How M&A Contracts Can Prevent Corporate Collapse (Student Journal of Business and Economics)

Summary

• Elon Musk agreed to acquire Twitter for $54.20 per share, totaling about $44 billion, before attempting to cancel the deal over fake account disclosures.p.2
• Twitter disclosed in public filings that spam and fake accounts represented fewer than 5 percent of its user base.p.2
• Bank of America agreed to buy Merrill Lynch for about $50 billion in stock at $29 per share, representing a premium of roughly 70 percent over its closing price.p.3
• Merrill Lynch approached a fourth-quarter loss of roughly $15 billion in 2008, triggering intervention from U.S. government officials.p.3
• The U.S. Treasury, Federal Reserve, and FDIC provided Bank of America $20 billion in new capital and guaranteed a pool of about $118 billion in risky assets.p.4
• Dow Chemical agreed to purchase Rohm and Haas for $78 per share in cash, representing about $15 billion in total transaction value.p.4
• Dow Chemical lost a anticipated $9 billion cash payment when Kuwait's Petrochemical Industries Company pulled out of the K-Dow joint venture on December 28, 2008.p.4

Key insights

1. Delaware courts maintain a very high legal bar for material adverse effect clauses, requiring harm that is long-lasting and unique to the target company rather than market-wide.p.3
2. Standard material adverse effect provisions typically exclude economic and financial market crashes, allocating broader systemic market risk to the buyer.p.3
3. Ordinary course covenants require target companies to operate normally until closing, but routine corporate and workforce adjustments do not automatically constitute a breach.p.2
4. Acquisition agreements lacking a financing condition require the buyer to carry full funding risk even if intended capital sources default.p.4
5. Specific performance clauses empower courts to compel buyers to close transactions rather than merely paying financial damages.p.4
6. The combined threat of specific performance enforcement and strict legal thresholds deters buyers from walking away during market downturns.p.5