I. Introduction
A tax law change can materially and adversely affect the tax consequences of a pending deal. In response, some merger and acquisition (M&A) agreements include a “Tax MAC” provision—a provision that triggers termination (or other) rights upon a material adverse change in tax law. For example, it was the Tax MAC provision in the acquisition agreement between Pfizer and Allergan that enabled Pfizer to terminate their pending transaction in 2016 after the Treasury Department issued new inversion regulations. Although Tax MAC provisions are not particularly common, they can be crucial in a business deal if a change in tax law would change a party’s interest in consummating the deal, particularly at the specified price and on the articulated terms. Tax MAC provisions enable taxpayers to specify which party to a deal bears which consequences that might arise from a possible tax law change: If a tax law change occurs, how will the terms of the deal change? Which party will be obligated to continue with the deal despite the tax law change? And which party will be able to terminate (and under precisely what circumstances)? Thus, taxpayers can use Tax MAC provisions in contracts to allocate tax-transition risk among themselves. Tax MAC provisions and other similar tax-transition, risk-shifting contractual provisions are useful in any situation in which a taxpayer’s economic decision is a function of tax law. As a result, these provisions are likely to be increasingly important when taxpayers are making decisions in a political climate like today’s when tax laws could change again, perhaps dramatically, if control of Congress and the White House changes.
Yet little has been written about Tax MAC clauses. To help fill this gap, I studied Tax MAC provisions included in publicly filed M&A agreements from the past five years, focusing on provisions that could trigger termination rights if an adverse tax law change occurs. This Article details the findings of that study and provides insights into how Tax MAC clauses are used to manage deal risk posed by the possibility of future tax law changes. Specifically, this Article identifies the key elements of the studied Tax MAC provisions and discusses the range of approaches taken on each. As explained further herein, the Tax MAC provisions vary significantly, including with respect to which changes constitute a “change in tax law” for purposes of these provisions, what adverse consequences constitute Tax MACs (i.e., material adverse tax law changes that trigger the provision’s consequences), what procedures are used to determine whether a Tax MAC has occurred, what rights or obligations arise if a Tax MAC has occurred, the extent of overlap between a Tax MAC provision and any general tax opinion required by the agreement, and how a Tax MAC provision is disclosed in relevant SEC filings. Understanding this variability is useful because Tax MAC provisions are, in many circumstances, carefully tailored to the concerns relevant to the particular deal and tend to be employed in large, high-stakes matters. As a result, these provisions present opportunities for nuanced bargaining and value-added lawyering.
This study also has implications beyond the types of deals in which parties might want to terminate a pending acquisition if tax laws change with adverse effect. There are many other situations in which parties might want to use a similarly bespoke tax-transition, risk-shifting provision to manage risks arising from the possibility of future tax law changes. For example, in an acquisition of a private target company, parties might want to contract for a post-closing purchase price adjustment if a tax law change affects the post-acquisition value of a target company’s net operating losses. In addition, parties to a loan might want to contract for an adjustment to the loan’s interest rate if a tax law change limits the availability or value of interest deductions for the borrower or if a tax law change alters the tax rate applicable to the interest received by the lender. To draft these and similar contractual provisions, the parties (and their lawyers) need to determine which changes should constitute “tax law changes” that could trigger the clause, what adverse consequence should trigger the specified additional payments or other rights, what procedures should be used to determine whether an adverse consequence arises, and more. Thus, this Article’s discussion of the key deal points in Tax MAC termination provisions from M&A agreements should also inform the drafting and negotiation of a wide variety of additional provisions that are intended to alter the terms of a contract if tax laws change. More generally, this Article provides insights into both strategies for empowering taxpayers to proceed with desirable transactions that might otherwise be stymied by uncertainty about possible future tax reforms and deal-making practices when tax laws may change.
Part II of this Article provides background on regular (i.e., nontax) MAC clauses, and Part III explains the methodology for this study of Tax MAC provisions. Then, Part IV discusses the findings of the study.
II. Background on MAC Clauses
As deal lawyers know, the overwhelming majority of M&A agreements with delayed closings include a “material adverse change” (MAC) or “material adverse effect” (MAE) provision. These provisions, which this Article refers to as “regular” MAC provisions (as opposed to “Tax” MAC provisions), can confer a termination right (often called a “MAC Out”) on one or more parties if a material adverse change occurs after signing but before closing. The absence of a MAC is typically a condition to closing the M&A deal, and a termination right generally arises if the closing condition is not satisfied or waived within a given time frame.
Although the exact details of these regular MAC provisions vary because the clauses tend to be heavily negotiated, they generally exclude adverse consequences that arise from changes in laws or regulations (tax or otherwise). The majority also exclude adverse consequences that arise from changes in “interpretation of laws by courts or government entities.” As a result, regular MAC provisions are typically of little help to a party concerned about the adverse impact that a possible tax law change could have on a deal. If a party wants to be able to exit the transaction upon the occurrence of tax law change that would materially and adversely affect the transaction or the party, a different provision is likely needed. Thus, concerned parties might want a tax-specific MAC-like provision to provide explicit termination or other rights if a future tax law change causes a specified adverse consequence. Hence, some deals include Tax MAC provisions in addition to regular MAC provisions.
