Who needs an MAE?

Ikon Office Solutions Inc. may be one of the few sellers not panicking in the current market. The Malvern, Pa.-based company agreed to sell to Tokyo's Ricoh Co. Ltd. for $1.6 billion on Aug. 27 in a merger agreement that does not include a so-called material adverse effects clause. Such provisions allow a buyer to walk from a deal if the target suffers an MAE as defined in the agreement. Just about every deal for a public company includes an MAE clause.

Ikon detailed its deal process in the preliminary proxy it filed on Sept. 11. The company began exploring a sale in February, and with its stock at $9.54 per share on April 22, its board authorized investment bankers Dusty Philip, Jeff Dodge and Josh O'Mara of Goldman, Sachs & Co. to start scouring for bidders. Goldman came up with 23 possible buyers; 11 signed confidentiality agreements and three submitted tentative bids. Ricoh, which manufactures cameras and office equipment, took the lead in the talks and by Aug. 15 was offering $17 per Ikon share.

The same day, the bidder's lawyers at Morrison & Foerster LLP served up a merger agreement that included an MAE clause, a so-called no-talk clause that barred Ikon from soliciting bids from third parties and a termination fee of 4%, which is slightly on the high side. (New York rather than Delaware law governs the merger agreement; Ikon is incorporated in Ohio.) MoFo's Ken Siegel and Randy Laxer in Tokyo led the firm's team on the deal. A team from Morgan Stanley in Tokyo provided banking advice to Ricoh.

Ikon's board found the no-talk clause unobjectionable because it had thoroughly shopped the company, but it opposed signing a deal with an MAE clause. Advised by Richard Hall of Cravath, Swaine & Moore LLP in New York, the board said it would be willing to accept a strict no-talk clause in exchange for Ricoh's forgoing the MAE clause. Ricoh agreed, and the parties struck a deal at $17.25 per share, with closing anticipated in the fourth quarter.

At first blush, the concession might seem to have favored Ikon because of the ubiquity of the MAE. After all, numerous buyers have claimed an MAE to try to escape deals that they have come to regret; Hexion Specialty Chemicals Inc. did so most recently in an effort to walk from its $10.5 billion agreement to buy Huntsman Corp.

But Hexion spent little time on the MAE claim in the six-day trial before Vice Chancellor Stephen Lamb of Delaware's Court of Chancery, and with good reason. Like most MAE clauses, the one in the Hexion-Huntsman deal says that changes in industry conditions do not constitute an MAE unless they disproportionately affect the target. Given that exception, it's hard to imagine what would constitute an MAE at a large company with far-flung manufacturing facilities and customers. And the leading case in the area, IBP Inc. v. Tyson Foods Inc., establishes a high bar for a buyer to walk from a deal based on an MAE. Therefore, claiming one is primarily useful to buyers as a way of extracting a price cut from a seller that wants to avoid a trial.

Still, Ricoh did forgo the right to make that threat. But since the deal was set to close within four months, Ricoh gave up a lot less than Hexion would have had it made the same trade; it expected to take at least a year to close the Huntsman purchase. And Ricoh gained incrementally more deal certainty by winning a 4% breakup fee and a no-talk clause so detailed and stringent that it goes on for four pages, both of which suggest Ricoh was worried about losing the deal.

Ricoh's counterintuitive trade, like Hexion's case in Delaware last month, suggests that buyers get very little from the standard MAE clause.

David Marcus is a senior writer at Corporate Control Alert.