#35 Which AI Model Drafts the Best Material Adverse Effect Clause?
This week, I created a competition among AI models to write a material adverse effect clause. The winner might surprise you!
AI will change the world, but how will it change M&A? I want to focus on AI’s impact on M&A in this newsletter. I am not an expert on either M&A or AI, but I want to learn about both topics and how they intersect. I thought there might be others in my situation (or people who are experts in one field or the other) who would find information on M&A and AI helpful in their careers, so I created this newsletter to track and share what I learn.
Can AI Correctly Write a Material Adverse Effect Clause?
I set out to test which AI model writes the best material adverse effect (“MAE”) clause. First, I will provide background on the MAE clause. Second, I’ll give you the precedents I used to judge the AI’s outputs. Third, I will share the prompt I used for each model. Fourth, and most importantly, you will get to see how each of the models responded to the prompt, along with some feedback on the format and the substance of the response. Last, I’ll give my overall takeaways on this experiment.
What is an MAE?
At a basic level, MAE clauses allocate various risks between the buyer and the seller in a transaction.
Here is an excerpt from an article by Glenn West, a retired partner at Weil, Gotshal & Manges LLP, about the structure of the MAE clause:
All MAE clauses follow a basic pattern. Professor Robert T. Miller (whose articles on MAE clauses have been cited by Delaware’s Vice Chancellor Laster and England’s Justice Cockerill in two of the recent pandemic-related MAE decisions) helpfully summarizes that basic pattern as follows: A Base Definition of MAE, followed by a “lead-in” to a list of MAE Exceptions, followed by a list of MAE Exceptions, followed by a list of Disproportionality Exclusions.[3] Randomly selecting an MAE definition from a recent publicly filed deal, reveals how this basic pattern works:
“Company Material Adverse Effect” means any fact, circumstance, effect, change, event or development that, individually or in the aggregate, (a) prevents, or has a material adverse effect on, the ability of the Company to consummate the Transactions or (b) has [or is reasonably expected to have] a material adverse effect on the business, properties, financial condition or results of operations of the Company and the Company Subsidiaries (without giving effect to the Merger), taken as a whole [the Base Definition]; provided, however, that [the lead-in to the MAE Exceptions] none of the following, nor any fact, circumstance, effect, change, event or development to the extent arising out of or relating to the following, shall constitute or be taken into account in determining whether a “Company Material Adverse Effect” has occurred or may, would or could occur under the foregoing clause (b) only: [list of MAE Exceptions], except, in the case of [list of MAE Exceptions to which Disproportionality Exclusions apply], to the extent such fact, circumstance, effect, change, event or development has a materially disproportionate effect on the Company and the Company Subsidiaries, taken as a whole, relative to others in the industries and regions in which the Company and the Company Subsidiaries operate in respect of the businesses conducted in such industries in such regions [the Disproportionality Exclusions].
The first part of the clause states that if something bad happens to the seller, the buyer can get out of the deal. The second part of the clause gives various exceptions to the first part where buyers remain bound to close the deal, despite something bad happening to the seller. The third part of the clause states that even if the bad thing that happened to the seller was included in the list of exceptions, the buyer can refuse to close if the seller is “disproportionately” affected by the bad event.
Precedent to judge AI responses
To accurately judge the various AI models’ responses, I pulled several MAE provisions from publicly filed transactions. Here was my search criteria:
MAE clauses in M&A transactions, using Delaware law, private equity party involved, deal size from $50mn to $10bn, and the deal involves semiconductors and related tech.
The clauses vary in substance and form, but all contain the same basic principles, described above.