III. Methodology
To find publicly filed M&A agreements with Tax MAC provisions, I used Bloomberg to search EDGAR for plans of acquisition, reorganization, etc. filed within a recent five-year period. Then, I reviewed each agreement to determine if it contained a Tax MAC clause. I culled the duplicate results and many false positives. To focus the study on termination rights triggered by a tax law change, I also set aside agreements in which the provision imposed mandatory consequences (e.g., gross-up payments) arising from a change in tax law but could not lead to a unilateral termination right.
Of the unique agreements from the search period in which a Tax MAC could potentially lead to a termination right, 13 clearly provided a unilateral termination right upon the occurrence of a Tax MAC (i.e., a “Tax MAC Out”), either through an explicit clause in the agreement’s termination section or via a closing condition, which, if not satisfied by a particular date, would allow for a termination right. These agreements, listed in Appendix A, were the focus of my analysis. I do not claim, however, to have found every publicly filed M&A agreement from the last five years with a Tax MAC Out. Because these provisions do not employ standardized language, the search may have missed some. Nevertheless, the agreements identified should provide a sample that is comprehensive enough to determine how these provisions are (and could be) drafted, the variables on which they differ, and the range of approaches taken on each variable.
The Tax MAC provision contained in several other agreements, listed in Appendix B, did not provide a termination right but merely obligated the parties to exert some level of effort to restructure the transaction in response to a change in tax law. Under these provisions, the failure to comply with the covenant to exert the requisite level of effort to restructure could lead to a unilateral termination right, but the mere existence of a material adverse tax law change did not. In some cases, these provisions were quite explicit that, if a Tax MAC occurred and the parties were unable to restructure after exerting the required effort, the tax law change did not entitle any party to terminate unilaterally. The parties remained obligated to consummate the transaction unless the transaction was terminated pursuant to another termination provision (e.g., mutual consent). Consequently, a party to the agreement bore real risk that it would not be able to terminate the transaction if a materially adverse tax law change occurred prior to closing. Although these provisions could ultimately lead to a Tax MAC-related termination right (i.e., if a party failed to exert sufficient effort to restructure as required by the agreement), such a right was rather attenuated. Thus, for purposes of the analysis discussed herein (a portion of which examines the termination provisions themselves), I focused primarily on the 13 agreements with Tax MAC Outs, referring to the Tax MAC restructuring provisions only when they provided additional insights beyond those provided by the Tax MAC Outs.
IV. Analysis of Results
The 13 agreements with Tax MAC Outs vary considerably. These transactions involved companies in widely varying industries, including pharmaceuticals, software, gas/energy, and leisure/entertainment. Some transactions were mergers of equals, but in others, there was a significant disparity between the sizes of the companies. The agreements were signed throughout the five-year search period, with three signed in 2015, one signed in 2016, five signed in 2017, and four signed in 2018. Three deals failed to close, but the Tax MAC Out was the reason for termination in only one of those deals (Pfizer/Allergan). Only one set of parties (Ashford Inc. and related enterprises and individuals) was involved in more than one deal with a Tax MAC Out—one deal signed in 2015 but did not close, and one signed in 2018, which did close. Nineteen different law firms (almost all Am Law 100 firms) advised on these deals, with only two firms (Kirkland & Ellis LLP and Cleary Gottlieb Steen & Hamilton LLP) advising on as many as three different deals and four other firms advising on two deals each.
The substantial similarity of the language used in a few of the Tax MAC Out provisions strongly suggests that these few provisions have common origins. The language similarities, together with the timing of the agreements, also suggests that the language in some of the agreements may be traceable from one deal to the next, often (but not always) through law firms that advised on multiple deals. Yet, even when a law firm was involved in multiple deals, the Tax MAC provisions in those deals could be very different.
Ultimately, notwithstanding some language similarities among a couple of subsets of agreements, there is quite a bit of variation in the details of the Tax MAC Out provisions themselves, as explained further below.
A. What Tax Concerns Led Parties to Include Tax MAC Outs in Their Agreements?
The Tax MAC Out provisions evinced concerns about a wide range of tax issues, and some deals included Tax MAC Outs on multiple issues. Inversions were a common focus of these clauses; five of the 13 deals were contingent on the absence of tax law changes that would cause a post-transaction party to be treated as U.S. domestic corporation, rather than a foreign corporation, for U.S. federal income tax purposes. Five other deals reflected the parties’ concern that tax law changes could prevent the transaction from qualifying as a section 368 reorganization or as an exchange under section 351 (or could lead to material gain recognition in a qualifying transaction) or both. The Tax MAC Out in one of these deals was also contingent on the absence of tax law changes that could result in recognition of gain under section 367(a). The Tax MAC Outs in two of these deals also involved tax law changes that could cause certain dividends not to be qualified dividends. One deal involved Tax MAC Outs related to tax-free treatment under section 721, the application of the partnership disguised sale rules, and a section 355 Morris Trust issue. And one deal evinced a concern that tax law changes could affect the availability and consequences of the renewable electricity production credit under section 45.
