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ANALYSIS: Morgan Stanley, E*Trade Merger Excludes Coronavirus

Feb. 28, 2020, 9:25 PM

While the stock market is turbulent, it appears that some of the big players are not worried. Morgan Stanley’s acquisition of E*Trade Financial Corp. specifically carves out the COVID-19 virus from the scope of the definition of “material adverse effect” (MAE).

This exclusion indicates that the parties have factored risks associated with the global coronavirus crisis into the deal—including the price.

‘COVID-19' Has Entered the M&A Market

This $14.5 billion mega deal is the largest acquisition by a Wall Street firm since the financial crisis, and appears to be the first publicly filed merger agreement to specifically carve out the coronavirus from the scope of an MAE.

Morgan Stanley and E*Trade Financial Corp.’s Agreement and Plan of Merger, dated Feb. 20, excludes with respect to both buyer and seller:

“any […] epidemic, pandemic or disease outbreak (including the COVID-19 virus)” from the events, circumstances, developments, changes, or occurrences that constitute, or are reasonably likely to result in, a material adverse effect on “the condition (financial or otherwise), assets, liabilities, business or results of operations.”

Further, if either party experiences a “disproportionate adverse effect” as a result of the coronavirus, the exclusion may not apply, meaning that the other party may be able to claim an MAE has occurred:

“to the extent that any such event, circumstance, development, change, occurrence or effect has a disproportionate adverse effect on [Company/Parent] and its Subsidiaries, taken as a whole, relative to the adverse effect such event, circumstance, development, change, occurrence or effect has on other companies operating in the securities brokerage industry or the other industries in which the [Company/Parent] or any of its Subsidiaries materially engages.”

The MAEs in this agreement qualify both parties’ representations and warranties, covenants, and the obligations of the parties to close the transaction.

The coronavirus exclusion comes alongside the usual exclusions for acts of God, natural disasters, terrorism, armed hostilities, and the like. In this deal, Davis Polk & Wardwell LLP represented Morgan Stanley and Skadden Arps Slate Meagher & Flom LLP represented E*Trade Financial Corp.

Epidemics and Pandemics

References to epidemics or disease in M&A MAE clauses are not new. Both the $88.8 billion Celgene Corp.–Bristol-Myers Squibb Co. and the $68 billion Aetna Inc.–CVS Health Corp. deals excluded “any epidemic, plague, pandemic or other outbreak of illness or public health event” from the scope of their MAEs.

Two other merger agreements filed publicly in the past week refer to epidemics, pandemics, and disease, but not specifically to the coronavirus or COVID-19. In both cases, the references operate as exclusions from the MAE clause.

The acquisition of the remaining stake of AVX Corp. (represented by Wachtell Lipton Rosen & Katz) by Japan’s Kyocera Corp. (also represented by Davis, Polk) for $1 billion excluded epidemics and pandemics from the scope of the MAE. AVX is headquartered in South Carolina, employs almost 15,000 in 16 countries, and manufactures capacitors and other electronic equipment.

A second acquisition agreement filed in the last week contains a similar MAE exclusion for “an outbreak of disease or hostilities.” WaterBridge Texas Midstream LLC purchased wells and pipelines from Centennial Resource Production LLC. The asset purchase, for $225 million, is expected to close on March 31, 2020.

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