Material Adverse Change' Clause Is Rarely Triggered

By Vipal Monga and Thomas Gryta 

Is a security breach that exposed 500 million consumer accounts a material adverse change to an internet company's business?

That is a question that will determine whether Verizon Communications Inc. lawyers could use the security breach disclosed by Yahoo Inc. in September to renegotiate the terms of a $4.8 billion deal they struck in July.

Many merger agreements contain provisions allowing buyers to withdraw from deals if the value of a transaction has been hurt by a significant development. In the case of the Verizon/Yahoo deal, such a change is defined as one that would "reasonably be expected to have a material adverse effect on the business, assets, properties, results of operation or financial condition of the Business, taken as a whole."

The breach, which Yahoo blamed on a state-sponsored actor, occurred two years ago but was discovered after the merger deal was signed. On Thursday, Verizon's general counsel, Craig Silliman, said "we have a reasonable basis to believe right now that the impact is material."

Stephen S. Wu, a lawyer at the Silicon Valley Law Group, a law firm, said Yahoo promised in the merger agreement that no security breaches had taken place -- and that no breaches will have occurred by the deal's closing.

That gives Verizon leverage to potentially renegotiate the deal, or even walk away, he said. "This is an agreement written in a way that there's a judgment call that needs to be made," Mr. Wu said.

It is rare for companies to trigger material adverse change clauses because courts have resisted their use, said Lisa Stark, a partner at K&L Gates LLP. "It has to be a very substantial event. It can't just be a hiccup."

The long-term effects of the data breach on Yahoo could tip the balance, said Erik Gordon, a professor at the University of Michigan Ross School of Business, making Verizon's case one of the rare situations in which a buyer can terminate an acquisition agreement.

In June, a Delaware judge ruled that Energy Transfer Equity LP could back out of a nearly $33 billion deal for Williams Cos. since the pipeline operator's lawyers couldn't deliver a necessary opinion on the deal's tax treatment.

More important, Yahoo and Verizon aren't likely to go to court because Yahoo's business has been declining and it may not want to face the prospect of selling itself again.

"There is a price you will pay to not face the uncertainty of going into a courtroom," Mr. Gordon said. "There is a lot of incentive for Yahoo to work something out with Verizon."

Write to Vipal Monga at [e-mail] and Thomas Gryta at [e-mail]

(END) Dow Jones Newswires

October 13, 2016 20:03 ET (00:03 GMT)

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