Although almost all the Tax MAC Out clauses identified the specific tax issue of concern, one deal did not. The Tax MAC Out in that deal was more general, reflecting a concern about any change in tax law that would have a material adverse effect, as that term was defined in the agreement’s regular MAE clause.
B. What Counts as a “Change in Tax Law?”
There is surprising variability as to what constituted a “change in tax law” for purposes of triggering the Tax MAC Out provisions. The parties’ choices about which types of changes should be deemed as “changes in tax law” presumably reflected their assessments about the ways in which the tax laws that concerned them were most likely to change (e.g., through congressional action, administrative action, or judicial decisions) and their preferences about how complete a change should be (e.g., whether bills, proposals, and changes not yet effective were sufficient) before it could trigger the Tax MAC provision’s termination rights. Fundamentally, all of these choices involve risk allocation—which party bears the risks arising from which types of changes in the tax law?
To implement these choices, the agreements reflected several different drafting approaches. Some agreements did not explicitly state which specific changes (e.g., regulations versus judicial decisions) constituted changes in tax law that could trigger the Tax MAC Out, opting instead to rely only on the defined terms “Tax” and “Law” used throughout the agreement (e.g., referring to a “change in Tax Law” when the terms “Tax” and “Law” were defined elsewhere in the agreement). A couple of agreements were even less specific, referring only to a nontax-specific “change in Law” (again using the term “Law,” which was defined elsewhere in the relevant agreement) that would have the particular adverse tax impact. On the other hand, some agreements were more specific about the particular tax law changes (e.g., explicitly addressing whether proposed legislation could trigger the Tax MAC Out), but even those agreements that clearly defined a “Change in Tax Law” (or other similar defined term) often used the agreement’s defined terms and, thus, implicitly incorporated their definitions.
1. Statutes and Bills
All agreements provided, whether explicitly or via the definitions of Tax or Law or both, that changes to the Code would constitute a change that could trigger the Tax MAC Outs. The majority of agreements referred generically to any “statute” or “code” and did not specifically limit the Tax MAC trigger to a change to a particular Code section or sections. One agreement, however, limited the relevant statutory changes to those that would amend only one specific Code section (section 7874). Thus, that agreement’s Tax MAC Out would not be triggered by an amendment to another Code section or the enactment of a new Code section, even if such an amendment or enactment would have resulted in an adverse effect that was substantially similar to one that would otherwise trigger the Tax MAC Out.
The agreements take a less uniform approach to legislative proposals. Some agreements did not mention bills at all and thus excluded any changes that were contained only in bills that had not yet been enacted into law. Under other agreements, a bill would constitute a change that could trigger the Tax MAC Out if the bill had been passed in identical or substantially identical form by both houses of Congress and the time for Presidential signature or veto had not yet elapsed. Other agreements included bills at even earlier stages, including a bill passed by either house of Congress as long as it has not been defeated in the other house; a bill passed by either house of Congress that was reasonably likely to be enacted into law; and even a bill that had merely been reported out of the House Ways and Means Committee or Senate Finance Committee, if it was reasonably likely to be enacted into law. In addition, one agreement provided that even a bill that had been vetoed by the President would constitute a law change that could trigger the Tax MAC Out as long as the period for overriding the veto had not yet elapsed.
2. Administrative/Regulatory Guidance
All agreements also included changes to, or issuance of, regulations or sub-regulatory guidance as changes that could trigger the Tax MAC Outs. In some cases, this was accomplished merely via the definition of the term “Law”, which typically included any “rule, regulation, . . . or requirement . . . of any Governmental Authority” or similar language. In other cases, it was accomplished more explicitly in the definition of “Adverse Tax Law Change” (or similar term) or in the Tax MAC Out provision’s language itself by including a reference to any “interpretation” of applicable law, sometimes specifically referring to any interpretation “by a taxing authority,” any “official” interpretation, or any interpretation “set forth in published guidance.” This sort of specific reference arguably included not only final and temporary regulations but also proposed regulations because even proposed regulations reflect the Treasury Department’s (nonbinding) interpretation of the law and proposed regulations are officially issued and published in the Federal Register and Internal Revenue Bulletin. Given that much of the action on inversions had been in the form of regulations, it was not surprising that all of the agreements with inversion-related Tax MAC Outs were explicit that a change to regulations or other administrative guidance constituted a change in tax law that could lead to a termination right.
Some agreements provided more detail about sub-regulatory guidance. A few agreements explicitly excluded IRS News Releases from possibly triggering the Tax MAC Out. One explicitly included “notices described in Section 7805(b) of the Code” as guidance that, if issued or changed, could trigger the Tax MAC Out. In addition, one agreement went into extensive detail about the particular sub-regulatory guidance that could trigger the Tax MAC Out, including a specific reference to memoranda or similar authority issued by the IRS Large Business and International Division or by the IRS Chief Counsel.
