Material Adverse Effect (MAE)

This term has a number of meanings. In the context of:

  • Finance. A term of art used as a threshold to measure the effect of some event. The language may vary slightly, but a typical definition is:

    "a material adverse effect on (a) the business, assets, properties, liabilities (actual or contingent), operations, condition (financial or otherwise) or prospects, of the Borrower, individually, or the Borrower and its Subsidiaries taken as a whole; (b) the ability of any Loan Party to perform its obligations under any Loan Document to which it is a party; or (c) the validity or enforceability of any Loan Document or the rights and remedies of any Agent or any Lender."

    Often used as a condition precedent (www.practicallaw.com/7-382-3355) to funding in commitment letters (www.practicallaw.com/4-382-3352) and loan agreements and as a means of qualifying representations and warranties (www.practicallaw.com/8-382-3760), covenants (www.practicallaw.com/2-382-3367) and other terms of the loan documents. Often used interchangeably with the term "material adverse change." See also material adverse change (www.practicallaw.com/0-382-3617).

  • Mergers and acquisitions. A term of art used as a materiality threshold to measure the negative effect of some event on the target business. A material adverse effect is typically considered to be an extremely high threshold and the definition in the acquisition agreement often carves out certain widespread events (such as terrorism). The scope of the definition (and its exceptions) depends on the type of transaction, industry and negotiating power amongst the parties. A material adverse effect is sometimes used to qualify the representations and warranties (particularly in a public merger). For example, a representation and warranty relating to governmental consents can be qualified to say, "the company has made all governmental filings except those that the failure to make are not reasonably likely to result in a material adverse effect." Typically, acquisition agreements also contain a condition to closing allowing a party to refuse to complete the deal if the other has suffered a material adverse effect between the signing of the agreement and the closing of the acquisition. Material adverse effect is often used interchangeably with material adverse change. For more information on material adverse effect provisions, see Practice Note, Material Adverse Change Provisions: Mergers and Acquisitions (www.practicallaw.com/9-386-4019).

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