Here are the five clauses I chose:
“Material Adverse Effect” means any change, occurrence or development that has or would reasonably be expected to have a material adverse effect on the business, assets, liabilities, results of operations or financial condition of the Sold Companies, taken as a whole, in each case, excluding the Legacy Defense Business; provided, however, that no change, occurrence or development arising or resulting from any of the following, either alone or in combination, shall constitute or be taken into account in determining whether there has been a Material Adverse Effect: (i) (A) general economic, financial, political, capital market, credit market, or financial market conditions (including any disruption thereof and any increase or decline in the price of any security, commodity or any market index) or (B) general conditions affecting any of the industries in which the Sold Companies operate or their customers or suppliers conduct business (including, in each case, changes in exchange rates, embargoes, tariffs and epidemics); (ii) changes in Law or changes in GAAP or accounting standards, or in the authoritative interpretations thereof; (iii) any natural disasters, pandemics or acts of war (whether or not declared), sabotage or terrorism, or an escalation or worsening thereof, whether or not pursuant to the declaration of a national emergency or war, or the occurrence or the escalation of any military or terrorist attack; (iv) the entry into, announcement or performance of this Agreement, the Closing Agreements and the transactions contemplated hereby and thereby, including compliance with the covenants set forth herein, and the impact thereof on relationships, contractual or otherwise, with customers, suppliers, distributors, resellers, partners, employees, independent contractors or regulators; (v) the identity of, or any facts or circumstances relating to, Buyer or its Affiliates; (vi) any failure by the Sold Companies to meet projections or forecasts (provided that the underlying change, effect, event or occurrence that caused or contributed to such failure to meet projections or forecasts shall not be excluded unless otherwise excluded pursuant to this definition); (vii) any actions taken pursuant to or in accordance with this Agreement or the Closing Agreements; (viii) any failure to obtain any waiver or Consent from any Person with respect to the transactions contemplated by this Agreement or any of the Closing Agreements (it being understood that this clause (viii) shall not limit the effect of Section 6.2(i)); (ix) the continued employment of any Business Employees (including any Key Employees) by the Sold Companies (it being understood that this clause (ix) shall not limit the effect of Section 6.2(h)); and (x) any actions to which Buyer has consented or agreed pursuant to this Agreement, any actions or omissions to act at the request of Buyer, any of its Affiliates or any of their respective representatives pursuant to this Agreement, or any failure by the Sold Companies to take any action as a result of the restrictions set forth in Section 5.1(b); provided, further, however, that any change, occurrence or development referred to in any of the preceding clauses (i), (ii) and (iii) shall be taken into account for purposes of such clause only to the extent that such change, occurrence or development does not adversely affect the Sold Companies, taken as a whole, in a materially disproportionate manner as compared to other companies operating in the industries in which the Sold Companies compete (excluding the Legacy Defense Business).
“ Material Adverse Effect ” means, with respect to any entity or group of entities, any result, occurrence, fact, event, change or effect that, either individually or in the aggregate, has or would reasonably be expected to have, a material adverse effect on the business, financial condition, assets, liabilities, operations and results of operations (but not on the prospects) of such entity and its subsidiaries, taken as a whole, or would prevent or significantly delay such entity’s performance of its obligations under this Agreement or the ability of such entity to consummate the transaction contemplated hereby, other than any event, change or effect resulting from (A) changes in general U.S. economic conditions, to the extent that they do not have a substantially disproportionate effect on such entity; (B) changes generally affecting the specific industry in which such entity operates, to the extent that they do not have a substantially disproportionate effect on such entity relative to other industry participants, (C) any action required or permitted by this Agreement, (D) the public announcement, pendency or completion of the transactions contemplated by this Agreement, (E) changes in Applicable Law or applicable accounting regulations or principles or interpretations thereof, to the extent that such act does not have a substantially disproportionate effect on such entity, (F) any act of terrorism, war, calamity or act of God, to the extent that such act does not have a substantially disproportionate effect on such entity, or (G) failure to achieve financial forecasts or projections (excluding the underlying cause for such failure).
“ Material Adverse Effect ” means, with respect to any entity or group of entities, any result, occurrence, fact, event, change or effect that, either individually or in the aggregate, has or would reasonably be expected to have, a material adverse effect on the business, financial condition, assets, liabilities, operations and results of operations (but not on the prospects) of such entity and its subsidiaries, taken as a whole, or would prevent or significantly delay such entity’s performance of its obligations under this Agreement or the ability of such entity to consummate the transaction contemplated hereby, other than any event, change or effect resulting from (A) changes in general U.S. economic conditions, to the extent that they do not have a substantially disproportionate effect on such entity; (B) changes generally affecting the specific industry in which such entity operates, to the extent that they do not have a substantially disproportionate effect on such entity relative to other industry participants, (C) any action required or permitted by this Agreement, (D) the public announcement, pendency or completion of the transactions contemplated by this Agreement, (E) changes in Applicable Law or applicable accounting regulations or principles or interpretations thereof, to the extent that such act does not have a substantially disproportionate effect on such entity, (F) any act of terrorism, war, calamity or act of God, to the extent that such act does not have a substantially disproportionate effect on such entity, or (G) failure to achieve financial forecasts or projections (excluding the underlying cause for such failure).