The agreements typically did not specify which Code sections such guidance needed to interpret to trigger the Tax MAC Out. One agreement, however, provided that the issuance or change of regulations or other administrative guidance could trigger the Tax MAC Out only if interpreting section 7874. Another agreement included changes to regulations and administrative guidance generally, but specifically excluded changes made when finalizing particular proposed regulations from potentially triggering the Tax MAC Out.
3. Judicial Decisions
All of the agreements arguably included judicial decisions in the types of changes that could trigger a Tax MAC Out, but most did so implicitly through a Tax MAC Out provision that was drafted using the defined term “Law” (or “Applicable Law”), which was, in turn, defined to include such things as orders, rulings, common law, and judicial interpretations. Thus, taking into account the defined terms, changes to these judicial authorities arguably could trigger the Tax MAC Out in all of the agreements. I say “arguably” because the conclusion that judicial decisions could trigger the Tax MAC Outs in many of these agreements was implicit and relied on the definition of the term “Law.” In most agreements, there was nothing that would undermine the conclusion that judicial decisions could be triggering changes. In one agreement, however, the high degree of specificity with which the agreement articulated the types of changes in tax law that could trigger the Tax MAC Out (and which did not include any reference to courts or case law) suggested that the parties might have intended to exclude judicial decisions despite the fact that the “Tax Law Change” provision used the defined term “Law,” which did include judgments and orders. This potential ambiguity suggests that parties might want to be explicit about whether (or not) judicial decisions could trigger Tax MAC Outs, particularly if a party is concerned about an imminent judicial decision with potentially adverse implications.
Two agreements were quite explicit that judicial decisions were included in the types of changes that could trigger the Tax MAC Out. Both agreements included in the definition of “Change in Tax Law” decisions by federal courts that change the interpretation of the tax law. One specifically listed particular federal courts. The other did not specify particular courts but did limit judicial Tax MAC Out triggers by the substantive topic of the decision. These agreements may provide sample language for anyone wishing to be explicit about whether judicial decisions can trigger a Tax MAC Out.
4. Proposed Changes
Except as discussed above regarding bills and proposed regulations that are set forth in published guidance, most agreements were silent regarding whether proposed changes were sufficient “tax law changes” to trigger a termination right. Proposals to change the law are not law, and thus, for most Tax MAC Outs, the mere proposal of a change would be insufficient to trigger a termination right even if the change (were it to be enacted) would have the specified adverse effect.
One agreement, however, explicitly treated any proposed statutory or regulatory change as a potential trigger for a Tax MAC Out, if the proposed change “has been publicly announced (through whatever media)” by the Service, the Treasury Department, the President, or any other executive agency and would, if “finalized and made effective,” have the specified adverse effect. The inclusion of proposed changes could lead to a termination right at a relatively early point when the tax change proposal is rather inchoate and no formal action has been taken to implement the proposal. This approach increases flexibility for, and reduces tax-transition risk borne by, the party that would have the termination right. On the other hand, including proposed changes as a Tax MAC Out trigger increases deal risk for the other parties by reducing the likelihood that the deal will close.
5. Changes That Are Not Yet Effective
A handful of agreements also explicitly provided that tax law changes that were not yet effective could also trigger a Tax MAC Out. Without specific language that an enacted-but-still-prospective change counts as a possible trigger, ambiguity about whether such a change is sufficient to trigger the termination right may lead to a dispute. Thus, if parties want the Tax MAC Out to be triggered by a change in law even if that change has a delayed or phased-in effective date, they should make their intention explicit.
6. Specifying What Counts as a “Change in Tax Law”
Ultimately, when drafting a Tax MAC Out, it may be useful to specify whether and under what conditions bills, other proposed changes, sub-regulatory guidance, judicial decisions, and changes that are not yet effective ought to entitle a party to terminate. Of course, the importance of specificity depends on the form in which a tax law change of concern is most likely to be made, which will vary depending on the tax issue of concern.
C. How Is the Tax MAC Out Triggered?
After identifying the tax issue of concern and determining whether a change in tax law has occurred, the next step is to ascertain whether the tax law change caused the specified adverse tax consequence (i.e., whether the Tax MAC Out is triggered). Whether the Tax MAC Out is triggered depends on, among other things, how the trigger is phrased, the level of confidence that the trigger has occurred, and the procedures for determining whether the Tax MAC Out has been triggered.
1. How Is the Trigger Phrased?
Different agreements phrase the Tax MAC Out trigger differently. Phrasing approaches that were found among the agreements included the following:
1. A change in tax law has occurred that would (with some level of confidence) cause the undesired tax treatment.
Example: A change in tax law has occurred that should cause the parent corporation to be treated as a domestic corporation for U.S. federal income tax purposes.
If true, the Tax MAC Out is triggered. If false, no trigger.
2. A change in tax law has occurred that would (with some level of confidence) cause the desired tax treatment NOT to result.
Example: A change in tax law has occurred that should cause the parent corporation not to be treated as a foreign corporation for U.S. federal income tax purposes.
If true, the Tax MAC Out is triggered. If false, no trigger.
3. No change in tax law change has occurred that would (with some level of confidence) cause the desired tax treatment not to result.
