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The collapse in the price of oil, which dropped by more than 50 percent through the first quarter of 2015 from the summer of 2014's highs and dragged energy firm valuations with it, has brought renewed interest and activity from oil and gas companies and investment funds alike in mergers, acquisitions and restructurings. Entities expected to experience distress in one form or another and be acquired or reorganized due to the combined effects of decreased cash flows, increased borrowing costs and related market volatility cover the gamut of exploration and production, refining, marketing, transportation and distribution, and oil field services firms.
Although not expected to result in the flurry of multi-billion-dollar mega-mergers similar to those that started in August 1998, which reshaped the structure of the petroleum industry in less than two years under similar conditions, in a move indicative of further industry consolidation, Royal Dutch Shell announced an offer on April 7,2015, to acquire BG Group for £55 billion. The offer includes its debt1 and was made just 24 days after Shell's chief executive called BG's chairman to propose the transaction and despite disagreements with BG Group's board over the deal price, risks associated with BG Group's operations in Brazil and elsewhere, and the future price of oil, which the transaction economics assume will increase to $90 a barrel by 2018, a level that many market participants disagree with.
Perhaps as a consequence, the terms of the merger agreement include a material adverse change (MAC) clause that Shell may invoke to terminate the transaction prior to closing in the event of an adverse change affecting BG Group's businesses. As demonstrated in litigation that has resulted from such efforts in the past, acquirers seeking to establish a MAC (also referred to as a material adverse effect (MAE) clause) face a significant burden of proof, including a showing that the adverse change (or effect) was material, durationally significant, unknown to the buyer prior to entering into the merger agreement, and had an effect on the subject firm that was disproportionate as compared to its industry.2 Consequently, it is crucial for acquirers to realize that unless they negotiate a MAC reflecting a different allocation, they assume nearly all of the risks affecting the target's business between...