Failure of a 'Basic Assumption': The Emerging Standard for Excuse Under Mae Provisions

32 Pages Posted: 15 Aug 2009 Last revised: 26 Mar 2018

See all articles by Nathan Somogie

Nathan Somogie

University of Michigan Law School - JD Candidate Author

Date Written: March 12, 2009

Abstract

The onset of the current economic crisis has led many strategic and financial acquirers to reconsider the desirability of transactions to which they had previously agreed. Because many of these agreements contain substantial termination fees, buyers have increasingly sought to be excused from their contractual obligations by invoking Material Adverse Effect (“MAE”) provisions. Reliance on MAE clauses as a basis for termination has historically been risky due to a lack of clarity in the case law regarding the standard for excuse under such provisions. A recent decision by the Delaware Chancery Court, Hexion v. Huntsman, the third in a series of prominent cases addressing the interpretation of MAE provisions, confirms that the standard is extremely high under Delaware law. However, because each of these cases found that no MAE had occurred, it remains unclear what circumstances, if any, will be sufficient to trigger judicial recognition of an MAE in Delaware. This paper suggests that the Delaware Chancery Court has applied a standard that analytically resembles the “basic as-sumption” test used to determine the existence of an excusing contingency under the doctrines of impracticability and frustration of purpose. This paper contends that such a standard is both unsurprising and desirable because the logical questions raised in disputes over MAE provisions closely parallel those addressed by default rules for excuse of performance. Given the broad language with which MAE clauses are typically drafted, this paper argues that courts should recognize that they are being asked to fill a gap in the merger agreement; as such, courts should apply the “basic assumption” test and follow the Delaware Chancery Court in setting a high standard for excuse under MAE provisions.

Keywords: material adverse effect, excuse doctrine

Suggested Citation

Somogie, Nathan, Failure of a 'Basic Assumption': The Emerging Standard for Excuse Under Mae Provisions (March 12, 2009). Michigan Law Review, Vol. 108, No. 1, 2009. Available at SSRN: https://ssrn.com/abstract=1448916

Nathan Somogie (Contact Author)

University of Michigan Law School - JD Candidate Author ( email )

Ann Arbor, MI
United States

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