Example: There has not been tax law change that should cause the parent corporation not to be treated as a foreign corporation for U.S. federal income tax purposes.
If true, no trigger. If false, the Tax MAC Out is triggered.
Phrasings 1, 2, and 3 are functionally equivalent if there are only two possible, mutually exclusive tax treatments—X and not X (e.g., foreign and domestic), although Phrasings 1 and 2 require affirmative conclusions about an identifiable change in law, whereas Phrasing 3 requires a conclusion about the absence of a change, which may be more difficult to establish in some situations.
A somewhat different phrasing was also observed in the agreements reviewed.
4. A change in tax law means that it is not the case that the desired tax treatment would (with some level of confidence) result.
Example: A change in tax law means that it is not the case that the parent corporation should be treated as a foreign corporation for U.S. federal income tax purposes.
If true, the Tax MAC Out is triggered. If false, no trigger.
Phrasing 4 can have a different meaning from Phrasings 1, 2, or 3 because, for example, “it is not the case that the corporation should be treated as a foreign corporation” does not mean that “the corporation should be treated as a domestic corporation.” The former could merely mean that the corporation is only “more likely than not” to be treated as a foreign corporation (i.e., the same conclusion as the former, just with less than a “should” level of confidence).
This discussion illustrates the fact that there can be subtle differences in the wording of a trigger. Thus, the parties should be very clear about exactly when they want the termination right to be triggered. For example, does the party want to be able to terminate only if there is a less than 50% chance of the desired result? Or does the party want to be able to terminate if there is anything less than a 75% chance of the desired result? Once the parties agree on the situations that will trigger the termination right, the language should be drafted carefully so it captures those precise situations.
2. How Much Confidence Does the Trigger Require?
Some of the Tax MAC Out triggers use traditional tax opinion levels to state explicitly how much confidence there must be that the particular triggering tax result has occurred. Some agreements used the word “should” as in the examples in the prior section, others used the phrase “more likely than not,” and one used the word “will.” Of course, even the same confidence level can lead to different results depending on how the trigger is phrased, but because these particular confidence levels are well accepted terms of art in the tax practitioner community, their use adds clarity to the Tax MAC Out trigger.
Other triggers use somewhat more ambiguous language. Several used the word “would,” and in those agreements it was not clear whether the parties intended to (1) require a “will” level of confidence (understanding “would” as a different verb tense of “will”) or (2) merely use “would” as a conditional verb (i.e., referring to a result that is dependent on the occurrence of a law change) without connoting any particular level of confidence. One agreement that used “would” expressly stated that “would . . . is not intended to specify a particular tax opinion level standard.” In these agreements and others that did not use language that reflected particular tax opinion level standards, it was unclear how certain the particular tax result must have been to trigger the Tax MAC Outs.
If any change in law is expected to have reasonably clear consequences for the tax treatment of the transaction, perhaps this language parsing is irrelevant, and it is unnecessary to specify a level of confidence for the trigger. On the other hand, the less clear cut the results of a change are likely to be, the more contentious a decision to exercise a Tax MAC Out right is likely to be. Consequently, parties might want to include both a specific level of confidence required to trigger the termination right and, as discussed in the next Part, a procedure to determine whether the trigger has occurred with the requisite level of confidence.
3. What Procedures Are Used to Determine Whether the Trigger Has Occurred?
Some agreements specified a method to determine whether the Tax MAC Out trigger had occurred, but others did not. Among the agreements that specified a method, the receipt (or absence) of an opinion or advice from counsel was the most common method of determining whether the Tax MAC Out triggering event had occurred. There were some variations on this method, with some agreements providing additional specificity about which advisors’ opinions count (e.g., only specified counsel, particular additional counsel sought pursuant to specific procedures, only “nationally recognized counsel,” or “accounting firm[s] that [are] nationally recognized” or, more specifically, “Big 4 accounting firms” or a combination of such advisors). Interestingly, the Tax MAC Out in one agreement was triggered not by a tax opinion about the impact of a change per se, but rather, the determination of whether the trigger had occurred made “in the reasonable and good faith judgment of the Company, based on the written opinion of outside counsel.”
Several agreements did not include specific procedures for determining whether the Tax MAC Out trigger had occurred. In these cases, other provisions of the agreement may nevertheless have provided guidance. For example, the general dispute resolution procedures (if any) in the agreement may have governed the resolution of a dispute whether the triggering event had occurred. In addition, the procedure to determine whether a Tax MAC Out triggering event occurred may have followed the procedure (and the same difficult-to-meet standard) used for determining if a regular MAC Out had occurred. Such provisions may, however, leave substantial uncertainty when determining if the triggering event has occurred and whose judgment is determinative. Thus, efforts to exercise a Tax MAC Out could devolve into expensive litigation like many disputes over the application of regular MAC clauses.
Detailed procedures for determining whether the triggering event has occurred may not be necessary if the parties expect that any change in law would lead to a relatively clear cut tax result or if the parties expect that the decision by any party to exercise the Tax MAC Out would not be particularly contentious. Otherwise, parties employing Tax MAC provisions should consider including clear procedures that explain how the triggering event of a Tax MAC provision is determined and that identify the party whose judgment is determinative.