“Material Adverse Change” and “Material Adverse Effect” when used in connection with an entity means any change, event, circumstance, condition or effect that is or is reasonably likely to be, individually or in the aggregate, materially adverse in relation to the condition (financial or otherwise), capitalization, properties, products, assets (including intangible assets) and liabilities, taken as a whole, Intellectual Property, business, operations or results of operations of such entity and its Subsidiaries, taken as a whole, except to the extent that any such change, event, condition or effect directly results from (a) the direct effect of actions by the Company taken at the direction or request of Parent pursuant to this Agreement, (b) changes affecting any of the industries in which such entity operates generally or the United States or worldwide economy generally (which changes in each case do not disproportionately affect such entity in any material respect), (c) any change in any Applicable Law, or any interpretation thereof, (d) any change in GAAP or other accounting standards, (e) the announcement or expected completion of the transactions contemplated by this Agreement or (f) changes caused by acts of terrorism or war (whether or not declared), sabotage, natural disasters or other calamity, crisis or geopolitical event occurring after the date hereof, or (g) the failure, in and of itself, of the Company to meet any financial forecast, projection, estimate, prediction or models, whether internal to the Company or otherwise.
“ Material Adverse Effect ,” when used in connection with an Entity, means any change, event, violation, inaccuracy, circumstance, or effect, individually or when aggregated with other such changes, events, violations, inaccuracies, circumstances or effects (each, an “ Effect ”), that is materially adverse to the business, assets, liabilities, financial condition, or results of operations of such Entity and its Subsidiaries, taken as a whole; provided , however , that any Effect resulting directly or indirectly from any of the following will not be deemed, either alone or in combination, to constitute, and none of the following will be taken into account in determining whether there has been or will be, a Material Adverse Effect (i) the announcement, pendency, or consummation of any of the transactions contemplated by this Agreement, including the impact thereof on relationships, contractual or otherwise, with vendors, customers or employees; (ii) changes generally affecting the industry in which the Entity operates or participates (provided that the changes do not disproportionally affect such Entity as compared to the other participants in such industry); (iii) changes in the U.S., the U.K. or global economy or capital or financial markets generally, including changes in interest or exchange rates (provided that such changes do not disproportionally affect the Entity as compared to the Entity’s competitors); (iv) the taking of any action expressly consented to or requested in writing by Parent or required by the terms of this Agreement; (v) any breach by Parent or Merger Sub of this Agreement; (vi) any change in accounting requirements or principles or any change in applicable laws, rules or regulations or the interpretation thereof (provided that the changes do not disproportionally affect the Entity as compared to the other participants in such industry); (vii) earthquakes, hurricanes, floods or other natural disasters (provided that the changes do not disproportionally affect the Entity as compared to the other participants in such industries in which such Entity operates or participates); or (viii) hostilities, acts of war, sabotage or terrorism or military actions or any escalation or material worsening of any such hostilities, acts of war, sabotage or terrorism or military actions existing or underway as of the date of this Agreement (provided that the changes do not disproportionally affect the Entity as compared to the other participants in such industries in which the Entity operates or participates).
Prompt
I used the following prompt:
You are an expert M&A lawyer. You specialize in M&A contract drafting. As an expert transactional lawyer, you know exactly what an MAE definition clause is and how it is formatted in almost every document. Draft a MAE definition clause that is fully negotiated, and represents a middle ground between the buyer and the seller. In other words, do not make the clause overly favorable to the buyer nor overly favorable to the seller—make it neutral towards both parties, much like how MAE clauses appear in fully negotiated documents. To ensure you use your expertise in contract drafting effectively, your MAE clause should be for a deal that uses Delaware law, involves semiconductors and related technology, and has a deal size between 50 million dollars and 10 billion dollars. You will be judged on how well your MAE definition clause fits the previously listed criteria, and as an expert lawyer, you do not want to disappoint!
Outputs
I used this website that sends prompts to several different models simultaneously. I included the responses of the most well-known models below. Follow the link to see all of the results!
