Material Adverse Change Definitions After the U.S. Cooper Tire & Rubber Case Brandon Byrne Senior Associate Norton Rose Fulbright August 11, 2015

Refresher on acquisition agreement closing conditions

• Present when have a time period between signing and closing – Present whether asset deal, stock deal, merger agreement, etc.

• Party’s obligation to close subject to satisfaction or waiver of certain conditions

• Key examples of closing conditions: – No material adverse effect on target between signing and closing – Target has complied with covenants and obligations under agreement (e.g., obligation of

target or operate in the ordinary course of business)

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Cooper Tire & Rubber v. Apollo (Delaware Chancery Court)

• Acquisition of Cooper Tire by Apollo • Deal quickly started having problems after signing • Strike and physical takeover at Chinese JV subsidiary

instigated by JV partner (e.g., stopped producing Cooper tires or generating financial statements, and prevented Cooper employees from accessing records and facilities)

• Cooper’s reaction: Cooper suspended payments to suppliers that continued to ship materials to the Chinese subsidiary)

• Cooper terminated merger agreement and sought reverse breakup fee

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Interim operating covenant The merger agreement had the following interim operating covenant: “[E]xcept as . . . otherwise expressly contemplated by [the merger agreement, Cooper] shall, and shall cause each of its Subsidiaries to, conduct its business in the ordinary course of business consistent with past practice . . . .”

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“Material Adverse Effect” The merger agreement had the following definition:

“Material Adverse Effect” means any fact, circumstance, event, change, effect or occurrence that: (i)  has had or would reasonably be expected to have a material adverse effect on the

business, results of operations or financial condition of the Company, its Subsidiaries and Joint Ventures, taken as a whole, but will not include facts circumstances, events, changes, effects, or occurrences to the extent attributable to . . . (F) the execution and delivery of this Agreement or the public announcement or pendency of the Merger or any of the other Transactions or the Financing, including the impact thereof on the relationships, contractual or otherwise, of the Company or any of its Subsidiaries with employees, labor unions, customers, suppliers or partners, and any litigation arising from allegations of any breach of fiduciary duty or violation of Law relating to this Agreement or the transactions contemplated by this Agreement or compliance by the Company with the terms of this Agreement . . . ; or

(ii)  that would reasonably be expected to prevent or materially delay or impair the ability of [Cooper] to perform its obligations under this Agreement or to consummate the Transactions.”

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Closing conditions Apollo’s obligation to close subject to several conditions: “[Cooper] shall have in all material respects performed or complied with the covenants and agreements contained in [the merger agreement] to be performed or complied with by it prior to or on the Closing Date.”

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Apollo’s argument Cooper had an unqualified obligation to cause its Chinese subsidiary to operate in the ordinary course, consistent with past practice, and Cooper was unable to satisfy this obligation due to the lockout at the Chinese subsidiary.

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Cooper’s argument If Cooper and Apollo specifically agreed that a negative reaction to the merger by Cooper’s labor unions or joint venture partners would not prevent a closing under the material adverse effect clause, it is implausible to think that the merger agreement would construe those very same circumstances as preventing a closing due to alleged non-compliance with the interim operating covenant.

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The court’s conclusion

•  Elements of lockout show Cooper’s failure to cause its Chinese subsidiary to conduct business in the ordinary course.

•  Cooper might be correct that the lockout at its Chinese subsidiary would fall under the exclusions in (i)(F) of the material adverse effect definition

•  Parties made clear that Apollo would bear risk of lockout only so long as the lockout would not “reasonably be expected to prevent or materially delay or impair the ability of [Cooper] to perform its obligations under the [merger agreement].”

•  Risk of carved out events on Apollo unless event prevented Cooper from complying with its obligations under the merger agreement.

•  The carveout under subsection (i)(F) of the material adverse effect definition did not prevent Apollo from enforcing Cooper’s obligations under the interim operating covenant. Since Cooper breached the interim operating covenant, Apollo was not obligated to close. –  Importantly, the court’s decision prevented Apollo from having to pay a reverse breakup fee.

