How M&A Contracts Can Prevent Corporate Collapse

Abstract

Buying a company is not instant. After a merger agreement is signed, it can take months before the deal closes and ownership changes hands. During that time, markets can fall, buyers can lose their nerve, and money can disappear. This paper asks how the protective clauses in buyout contracts insulate transactions from severe operational disruptions during this waiting period. It studies three real cases: Elon Musk's 2022 deal to buy Twitter, Bank of America's purchase of Merrill Lynch during the 2008 financial crisis, and the fight between Dow Chemical and Rohm and Haas in 2008 and 2009. Across these cases, the paper looks at three contract tools. The first is the material adverse effect (MAE) clause, an escape hatch that buyers can use only after a severe, lasting blow to the target company. The second is the ordinary course requirement, which obliges the target company to keep running its business normally until closing. The third is specific performance, a court order that forces a party to complete the deal. The paper finds that in these high-profile deals, these rules often worked as safety guardrails. They tend to discourage buyers from backing out simply because the market turns bad, offer paths to manage risk under serious losses, and frequently protect sellers if a buyer's cash suddenly vanishes.

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