PRIVILEGED AND CONFIDENTIAL ATTORNEY WORK PRODUCT
CALDERWOOD & HARKNESS LLP 425 Park Avenue New York, New York 10022
MEMORANDUM
Right-click to update Table of Contents
I. Executive Summary
This memorandum analyzes the negotiated definition of "Material Adverse Effect" (or "MAE") in the draft Membership Interest Purchase Agreement (the "MIPA") for the proposed sale of one hundred percent (100%) of the membership interests in Meridian Press Holdings LLC ("MPH" or the "Business") by Aurelius Media Holdings Inc. ("Seller"), a wholly owned subsidiary of our client, Aurelius Global Media Group PLC ("Aurelius"), to Ridgeline Publishing Acquisition Corp. ("Buyer"), a special-purpose acquisition vehicle organized by Pinnacle Ridge Capital Partners Fund IV, L.P. ("Sponsor").
The transaction is structured as a carve-out divestiture at an enterprise value of $480,000,000, representing approximately 5.0x MPH's fiscal year 2023 Adjusted EBITDA of $96,000,000. The transaction is governed by Delaware law, and the MIPA will be executed in New York. The initial draft of the MIPA was circulated by our firm, Calderwood & Harkness LLP, on behalf of Seller on May 28, 2024. Buyer's counsel, Hathaway, Locke & Barnett LLP (principal contacts: Graham Ashworth, Partner, and Danielle Ferreira, Counsel), returned a comprehensive markup of the MIPA on approximately June 14, 2024.
This memorandum is intended to accomplish four objectives. First, it summarizes the two-prong MAE definition as proposed in Seller's initial draft. Second, it identifies the substantive counter-proposals advanced by Buyer's counsel, principally regarding the disproportionate-impact qualifier and certain exclusion carve-backs. Third, it compares the negotiated language against current market precedent and our firm's recommended formulations for sell-side carve-out transactions. Fourth, it provides specific recommendations for resolving the remaining open points in advance of the anticipated signing date.
The MAE definition is among the most consequential provisions in the MIPA because it serves a dual function. As a qualifier, it modifies numerous Seller representations and warranties throughout Article III of the MIPA, effectively setting the threshold below which inaccuracies in those representations will not constitute a breach. As a closing condition, it operates independently: under Section 6.2 of the MIPA, Buyer's obligation to consummate the transactions at Closing is expressly conditioned on the absence of a Material Adverse Effect since the date of the MIPA, as certified by Seller's officer in a bring-down closing certificate. Accordingly, the scope and precision of the MAE definition directly affect both Seller's exposure to post-closing indemnification claims and the risk of a failed closing.
Given these stakes, and the fact that the parties are now at an advanced stage of drafting, careful attention to the remaining open items — particularly the geographic scope of the comparator group in the disproportionate-impact qualifier — is warranted before the next exchange of drafts with Buyer's counsel.
II. Structure of the MAE Definition
A. The Two-Prong Test
The MAE definition in Seller's initial draft, which has been retained in substantially the same structural form through the current round of negotiations, employs a standard two-prong formulation. Each prong addresses a distinct category of adverse developments, and the occurrence of events satisfying either prong would constitute a Material Adverse Effect for purposes of the MIPA.
Prong (a) — Business Impact. The first prong defines a Material Adverse Effect as any change, event, occurrence, effect, condition, or development that, individually or in the aggregate, has had or would reasonably be expected to have a material adverse effect on the business, financial condition, assets, liabilities, or results of operations of the Business, taken as a whole.