For each output, I gave feedback on what the model did correctly and where the model made mistakes. Specifically, I judged the outputs on the format and, to the extent I could (I am not an M&A expert!), the substance of the text.
Model: GPT-o1 Preview
This is OpenAI’s newest model. Supposedly, it is excellent at difficult tasks.
**Material Adverse Effect Definition Clause**
"**Material Adverse Effect**" means any change, event, circumstance, development, condition, or effect that, individually or in the aggregate, has had or would reasonably be expected to have a material adverse effect on (a) the business, financial condition, results of operations, or assets of the Company and its Subsidiaries, taken as a whole, or (b) the ability of the Company to consummate the transactions contemplated by this Agreement on a timely basis; **provided, however,** that none of the following shall be deemed, either alone or in combination, to constitute, and none shall be taken into account in determining whether there has been or would reasonably be expected to be, a Material Adverse Effect:
1. **Industry and Market Conditions**: Changes or conditions generally affecting the semiconductor industry or related technology sectors in which the Company and its Subsidiaries operate, including fluctuations in market prices, supply and demand dynamics, or regulatory conditions.
2. **General Economic and Political Conditions**: Changes in general economic, business, regulatory, or political conditions, including acts of war (whether or not declared), armed hostilities, sabotage, terrorism, cyber-attacks, or the escalation or worsening thereof, and natural disasters or other force majeure events.
3. **Financial Market Fluctuations**: Changes in financial, banking, or securities markets, including interest rates, exchange rates, or any disruption of such markets.
4. **Legal and Regulatory Changes**: Changes in applicable laws, regulations, or accounting principles (including GAAP) or the interpretation or enforcement thereof.
5. **Failure to Meet Projections**: Any failure by the Company or its Subsidiaries to meet any internal or published projections, forecasts, estimates, predictions, or budgets for any period **(provided that** the underlying causes of such failure may be considered in determining whether a Material Adverse Effect has occurred).
6. **Announcement or Pendency of Agreement**: Effects resulting from the announcement or pendency of this Agreement and the transactions contemplated hereby, including any impact on relationships with employees, customers, suppliers, distributors, partners, or governmental authorities.
7. **Stock Price and Trading Volume**: Changes in the market price or trading volume of the Company's capital stock **(provided that** the underlying causes of such changes may be considered in determining whether a Material Adverse Effect has occurred).
8. **Actions Taken with Buyer's Consent**: Any action taken, or omitted to be taken, by the Company or its Subsidiaries that is expressly required, permitted, or consented to by the Buyer in writing pursuant to this Agreement.
9. **Shareholder Litigation**: Any litigation arising from allegations of breach of fiduciary duty or violation of securities laws relating to this Agreement or the transactions contemplated hereby.
**Provided, further,** that with respect to clauses (1), (2), (3), and (4), such changes, events, circumstances, developments, conditions, or effects shall be taken into account in determining whether a Material Adverse Effect has occurred **only to the extent** that they have a disproportionate adverse effect on the Company and its Subsidiaries, taken as a whole, compared to other participants in the semiconductor industry.
Feedback
Format: The model did not format the clause correctly. The numbered list the model gave would likely not appear in an M&A transaction document.
Substance: Substantively, I think the model was great. The model used language similar to the precedent clauses and it matched the structure of typical MAE clauses, described above.
GPT-4o
This is OpenAI’s current mainstream AI model.
