Deals in the Time of Pandemic

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.


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.


MAE definitions typically follow the same general structure. First, a basic definition of an MAE as an event, fact or circumstance that would (or could) reasonably be expected to have a material adverse effect on various “objects” relating to the target company and its subsidiaries. Following this statement is a list of exceptions, also known as “carveouts,” which exclude certain risks from the definition of MAE. After the list of carveouts, the MAE definition typically includes a series of exceptions to the exceptions, also known as “carvebacks” or “carveins.” Most typically, a carveback will provide that the earlier carveouts will be MAEs to the extent that they disproportionately affect the target company.

We find that an MAE is triggered by a material adverse effect on: results of operations (91.3% of the sample), financial condition (75.6%), assets or liabilities (59.6%), business (59.6%), and properties (24.5%). In contrast, “prospects” appears as an MAE object in only 1.5% of the sample. Instead of identifying “prospects” as an MAE object, we find that 48% of MAEs have a forward-looking overlay on all MAEs by tethering the MAE object to a “reasonably likely” qualifier.

MAE carveouts have generally become more specific and more detailed over the past fifteen years. While the length of the base MAE language has remained consistent since 2005, MAE carveout language has dramatically increased in length, from approximately 220 words in 2005, on average, to more than 600 words by 2020. In addition, the number of carveouts has correspondingly increased, from approximately six carveouts on average in 2005 to more than ten carveouts on average by 2020, driven entirely by the increase in a “disproportionate carveback.”

Given the ongoing COVID-19 pandemic, our analysis included particular attention on “Act of God” and pandemic carveouts. The incidence of both these carveouts has increased dramatically since 2005. Act of God carveouts have increased from 10% incidence in 2005 to 90% incidence by 2020. Meanwhile, pandemic carveouts have increased from nonexistent in 2005 to 30% by 2019, then spiking to 60% in 2020. Notably, the fact that practitioners layered Act of God carveouts on top of change in economic conditions carveouts, and further layered pandemic carveouts on top of Act of God carveouts, suggests that practitioners believed that they potentially addressed different things.

Ordinary Course Covenants

Like MAE clauses, ordinary course covenants—covenants that require that the company operate its business in the ordinary course—also address the delay between signing and closing. The parties will invariably (94%) include two affirmative ordinary course provisions: the general affirmative ordinary course covenant (GAOCC) and the specific affirmative ordinary course covenant (SAOCC).

The GAOCCs were coded according to whether they included a materiality constraint, an efforts qualifier, and a “consistent with past practice” requirement. GAOCCs have become generally more seller friendly over the past fifteen years. The (seller-friendly) efforts qualifier has increased in incidence, from approximately 10% incidence in 2005 to 30% incidence in 2020; the (seller-friendly) materiality qualifier has also increased in incidence, from 20% to 40% incidence; and the (buyer-friendly) “consistent with past practice” requirement has declined in incidence, from 80% in 2005 to 60% incidence by 2020.

The majority (57%) of specific ordinary course covenants include a “commercially reasonable efforts” qualifier, which is the loosest constraint on the seller’s behavior. Another 37% included a “reasonable best efforts” qualifier, whereas only 2% of the sample had an absolute requirement.

Consent Exceptions

In addition, we examined whether MAE clauses and ordinary course covenants included an exception for buyer consent. We found a significant increase in consent exceptions during the timeframe of analysis: from 15% incidence to 80% incidence for exceptions from the MAE clause, and from 60% incidence to 90% incidence for exceptions from the ordinary course requirement. But the consent exceptions are not necessarily tethered together; less than half the sample (46%) has a consent exception from both the ordinary course requirement and the MAE clause. Overall, 53% of the deals in our sample include a consent exception from the MAE clause and 86% include a consent exception for the ordinary course requirement. Among the ordinary course consent exceptions, 79% specify that the buyer may not “unreasonably withhold” consent.


Our findings have notable implications for corporate boards, the Delaware courts, and transactional planners. For example, our findings highlight where corporate boards should look to “stress test” the MAE clause in order to appropriately manage business risks. For transactional planners, our finding that disproportionality carvebacks have proliferated since 2005 emphasizes the importance of specifying the target’s industry in the merger agreement itself—so that the parties do not need to fight about the target’s industry and whether the effect on the target was disproportionate to that industry in subsequent litigation. (Anecdotal evidence from deals since our paper has been posted online suggests that practitioners have indeed begun specifying the target industry in the merger agreement itself.) Finally, and perhaps most importantly, we recommend that Delaware courts should read the ordinary course requirement according to its plain meaning—i.e., requiring the target to operate in the ordinary course of business—which then forces the target to negotiate with the acquirer over any changes to the business that would be necessary to respond to extraordinary circumstances. We demonstrate in our paper why forcing this negotiation is optimal, from a law & economics perspective, as opposed to reading the ordinary course requirement to permit unilateral extraordinary actions in extraordinary times.

The full paper is available here.

Both comments and trackbacks are currently closed.