The private equity firm is citing a drastic deterioration of Accredited’s financial, and operational condition as a reason to back out of the deal. Something like that would seem to be classified as a material adverse effect on Accredited’s business that would easily permit Lone Star to back out. Right? No, it’s not that simple because the issue is a bit cloudy and gets into a real gray area.At the front and center of this interesting case study is this line from the agreement concerning what isn’t considered to be a material adverse effect:

changes generally affecting the industry in which the company and the company subsidiaries operate and that such changes do not disproportionately affect the company and the company subsidiaries as compared to other companies operating in the industry in which the company and the company subsidiaries operate.

[Thanks to a reader for bringing this to light. Here’s the link.]

So in essence, changes affecting the subprime-mortgage industry would not allow Lone Star to abandon the deal, unless the changes disproportionately affect Accredited. That will be tough to prove in a court of law and why Accredited, after receiving regulatory approval and meeting the minimum threshold of tendered shares, is suing Lone Star to hold the private equity firm to its obligations. Let the debate, and volatility in Accredited shares continue.

originaly from source