Certainly! Here is a Material Adverse Effect (MAE) definition clause tailored to a middle-ground position for a Delaware-law governed M&A transaction in the semiconductor and related technology sector, with a deal size between $50 million and $10 billion:
Material Adverse Effect Definition Clause
For purposes of this Agreement, "Material Adverse Effect" or "MAE" means any event, change, effect, occurrence, state of facts, or development (each, an "Effect") that, individually or in the aggregate, has had or would reasonably be expected to have a material adverse effect on the business, assets, properties, financial condition, or results of operations of the Company and its Subsidiaries, taken as a whole; provided, however, that none of the following, either alone or in combination, shall be deemed to constitute, or be taken into account in determining whether there has been, a Material Adverse Effect:
(a) Effects resulting from changes in general economic, financial market, or geopolitical conditions, including the outbreak or escalation of hostilities, acts of war, terrorism, or natural disasters, in each case to the extent that such changes do not disproportionately affect the Company and its Subsidiaries, taken as a whole, relative to other participants in the semiconductor and related technology industry;
(b) Effects resulting from changes in conditions generally affecting the semiconductor and related technology industry, including fluctuations in the price of raw materials or components, to the extent that such changes do not disproportionately affect the Company and its Subsidiaries, taken as a whole, relative to other participants in such industry;
(c) Effects resulting from any changes in applicable laws or regulations or the interpretation thereof, or changes in GAAP or other applicable accounting standards (or the interpretation thereof), to the extent that such changes do not disproportionately affect the Company and its Subsidiaries, taken as a whole, relative to other participants in the semiconductor and related technology industry;
(d) Effects resulting from the announcement or pendency of the transactions contemplated by this Agreement, including any loss of or adverse change in the relationship of the Company or any of its Subsidiaries with its employees, customers, suppliers, or other business partners, provided that this clause (d) shall not apply to any representation or warranty to the extent that such representation or warranty is intended to address the consequences resulting from the announcement or pendency of this Agreement;
(e) Effects resulting from any action taken (or omitted to be taken) at the written request or with the written consent of the Buyer or any of its Affiliates;
(f) Effects resulting from any failure by the Company or any of its Subsidiaries to meet any internal or published projections, forecasts, or revenue or earnings predictions for any period (provided that the underlying cause of such failure may be taken into account in determining whether a Material Adverse Effect has occurred, unless such cause is otherwise excepted by this definition); and
(g) Effects resulting from any litigation arising from allegations of a breach of fiduciary duty or other violation of applicable Law relating to this Agreement or the transactions contemplated hereby;
except, in the case of clauses (a) through (g), to the extent that such Effects have a disproportionate impact on the Company and its Subsidiaries, taken as a whole, relative to other participants in the semiconductor and related technology industry.
This definition aims to strike a balanced approach, ensuring that both the Buyer and the Seller are protected from extraordinary, unforeseen circumstances while also excluding common industry-wide risks and changes that should not be considered material adverse effects.
Feedback
Format: The format by GPT-4o is okay. It does not look like the precedent documents because the exceptions are not listed “in-line.” however, I think this is a plausible way to format the exceptions, so it passes the test.
Substance: Substantively, one potential issue is that the definition of “Effects” may or may not include the list of exceptions, which could cause uncertainty. “Effect” was not defined in any of the precedent clauses. Something else I noticed, the disproportionality exception applies to all of the exceptions, which did not occur in the precedent document. This is likely a result of heavy negotiation.
GPT 4 Turbo
Material Adverse Effect Definition
For purposes of this Agreement, "Material Adverse Effect" means any change, effect, event, occurrence, state of facts, or development that is materially adverse to the business, assets, financial condition, or results of operations of the Company and its Subsidiaries, taken as a whole; provided, however, that "Material Adverse Effect" shall not include any adverse change, effect, event, occurrence, state of facts or development directly or indirectly arising out of or attributable to: (a) general economic or political conditions; (b) conditions generally affecting the industries in which the Company and its Subsidiaries operate; (c) any changes in financial, banking, or securities markets in general, including any disruption thereof and any decline in the price of any security or any market index or any change in prevailing interest rates; (d) acts of war (whether or not declared), armed hostilities or terrorism, or the escalation or worsening thereof; (e) any action required or expressly permitted by this Agreement; (f) changes in applicable laws or accounting rules, including GAAP; (g) any natural or man-made disaster or acts of God; (h) any failure by the Company to meet any internal or published projections, forecasts, or revenue or earnings predictions (provided that the underlying causes of such failures may, except as otherwise excluded by this clause, constitute a Material Adverse Effect); (i) any changes in the share price or trading volume of the Company (provided that the underlying causes of such changes may, except as otherwise excluded by this clause, constitute a Material Adverse Effect); or (j) any matter disclosed in the Disclosure Schedules attached hereto; provided, further, that any change, effect, event, occurrence, state of facts or development referred to in clauses (a) through (g) above shall be taken into account in determining whether a Material Adverse Effect has occurred to the extent that such change, effect, event, occurrence, state of facts or development has a disproportionate effect on the Company as compared to other participants in the industries or markets in which the Company operates.