Several features of this formulation warrant discussion:
"Taken as a whole" qualifier. This language requires that the materiality of any adverse development be assessed with reference to the Business in its entirety, rather than on a subsidiary-by-subsidiary, division-by-division, or imprint-by-imprint basis. This is a significant protection for Seller. MPH operates through several subsidiaries and business lines, and localized adverse developments affecting, for example, the academic publishing operations conducted through Bellweather Academic Press Inc. would need to be assessed in the context of the overall consolidated operations of the Business. The "taken as a whole" formulation is universally included in sell-side MAE definitions and is consistent with Delaware Court of Chancery jurisprudence, including Akorn, Inc. v. Fresenius Kabi AG, 2018 WL 4719347 (Del. Ch. Oct. 1, 2018), aff'd, 198 A.3d 724 (Del. 2018).
Temporal scope. The definition covers both backward-looking impacts ("has had") and forward-looking impacts ("would reasonably be expected to have"). The inclusion of the forward-looking element means that an MAE determination is not limited to effects that have already materialized as of the relevant date but also encompasses developments whose impact is probable but not yet fully realized. This forward-looking component is standard but merits attention in the context of the bring-down certificate at Closing, where Seller's certifying officer will need to consider both existing and reasonably expected future impacts.
Breadth of covered subjects. The first prong encompasses the "business, financial condition, assets, liabilities, or results of operations" of the Business. This expansive formulation captures virtually all aspects of MPH's operations and financial profile. It is consistent with our standard recommended formulation and with prevailing market practice.
The Business, for purposes of the MAE definition, encompasses MPH and its direct and indirect subsidiaries, which are as follows:
• Meridian Distribution Services Inc., a Delaware corporation engaged in the distribution and fulfillment operations supporting MPH's publishing business;
• Bellweather Academic Press Inc., a Delaware corporation focused on academic and scholarly publishing, including textbooks and peer-reviewed journals;
• Foxglove Media LLC, a New York limited liability company operating MPH's digital media and content licensing platform; and
• Meridian Press Canada ULC, an unlimited liability company organized under the laws of British Columbia, conducting the Canadian operations of the publishing business.
All four subsidiaries are wholly owned by MPH, and their operations, assets, liabilities, and financial results are consolidated with those of MPH for purposes of the "taken as a whole" analysis.
Prong (b) — Ability to Consummate. The second prong defines a Material Adverse Effect as any change, event, occurrence, effect, condition, or development that, individually or in the aggregate, has had or would reasonably be expected to have a material adverse effect on the ability of Seller to consummate the transactions contemplated by the MIPA.
This prong is designed to protect Buyer against impediments to closing that arise on Seller's side of the transaction. Such impediments could include, among other things, regulatory actions directed at Seller, loss of legal capacity or corporate authority, litigation challenging the transaction, or the failure of Seller to obtain required internal approvals. The inclusion of Prong (b) is standard in seller-side MAE definitions, and our initial draft follows the conventional formulation. Buyer's counsel has not proposed any modifications to Prong (b), and we do not anticipate further negotiation on this point.
B. Relationship to MIPA Provisions
The MAE definition does not operate in isolation; rather, it is a defined term that is incorporated by reference throughout the MIPA and interacts with several critical transactional provisions. An understanding of these interactions is essential to assessing the practical significance of the definition.
Representations and warranties. The MAE definition qualifies a substantial number of Seller's representations and warranties set forth in Article III of the MIPA. Representations that are "MAE-qualified" are subject to a materiality threshold keyed to the MAE definition, meaning that inaccuracies in such representations will not constitute a breach unless the inaccuracy rises to the level of a Material Adverse Effect. The MAE-qualified representations include, among others, the representations regarding:
• Financial statements (Section 3.5);
• Absence of undisclosed liabilities (Section 3.6);
• Absence of certain changes since the balance sheet date (Section 3.7);
• Material contracts (Section 3.12);
• Litigation and proceedings (Section 3.14);
• Compliance with applicable laws (Section 3.15);
• intellectual property (Section 3.16); and
• Tax matters (Section 3.18), in part.
A detailed cross-reference of MIPA provisions incorporating the MAE definition is set forth in Appendix B to this memorandum.