D. What Consequences Arise If a Change in Tax Law Triggers a Tax MAC?
Tax MAC Outs, by definition, provide a termination right if triggered, but the agreements reviewed varied with respect to exactly how this right was incorporated into the agreement. Some agreements simply included the Tax MAC Out trigger as an explicit reason for termination. A more common approach was to include, as a condition to the obligation of one or more of the parties to close, a requirement that the tax law had not changed in a way that triggered the Tax MAC provision. Then, if the transaction did not close by a particular date (e.g., because the “no Tax MAC” closing condition was neither satisfied nor waived), the agreements generally provided for a termination right. One agreement did both—including the Tax MAC Out trigger both as a condition to close (which could lead to a termination right if the transaction did not close by a particular date) and as an explicit termination right.
One possible advantage of including the Tax MAC Out trigger as an explicit termination right rather than including the trigger as a condition to closing that ultimately trickles through and leads to an eventual termination right relates to the timing of the termination. The former generally allows termination as soon as the Tax MAC Out trigger has occurred, while the latter only allows termination once the set end date has occurred without closing, even if that set date is months after the tax law change with the adverse effect. Of course, the parties could agree to terminate earlier pursuant to other termination provisions (e.g., mutual consent), but including the Tax MAC Out trigger as an explicit reason to terminate may accelerate the exit from a transaction doomed by an adverse tax change.
A couple of the agreements interposed one or more additional steps between the adverse tax change and termination. For example, the Tax MAC Out trigger in one agreement allowed each party to terminate “specified covenants,” but did not explicitly provide for termination of the entire agreement. Nevertheless, the termination of the specified covenants generally relieved the parties from their obligations to take certain steps (e.g., obtain regulatory approvals for the transaction) that, if not taken, would likely cause closing conditions not to be satisfied, thereby leading to termination rights. Another agreement included an obligation to work in good faith to restructure the transaction to avoid the adverse tax consequence resulting from the tax law change. This agreement provided that a closing condition was not satisfied and a termination right was triggered only if the adverse tax consequences still existed after such restructuring efforts.
Several other agreements included covenants obligating the parties to exert some level of effort to restructure or otherwise alter the transaction to avoid adverse tax consequences that arose because of a tax law change. The provisions in those agreements differed from the Tax MAC Out provisions discussed in the prior paragraph because, under these other agreements, the failure to avoid the adverse tax consequence (after appropriate efforts) did not lead to a termination right. Some agreements were quite explicit about this. Thus, as explained in Part III, although these agreements could technically lead to a termination right if the parties failed to comply with the covenant to exert the specified efforts to avoid the adverse tax consequences of a tax law change (e.g., failing to negotiate in good faith about restructuring), that termination right was rather attenuated and quite unlikely to be triggered. As a result, this Article does not treat these agreements as including a Tax MAC Out.
Nevertheless, it is useful to note that Tax MAC provisions need not trigger exit rights. Adverse tax law changes can also trigger obligations to exert efforts to restructure the transaction, obligations to increase the amount of consideration, or obligations to make gross-up/indemnification payments, or a wide variety of other rights or obligations. The variety of possible consequences that could be triggered by the occurrence of an adverse tax law change allows for extrapolation from this Article’s discussion of Tax MAC Outs to any additional provision that is intended to alter the terms of a contract if tax laws change.
E. How (If at All) Does the Tax MAC Out Overlap with a General Tax Opinion Requirement?
Many deals require a tax opinion that the transaction qualifies for the intended tax treatment. Often, this type of “general” tax opinion provision (i.e., requiring an opinion that addresses the tax consequences in general, and not solely as a result of changes in tax law) is a condition to closing the transaction. In those cases, a party’s inability to obtain a general opinion about the desired tax treatment can prevent closing and lead to termination, regardless of whether that inability arises from the laws or facts as they existed prior to signing or from a change in law or a change in facts that arises between the time of signing and closing. As a result, a general tax opinion that is required as a condition to closing generally allows for termination if there is a material adverse change in tax law relating to the topic of the opinion (i.e., a Tax MAC Out trigger) or if there are any other problems whatsoever that prevent the tax opinion from being rendered.
Thus, a general tax opinion required as a condition to closing implicitly provides a Tax MAC Out on the topic of the opinion. Accordingly, it is useful to understand the following: (1) whether deals with explicit Tax MAC Out provisions also included general tax opinions as a condition to closing (or otherwise); (2) if so, the extent to which the Tax MAC Out provision and the general tax opinion provision overlapped; and (3) when (and why) a party might opt for one, the other, or both. The short answers are that (1) some, but far from all, deals with Tax MAC Out provisions also included general tax opinion provisions; (2) when a deal involved both types of provisions, there was usually a difference regarding the functions of the two provisions (e.g., they addressed different issues, conferred rights on different parties, or spoke as of different points in time); and (3) the choice about whether to opt for one, the other, or both likely depended on the risk allocation decisions made by the parties and on counsel’s willingness to render opinions. Examining the agreements provides greater insight.
