MAC conditions: more disclosure but no real change to market practice

Aug 25, 2023

INSIGHT

Material adverse change (MAC) conditions allow a party to walk away from a transaction where a trigger event occurs, or only becomes known to a party, after the transaction is agreed, and which is likely to have a detrimental effect on the counterparty relative to the time the transaction was agreed.

MAC conditions have long been a feature of managing completion risk in public M&A transactions in Australia—utilising triggers based on either or both quantitative and qualitative measures. However, in 2022 ASIC published its concerns in relation to the formulation of these conditions and, in particular, its expectation that MAC conditions include objective and 'quantifiable' triggers.

As we reflect on the past year, not much has changed since ASIC's intervention—qualitative conditions are still a feature of Australian public M&A—albeit (at ASIC's behest) with additional disclosures being made to securityholders about the risks associated with the interpretation of such conditions.

In our view, the current concerns about qualitative MAC conditions are overstated, and the additional disclosure around the interpretation of these conditions (which is fast becoming boilerplate language in scheme booklets) is of marginal value to securityholders.

In this Insight, we examine the basis of ASIC's intervention and assess it against a series of recent transactions utilising qualitative MAC conditions.

Broadly speaking, there are two types of thresholds that can apply to trigger a MAC condition:

MAC conditions with qualitative thresholds have caught ASIC's attention.

In an update late last year,1 ASIC confirmed its expectation that MAC conditions 'contain objective and quantifiable standards by which the parties to a transaction, and their securityholders, can determine whether a material adverse change has occurred.' ASIC flagged a trend of 'uncertain' MAC conditions in control transactions (where a 'material adverse change' is circularly defined as a 'material adverse change'), noting that such MAC conditions pose the following risks:

ASIC sought to ensure an adequate level of disclosure about the terms of an offer to securityholders, so they can make an informed decision on the merits of the transaction, including on the likelihood of a MAC occurring and the transaction subsequently proceeding.

ASIC's public comments responded to the scheme of arrangement in relation to Vimy Resources. In that transaction, the MAC condition contained a combination of quantifiable and qualitative thresholds in relation to Vimy Resources, including triggers for any event, matter or circumstance that has a material adverse effect on 'the assets and liabilities (taken as a whole), financial condition or business of [Vimy Resources] (taken as a whole)'. ASIC raised concerns that the MAC condition was circular or provided a subjective threshold, and these concerns were addressed through the inclusion of an additional transaction risk disclosure in the scheme booklet. The additional disclosures explained to securityholders that, because there was no quantitative threshold to the MAC condition, the bidder and target may interpret the MAC condition differently, and there may be a greater risk of litigation or uncertainty as to whether the condition has been met in any particular circumstance.

Since Vimy Resources (and ASIC's public comments), there have been several other scheme transactions announced in the market utilising qualitative MAC conditions, including:

While the industries, target businesses and circumstances applicable to each of the above transactions vary, the inclusion of a qualitative MAC threshold in each condition reflects a negotiated outcome considered to be appropriate to the particular transaction—whether because the bidder was seeking to mitigate against certain risks in the target's business, or because of the involvement of an overseas-based bidder or governing law outside of Australia. Although not all have released scheme booklets, those that have included additional lengthy disclosure consistent with the Vimy Resources scheme in relation to the operation of the MAC condition.

This recent market practice continues to demonstrate that appropriate qualitative thresholds for MAC conditions can be utilised without undermining an informed market. In this context, we think the market's lived experience demonstrates that current concerns in relation to qualitative MAC conditions are overstated for a few reasons:

Unfortunately, the market experience of the past 12 months suggests that this latest regulatory focus on MAC conditions has achieved little more than adding another 'tick the box' style disclosure exercise for scheme booklets, which is of marginal value to securityholders. Even though scheme booklets continue to become longer and more complex, additional lengthy disclosure in relation to the operation of qualitative MAC conditions is still rapidly becoming standard.

ASIC Corporate Finance Update - Issue 10 (September 2022) available here.

The transaction agreement for the Allkem/Livent merger is governed by the laws of Delaware where qualitative-only thresholds are consistent with accepted market practice and well understood through the combination of practice and judicial commentary.

In April 2023, the scheme implementation deed was terminated by mutual agreement, predominantly due to a material increase in funding requirements for St Barbara and the Atlantic Operations.

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