This definition is drafted to balance the interests of both the buyer and the seller by providing specific exclusions to the definition of a Material Adverse Effect, thereby limiting the scope of what can be considered an MAE. This clause is designed to protect the buyer from unforeseen changes that could significantly impact the underlying value of the acquisition while ensuring that the seller is not unfairly penalized for normal industry fluctuations or broad economic conditions that are outside of their control.
Feedback
Format: GPT-4 Turbo formatted the response better than GPT-4o Preview and GPT-4o. It correctly enumerated the list like the precedent documents. Of course, to really judge the format we need to know what style of list the entire document follows, but GPT-4 Turbo at least didn’t make a numbered list!
Substance: As far as I can tell, the substance of GPT-4 Turbo’s response is correct. None of the five precedent clauses contained the disclosure schedule exception, but upon googling it, I found that it is a common exception.
Claude 3.5 Sonnet
Here's a balanced Material Adverse Effect (MAE) definition clause for a semiconductor industry M&A transaction under Delaware law, with a deal size between $50 million and $10 billion:
"Material Adverse Effect" means any event, change, circumstance, occurrence, effect or state of facts that, individually or in the aggregate, (a) has had or would reasonably be expected to have a material adverse effect on the business, assets, liabilities, results of operations or financial condition of the Company and its Subsidiaries, taken as a whole, or (b) would reasonably be expected to prevent or materially impair or delay the ability of the Company to consummate the Transactions; provided, however, that none of the following shall be deemed to constitute, and none of the following shall be taken into account in determining whether there has been, a Material Adverse Effect:
(i) any change in general economic, political or financial market conditions, including changes in interest or exchange rates;
(ii) any change generally affecting the semiconductor industry or the markets in which the Company operates;
(iii) any change in GAAP or applicable Law;
(iv) any acts of war, sabotage, terrorism or military actions, or any escalation or worsening thereof;
(v) any hurricane, earthquake, flood or other natural disasters, acts of God or force majeure events;
(vi) any failure by the Company to meet any internal or published projections, forecasts or revenue or earnings predictions (provided that the underlying causes of such failures may be considered in determining whether there is a Material Adverse Effect);
(vii) the announcement, pendency or consummation of the Transactions, including any loss of customers, suppliers, employees or other business relationships resulting therefrom;
(viii) any action taken by the Company as required by this Agreement or with Buyer's written consent;
(ix) any change in the market price or trading volume of the Company's securities (provided that the underlying causes of such changes may be considered in determining whether there is a Material Adverse Effect);
except, in the case of clauses (i), (ii), (iii), (iv) and (v), to the extent that such event, change, circumstance, occurrence, effect or state of facts has a materially disproportionate adverse effect on the Company and its Subsidiaries, taken as a whole, as compared to other companies operating in the semiconductor industry in which the Company operates."
This MAE definition clause is designed to strike a balance between the interests of both the buyer and the seller in a semiconductor industry transaction. It includes standard carve-outs for industry-wide and macroeconomic factors, while allowing for consideration of company-specific issues that could materially affect the deal. The clause also incorporates language specific to the semiconductor industry and is consistent with Delaware law principles for MAE clauses.
Feedback
Format: The format from Claude 3.5 Sonnet is good, something that could show up in a document, but again, it is not like any of the precedent clauses.
Substance: Substantively, it seems like this clause is good because it contains several exceptions that the precedent clauses contain. It is interesting that it excludes some of the exceptions from the “disproportionate effect” qualifier. It contains “underlying causes” language present in the precedent documents and the other outputs, except for the Llama 3 70b, below.
Llama 3 70b
The art of crafting a well-balanced MAE (Material Adverse Effect) definition clause! As an expert M&A lawyer, I'm delighted to provide a fully negotiated MAE definition clause that represents a middle ground between the buyer and the seller, tailored to the specified deal parameters.