1. General Tax Opinion as a Condition to Close, but No Explicit Tax MAC Out
Many agreements include a general tax opinion as a condition to closing and do not include an explicit Tax MAC Out. This is not surprising because, as explained above, a general tax opinion closing condition provides all of the risk protection provided by an explicit Tax MAC Out covering the same topic and parties (i.e., the ability to exit the transaction if the law changes in a way that adversely affects the particularly tax analysis), and more (i.e., the ability to exit the transaction if any problems with the tax analysis arise for reasons other than a change in tax law). This may be one reason why the search for explicit Tax MAC Out provisions yielded so few results—an explicit Tax MAC Out provision is not needed in many cases because many deals already include a general tax opinion (on the same tax issue, for the same parties, etc.) as a condition to closing.
2. Both a General Tax Opinion as a Condition to Close and an Explicit Tax MAC Out
Some agreements included both a general tax opinion as a condition to closing and an explicit Tax MAC Out, but the general tax opinion provision and the explicit Tax MAC Out typically differed in an important way. In a few of these agreements, the tax opinion closing condition and the Tax MAC Out provision addressed different tax issues. In such cases, a party presumably made a decision that, for one tax issue (e.g., section 368 reorganization qualification), it wanted the extra risk protection offered by the general tax opinion condition to closing, but for another issue (e.g., domestic/foreign classification of a corporation after an intended inversion), it was comfortable with the additional risk of the Tax MAC Out-only strategy.
In some deals with both a general tax opinion closing condition and an explicit Tax MAC Out, the tax issue addressed by both provisions was the same, but the provisions differed in other, often subtle, ways. For example, the provisions conferred termination rights on different parties or addressed the tax consequences of different parties. In other agreements, the provisions covered slightly different steps in a multi-step transaction or required different levels of confidence for the relevant determinations. Further, the timing of the termination rights conferred by the provisions in some agreements was different (e.g., a Tax MAC Out could allow termination immediately after any tax change, whereas a general tax opinion closing condition might only allow termination once a set date had passed without closing). There could also be other similarly subtle differences that lead parties to include both an explicit Tax MAC Out and a general tax opinion closing condition on the same tax issue. All of these situations typically involve nuanced choices about exactly which tax-related deal risks each party is willing to bear.
It is also possible that parties might want to include both types of provisions, even if the explicit Tax MAC Out provision does not cover any situation that is not already covered by the general closing condition tax opinion, a so-called “belt and suspenders” approach.
3. Explicit Tax MAC Out, but No General Tax Opinion as a Condition to Close
a. In General. Some agreements included an explicit Tax MAC Out but did not include a general tax opinion as a closing condition. The use of this approach was likely driven by at least two factors: counsel’s willingness to opine and the parties’ risk allocation decisions.
There may be issues on which counsel does not feel comfortable giving a general tax opinion, in which case having such an opinion would not be an option. This could be because the tax issue of concern is the ongoing tax treatment for the parties after the closing (e.g., foreign or domestic treatment of a corporation, availability of post-transaction credits) rather than the tax treatment of closing of the deal itself (which is a more common subject of opinions) or because the analysis depends on material facts that are only known after (not at) closing (and with respect to which counsel cannot obtain sufficient assurance in advance of closing), among other reasons. Even in these situations, however, counsel might be more willing to opine about whether the law changed after signing in a way that is likely to affect the tax analysis; such an opinion is much more discrete. These concerns may help explain why, for example, none of the reviewed deals included a general tax opinion closing condition on the post-transaction domestic/foreign status of a corporation or on the post-transaction availability of certain credits, despite including Tax MAC Outs on these topics.
A party may also opt to proceed with only a Tax MAC Out and no general tax opinion closing condition if, taking into account all of the other deal terms (including price), the party is willing to bear the additional risk that accompanies a narrower termination right (i.e., being able to terminate only if the desired tax treatment fails due to a change in law but not due to any other reason). The party may conclude that this additional risk (i.e., that the desired tax treatment fails for a reason other than a change in law) is minimal, such that the party is willing to bear it. This decision would likely be informed by tax analysis performed by that party’s counsel prior to signing. Presumably, the party’s counsel analyzed the tax treatment of the transaction under the laws and facts that existed through the time of signing the agreement, doing whatever diligence and securing whatever representations, warranties, and covenants were needed to give the party sufficient confidence in the tax treatment to proceed.
b. General Tax Opinion Included, But Not as a Condition to Close. Some deals that included an explicit Tax MAC Out and lacked a general tax opinion closing condition, still involved a general tax opinion—just not as a condition to close. The reason for adopting such an approach may relate to when the relevant determinations are made. For example, in some transactions, a general tax opinion was rendered at a time prior to the closing (e.g., no later than the date of the proxy/prospectus), but the Tax MAC Out (on the same issue as the general tax opinion) continued to apply and could have triggered a termination right for the full period until closing. In these situations, the general tax opinion presumably provided the relevant party (and any shareholders who must vote on the deal) confidence concerning the tax treatment as of the date of the issuance of the opinion. The tax analysis could, however, change between the issuance of the opinion and the closing. Thus, the addition of the Tax MAC Out protected the party from adverse consequences arising from changes in tax law that could occur in the remaining period prior to closing.
