connection between the material adverse effect (MAE) clause and the obligation for the seller to act “in the ordinary course of business” between signing and closing. Our new paper, Deals in the Time of Pandemic, forthcoming in the Columbia Law Review (June 2021), is the first to examine the interaction between the MAE clause and the ordinary course covenant in M&A deals.
Methodology
We constructed a new database of 1,300 M&A transactions announced between 2005 and 2020 with a transaction value of at least $1.0 billion, along with their MAE and ordinary course covenants—by far the most comprehensive, accurate, and detailed database of such deal terms that currently exists.