MAE Definition Clause:
For purposes of this Agreement, "Material Adverse Effect" means any event, occurrence, fact, condition, or change that, individually or in the aggregate, has a material adverse effect on the business, assets, liabilities, financial condition, or results of operations of the Company, taken as a whole; provided, however, that none of the following shall be deemed to constitute a Material Adverse Effect:
(i) changes in general economic or market conditions affecting the semiconductor industry or the global economy as a whole;
(ii) changes in laws, rules, or regulations of general applicability to companies in the semiconductor industry;
(iii) any failure to meet internal projections or forecasts, but only to the extent that such failure is not caused by a breach of this Agreement or any other agreement or instrument to which the Company is a party;
(iv) any natural disaster or act of terrorism, to the extent that such event does not disproportionately affect the Company relative to other companies in the semiconductor industry;
(v) any change in the market price or trading volume of the Company's securities, but only to the extent that such change is not caused by a breach of this Agreement or any other agreement or instrument to which the Company is a party;
(vi) any action taken, or not taken, by the Company at the written request of the Buyer or with the Buyer's prior written consent;
(vii) any disclosure or announcement of this Agreement or the transactions contemplated hereby, including any impact on the Company's relationships with its customers, suppliers, or employees; or
(viii) any event, occurrence, fact, condition, or change that is cured or remedied prior to the Closing Date.
Notwithstanding the foregoing, any event, occurrence, fact, condition, or change that has a disproportionate impact on the Company relative to other companies in the semiconductor industry may be deemed to constitute a Material Adverse Effect.
Why this clause is well-balanced and neutral:
Scope of MAE: The clause defines MAE as an event that has a material adverse effect on the Company's business, assets, liabilities, financial condition, or results of operations, taken as a whole. This scope is broad enough to capture significant events but narrow enough to exclude minor issues.
Carve-outs: The clause includes eight carve-outs, which are typical in M&A agreements. These carve-outs exclude certain events that are beyond the Company's control or are not unique to the Company, such as changes in general economic conditions, natural disasters, or changes in laws and regulations.
Internal projections: The clause excludes failures to meet internal projections or forecasts, unless such failure is caused by a breach of the agreement. This provision prevents the buyer from claiming an MAE based on the Company's internal performance metrics.
Disproportionate impact: The clause includes a provision that allows an event to be deemed an MAE if it has a disproportionate impact on the Company relative to other companies in the semiconductor industry. This provision ensures that the buyer is not unfairly protected from industry-specific risks.
Cure or remedy: The clause provides that any event that is cured or remedied prior to the Closing Date will not be considered an MAE. This provision encourages the parties to work together to resolve issues before closing.
Delaware law: This clause is drafted in accordance with Delaware law, which is commonly chosen as the governing law in M&A agreements. Delaware law provides a well-established framework for interpreting MAE clauses, and this clause is designed to be consistent with Delaware court decisions.
Semiconductor industry: The clause takes into account the unique characteristics of the semiconductor industry, including the potential for industry-specific risks and disruptions.
Deal size: The clause is suitable for deals with a value between $50 million and $10 billion, as it provides a balanced approach to allocating risk between the buyer and the seller.
I hope this MAE definition clause meets your expectations!
Feedback
Format: The format is once again a plausible way to format this clause, but does not match any of the formatting of the precedent clauses.
Substance: Again, I am not an expert, but this seems worse than the other models. First, there is a double “disproportionate effect” language, which does not make sense (it appears in list item “iv.” and again at the end). Second, the capitalization is strange. We need the full document to really judge the model, but it capitalized some words, like “Company”, but did not capitalize others that would typically be defined, like “law.” Last, it added “semiconductor industry” in places where it did not make sense, like in the first two list items. This was out of line with some of the precedents and the other models. The precedents never explicitly mentioned the specific industry the businesses operated in, presumably so there was some flexibility if a business operated in more than one industry.
Overall Takeaways
It is interesting what the models put in and leave out. For example, why would the words “whether declared or undeclared” be omitted from the “hostilities exception”? That seems pretty buyer-friendly to me, but perhaps it’s a good representation of how these clauses are negotiated!
The older models (GPT-4) had better formatting than the newer models (GPT-o1 Preview).
None of the models formatted the clause like some of the precedent clauses with the “disproportionate effect” language in parenthesis next to the exception.
Next time I do a similar experiment, I will choose a clause with less variation so the models have a fair shot at getting it “correct.” The high level of negotiation involved with the MAE clause makes it hard to accurately judge.
About me
My name is Parker Lawter, and I am a law student pursuing a career as an M&A lawyer. I am in my last semester of law school, and with some extra time on my hands, I decided to create this newsletter. I hope it is informative and helpful to anyone who reads it! I am not an expert at either M&A or AI, but I am actively pursuing knowledge in both areas, and this newsletter is a part of that pursuit. I hope you’ll join me!
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All views expressed are my own!