Of course, this approach (with a general tax opinion issued prior to closing and a Tax MAC Out covering the remaining time until closing) does not provide as much protection for the party as would the inclusion of a general tax opinion closing condition. Under the approach described in this Part, if a problem with the tax analysis is discovered after the opinion is rendered but before the closing, no termination right arises unless the problem is due to a change in tax law. Nevertheless, the issuance of the general tax opinion prior to the closing date may provide sufficient confidence for the party to proceed despite having a more limited termination right for the period remaining between the issuance of the opinion and the closing.
4. Conclusion About Whether to Include a General Tax Opinion Provision or an Explicit Tax MAC Out
Ultimately, if counsel is willing to render a general tax opinion on the relevant tax issue, a party considering whether to request a general tax opinion (perhaps as a condition to closing) or a Tax MAC Out should identify which tax situations would warrant exiting the transaction and when they would be willing to accept the risk of being obligated to continue the transaction despite unfavorable tax results. If the key concern is that the law might change between signing and closing, a Tax MAC Out might provide sufficient protection. If, however, a party is concerned about the impact of existing law, existing (or unknown) facts, changes in facts between the time of signing and closing, or counsel’s analysis of any of these factors, the party might prefer a general tax opinion as a condition to close if the party wants to retain the ability to exit the transaction if any of these factors produces an undesirable tax result.
Of course, there are many possible approaches to address these concerns. One approach that provides broader exit rights (and less risk to a party that might want to terminate) than a Tax MAC Out but narrower exit rights (and more risk) than a general tax opinion closing condition involves a termination right that arises upon a change, between signing and closing, in either the tax law or in the facts that results in the specified adverse impact on the tax analysis of the transaction. Alternatively (or in addition), the parties could provide that different termination triggers yield different termination payouts. For example, the termination fee could be higher if the party terminates because of counsel’s inability to render a general tax opinion that is a condition to closing and lower if the party terminates pursuant to a Tax MAC Out. In this situation, the party that might want to exit bears more deal risk than it would have had the former termination fee been as low as the latter, but less deal risk than it would have had there been no general tax opinion closing condition at all. Ultimately, there are many permutations, and the right one for a given deal depends on the tax issues, uncertainty of the tax analysis, sources of that uncertainty, likelihood of changes in law or facts, the risk appetites of the parties, and more.
F. How (If at All) Is the Tax MAC Out Discussed in the Publicly Filed Disclosure Documents?
The deals’ publicly filed disclosure documents (whether just 8-Ks or also proxy statements) varied considerably as to whether and how they discussed the Tax MAC Out and the related tax issues. The documents range from some proxy statements that discussed the Tax MAC Out extensively and repeatedly to some 8-Ks that did not mention the Tax MAC Out at all.
For every deal in which a proxy statement was filed, the Tax MAC Out was discussed in the section of the proxy that explained the transaction agreement’s closing conditions or possible termination events. The proxy statements varied, however, as to whether the Tax MAC Out was discussed elsewhere in the document. Some proxy statements also discussed the Tax MAC Out in the risk factor section, the tax disclosure, or the section discussing the factors relevant to the parties’ decision to undertake the transaction. In other proxies, these additional sections often raised the tax issue of concern (e.g., flagging the possibility that the post-transaction parent corporation might be treated as a domestic corporation for federal income tax purposes), but these sections did not specifically mention the Tax MAC Out (i.e., the possibility that the deal might be terminated if the law changed in a way that caused specified adverse tax consequences).
For some of the transactions with Tax MAC Outs, no proxy statement was filed, and only an 8-K was available. This was likely because no vote of public shareholders was required or because the deal terminated before the proxy statement was filed. The 8-Ks announcing two of these deals mentioned the Tax MAC Out, and the 8-K announcing two other deals did not.
The different approaches to discussing the Tax MAC Outs in the public filings likely reflected the parties’ differing assessments about the likelihood of the possible tax changes and how material the possible tax changes might have been to an investor’s decision whether to vote for the transaction (where votes were solicited) or whether to buy, sell, or hold the stock of the disclosing corporation.
V. Conclusion
Uncertainty about future tax law changes can stymie desirable business transactions. One way to manage that uncertainty is for the parties to a deal to contract explicitly with respect to their rights and obligations if tax law changes ultimately occur. Tax MAC Out provisions in M&A agreements provide examples of this type of contracting, and because these provisions are carefully tailored to the specific circumstances in which they are used, they illustrate a wide range of possible approaches on key deal points. Thus, this Article’s study of the details of Tax MAC Out provisions offers guidance about the design, drafting, and deployment of tax-transition, risk-shifting provisions both in M&A agreements and elsewhere. More generally, this study provides insights into strategies for managing deal risk posed by the possibility of future tax law changes and into deal-making practices when tax laws may change.
