Economic woes herald return of the MAC

Cerberus’ abandoned deal to acquire US hotel chain Innkeepers may signal a return of firms exercising Material Adverse Change or Material Adverse Effect Clauses in response to global market uncertainty.

New York-based private equity firm Cerberus Capital Management and Chatham Lodging Trust have terminated their $1.1 billion agreement to acquire stakes in 64 hotels owned by Innkeepers USA Trust.

The two buyers cited a Material Adverse Effect (MAE) clause in the deal agreement as justification for jettisoning the agreement. MAE or Material Adverse Change (MAC) provisions are used by parties to allocate liability for unforeseen risks between the time a deal is agreed to its closing, and thereby escape having to complete the deal.

[There is] no doubt that Cerberus/Chatham terminated the Commitment Letter inappropriately


Cerberus and Chatham declined to provide comment to sister news service PERE beyond confirming what was stated in the announcement.

Innkeepers said in its own statement there is “no doubt that Cerberus/Chatham terminated the Commitment Letter inappropriately. Accordingly, we are evaluating all legal and equitable remedies against Cerberus/Chatham.”

The company noted that during its restructuring process it has maintained normal business operations despite recent volatility in the global markets.

Unusually, the MAE clause did not provide Innkeeper any carve-outs which are used to provide a seller certainty in the applicability of the clause. These often include an exception for an overall decline in the economy outside of the seller’s control.

The use of a MAE, as opposed to a MAC, may also work against Innkeeper’s favour. While the differences between the two are not substantial, generally “a clause that is triggered by an ‘effect’ sweeps broader than a clause triggered by a ‘change’ because ‘change,’ raises questions of the buyer’s prior awareness,” explained a recent client memo from law firm Reed Smith.

More broadly, the news serves as a fresh reminder of the number of dropped deals experienced during the still-recent credit collapse. Large buyout deals scrapped due to MAC clauses during the economic crisis included Harman International Industries, HD Supply and Sallie Mae, among others.