Musk, mergers and acquisitions and material adverse change

Billionaire Elon Musk completed his high-profile acquisition of Twitter last month, ending a nearly eight-month sale process. The total purchase price payable to Twitter shareholders following the acquisition exceeded US$44 billion/AUD$68 billion.

One of the most intriguing aspects of this deal (of which there were many) was Musk’s attempts to walk away from the transaction in May and June after final merger agreements were reached on April 25 (Merger agreements). Musk claimed that, among other things, Twitter made misleading claims about the number of bot accounts on Twitter that weren’t connected to a legitimate (and human) user (so-called “bot” accounts). At one point, Musk suggested that the number of bot accounts made up at least 20% of all users on Twitter, and indicated that the number could be as high as 90%. Musk’s alleged discovery of the bot accounts in May was after the merger agreements were signed, and in July Musk sought to withdraw from the misleading representations agreement, prompting litigation from Twitter seeking to enforce the agreement, and a subsequent counterclaim by Musk.

Ultimately, Musk agreed to acquire Twitter, avoiding a trial scheduled for October 17, 2022 in the Delaware Court of Chancery, and the transaction closed under the terms of the merger agreements on October 27, 2022.

Private Mergers and Acquisitions in Australia – Material Adverse Change

A buyer might feel justified in seeking to forgo a transaction after signing a sales contract, either because of an allegation of misrepresentation or because circumstances change. While Twitter was a US public company and the Musk acquisition was governed by Delaware law, in the context of Australian private M&A transactions, a key buyer protection often contained in sale agreements is the “Material Adverse Change” (or MAC) clause.

In a private M&A sale agreement, there is often a time lag between the signing of the sale agreement and the completion of the transaction, usually for the parties to satisfy various conditions precedent. Although the gap is not often six months (as was the case with Musk’s acquisition of Twitter), it may be enough that an adverse change or deterioration in the target business or its future prospects happen. A buyer may conclude that they shouldn’t be obligated to close the deal because they’re not getting what they bargained for.

Accordingly, a buyer will often seek to include a material adverse change clause in the sales contract, so that the buyer can terminate the sales contract before its completion in certain circumstances.

Material adverse change clauses tend to be expressed in qualitative terms, such as a change that has a material and adverse effect on the target company’s financial condition, operations or prospects, or in quantitative terms, such as a change based on a decline in income. , income or other financial thresholds (or a combination of both).

Material Adverse Change Clause Analysis

Material adverse change clauses will be interpreted in accordance with contract law, including taking into account the entire contract, and if possible giving the clause its natural meaning in accordance with the parties’ expectations at the time of entering into the contract of sale. The buyer will bear the burden of proving that a material adverse change has occurred.

Material adverse change clauses have rarely been interpreted by Australian courts and have been primarily reviewed by US courts. Although US decisions are not binding on Australian courts, the US courts’ approach to MAC clauses will carry weight here, at least for general qualitative adverse material change clauses.

The principles established in the American business of Hexion1, IBP2 and Akorn3and the Canadian case of Fairstone4 can be summed up as follows:

  • US case law defines material adverse change as “the occurrence of unknown events that significantly threaten the target’s overall earnings potential in a materially material manner”.
  • A buyer faces a heavy burden when it attempts to invoke a material adverse change clause to avoid its obligation to perform.
  • A “short-term income hiccup” may not suffice as a material adverse change. The material adverse change is expected to be material when viewed from the longer-term perspective of a reasonable purchaser. In the IBP case, the Court ruled that a 64% decline in quarterly earnings did not constitute a material adverse change, because shortly after the 64% decline, IBP began to operate more in line with its results profitable annuals. The significance of the effect over time5will usually be measured in years rather than months.
  • In the absence of evidence to the contrary, the buyer can be assumed to buy the target as part of a long-term strategy.
  • Generally, a Qualitative Adverse Change will require the occurrence of an unknown event. In Fairstonethe court found that, notwithstanding the fact that the COVID-19 pandemic was regularly the subject of press articles on the date of signature of the relevant purchase contract, the effect of the pandemic on the activity of the seller was not known and the effect of the COVID-19 19 pandemic on the seller’s business constituted a Material Adverse Change.

However, each situation will depend on the specific wording of the relevant clause, and the few recent Australian cases revolve around the particular clause at issue.

A buyer should seek to define precisely what constitutes a “material adverse change”, in order to avoid any ambiguity. A buyer may have difficulty enforcing an adverse material change drafted too broadly, because whether a material and adverse change has occurred is in many cases inherently uncertain.


Sellers will often seek to include exceptions to the material adverse change clause in order to limit its scope. These exclusions may include changes in general trading conditions, the industry or markets in which Target operates and changes in legislation. Exclusions may also include force majeure events beyond the target’s control. In Fairstonethe vendor successfully established that the COVID-19 pandemic had a general impact on the Canadian consumer credit industry and relied on an exclusion that excluded changes in the markets or industry as constituting an adverse change material (which would otherwise have been established on the facts of this case).

A buyer may grant certain exclusions on the basis that the relevant event being excluded does not disproportionately affect the purpose.

Just as the scope of a material adverse change clause is often the subject of detailed negotiations, exclusions may also be the focus of parties seeking to reach agreement on the clause.

Final remark

For sellers and buyers alike, being embroiled in public litigation over a material adverse change clause can have negative reputational effects, regardless of the cost and distraction of litigation. Buyers should seek to strengthen their position – even if their objective is to threaten to withdraw in order to renegotiate a transaction – and to mitigate the risk of uncertainty, by including specific quantitative thresholds, in order to objectively determine whether an adverse change important happened. Sellers, if they must agree to a material adverse change clause, may be more optimistic about the risk of public litigation if a material adverse change drafted in general terms and less certain in its application gives them reason to argue that a material adverse change has not occurred. Sellers should also ensure that a material adverse change clause does not depend on a buyer’s opinion; seek appropriate exclusions that limit material adverse change events to those specific to the target business; and finally attempt to prevent the Material Adverse Change from being based on potential future impacts.

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