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Takeaways – MAE definition – Scenario 1

•  Sellers should make sure all carve-outs to the material adverse effect definition apply to each independent prong of the material adverse effect definition: “Material Adverse Effect” means any fact, circumstance, event, change, effect or occurrence that: (i)  has had or would reasonably be expected to have a material adverse effect on the business, results

of operations or financial condition of the Company, its Subsidiaries and Joint Ventures, taken as a whole, but will not include facts circumstances, events, changes, effects, or occurrences to the extent attributable to . . . (F) the execution and delivery of this Agreement or the public announcement or pendency of the Merger or any of the other Transactions or the Financing, including the impact thereof on the relationships, contractual or otherwise, of the Company or any of its Subsidiaries with employees, labor unions, customers, suppliers or partners, and any litigation arising from allegations of any breach of fiduciary duty or violation of Law relating to this Agreement or the transactions contemplated by this Agreement or compliance by the Company with the terms of this Agreement . . . ; or

(ii)  that would reasonably be expected to prevent or materially delay or impair the ability of [Cooper] to perform its obligations under this Agreement or to consummate the Transactions, but will not include facts circumstances, events, changes, effects, or occurrences to the extent attributable to . . . (F) the execution and delivery of this Agreement or the public announcement or pendency of the Merger or any of the other Transactions or the Financing, including the impact thereof on the relationships, contractual or otherwise, of the Company or any of its Subsidiaries with employees, labor unions, customers, suppliers or partners, and any litigation arising from allegations of any breach of fiduciary duty or violation of Law relating to this Agreement or the transactions contemplated by this Agreement or compliance by the Company with the terms of this Agreement . . . .”

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Takeaways – MAE definition – Scenario 2

•  Sellers should strike the separate impairment clause of the material adverse effect definition: “Material Adverse Effect” means any fact, circumstance, event, change, effect or occurrence that: (i)  has had or would reasonably be expected to have a material adverse effect on the business, results

of operations or financial condition of the Company, its Subsidiaries and Joint Ventures, taken as a whole, but will not include facts circumstances, events, changes, effects, or occurrences to the extent attributable to . . . (F) the execution and delivery of this Agreement or the public announcement or pendency of the Merger or any of the other Transactions or the Financing, including the impact thereof on the relationships, contractual or otherwise, of the Company or any of its Subsidiaries with employees, labor unions, customers, suppliers or partners, and any litigation arising from allegations of any breach of fiduciary duty or violation of Law relating to this Agreement or the transactions contemplated by this Agreement or compliance by the Company with the terms of this Agreement . . . ; or

(ii)  that would reasonably be expected to prevent or materially delay or impair the ability of [Cooper] to perform its obligations under this Agreement or to consummate the Transactions.”

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Takeaways – Interim operating covenant

•  Sellers should add specific exceptions to the covenant for events that they may not be able to control (e.g., if seller has a JV subsidiary not wholly owned, sellers could add an exception for events that take place at that that subsidiary).

•  If sellers cannot obtain exceptions, sellers can try to add a standards qualification to the obligation to operate in the ordinary course.

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Post-decision market practice

•  Slight trend towards seller-friendly MAE definitions (i.e., more agreements either not including the impairment clause or applying carve-outs to the clause).

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Questions? Brandon Byrne

Senior Associate, US T: +1 214 855 7437 brandon.byrne@nortonrosefulbright.com • Brandon Byrne is a senior associate in the Dallas

office. Brandon has experience assisting public and private entities with SEC reporting and compliance, corporate governance matters, merger and acquisition transactions, equity and debt offerings, stock exchange matters, derivatives reform, and hedge fund investments. Prior to joining the Dallas office, Brandon clerked for the Honorable William J. Holloway, Jr., of the United States Court of Appeals for the Tenth Circuit.

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