Closing conditions. The MAE definition is incorporated into the conditions to Buyer's obligation to close the transaction. Specifically, Section 6.2(a) of the MIPA conditions Buyer's closing obligation on the truth and correctness of Seller's representations and warranties as of the Closing Date. Under the "bring-down" mechanics, representations and warranties that are qualified by Material Adverse Effect must be true and correct in all respects (without giving further effect to the MAE qualifier) as of the Closing Date, while representations and warranties that are not so qualified must be true and correct in all material respects. In addition, Section 6.2(b) requires delivery of a closing certificate executed by an officer of Seller, certifying that no Material Adverse Effect has occurred since the date of the MIPA. This standalone MAE closing condition operates independently of the representation bring-down and provides Buyer with a separate basis for refusing to close if a Material Adverse Effect has occurred between signing and closing.
Indemnification framework. The MAE definition is also relevant to the post-closing indemnification framework set forth in Article VII of the MIPA. Seller's indemnification obligations for breaches of representations and warranties are subject to the following parameters:
• Cap: The aggregate indemnification cap for non-fundamental representations is $72,000,000, representing fifteen percent (15%) of the $480,000,000 enterprise value. This amount is coextensive with the escrow amount to be deposited at Closing with Granite Trust Company, N.A., as escrow agent.
• Basket/deductible: Indemnification claims are subject to a basket of $4,800,000, representing one percent (1%) of enterprise value, structured as a true deductible (i.e., Buyer may only recover losses in excess of the deductible amount, not from the first dollar).
• General survival period: Seller's representations and warranties (other than fundamental representations) survive for eighteen (18) months from the Closing Date.
• Fundamental representations: The fundamental representations — including those relating to organization, authority, capitalization, and tax — survive for thirty-six (36) months from the Closing Date.
These indemnification parameters inform the practical significance of the MAE qualifier. Because the MAE qualifier elevates the threshold for what constitutes a breach of the qualified representations, it effectively reduces the universe of post-closing claims that Buyer can assert under the indemnification framework. Conversely, the exclusions from the MAE definition determine which categories of adverse developments are shielded from MAE treatment and thus cannot form the basis for a breach claim (subject to the disproportionate-impact qualifier discussed below).
III. Exclusions (Carve-Outs) from the MAE Definition
The most heavily negotiated component of any MAE definition is the set of exclusions — commonly referred to as "carve-outs" — that enumerate categories of changes, events, or conditions that shall not constitute, and shall not be taken into account in determining whether, a Material Adverse Effect has occurred. These exclusions serve to allocate certain categories of exogenous risk to the Buyer by removing them from the MAE calculus. This section summarizes the exclusions as proposed in Seller's initial draft, the modifications proposed by Buyer's counsel, and our recommended positions.
A. Seller's Draft — Initial Exclusions
Seller's initial draft of the MIPA, circulated on May 28, 2024, proposed the following nine (9) exclusions from the MAE definition. Under this formulation, none of the following changes, events, or conditions shall, individually or in the aggregate, constitute or be taken into account in determining whether a Material Adverse Effect has occurred:
Exclusion (1) — General Economic Conditions. Changes in general economic, business, financial, or market conditions, including changes in prevailing interest rates, exchange rates, credit markets, capital markets, or commodities prices. This exclusion is designed to ensure that macroeconomic fluctuations — such as a recession, a rise in interest rates by the Federal Reserve, or volatility in currency exchange rates affecting the Canadian operations — are treated as systemic risks borne by Buyer rather than as grounds for an MAE claim.
Exclusion (2) — Industry-Wide Changes. Changes generally affecting the publishing, media, or educational content industries, and not specifically relating to the Business. This exclusion recognizes that secular or cyclical trends affecting the publishing industry as a whole — such as shifts from print to digital consumption, declining print advertising revenue, or changes in library acquisition budgets — should not be attributable to the Business as a company-specific MAE.
Exclusion (3) — Changes in Law or Regulation. Changes in applicable law, regulation, or governmental policy, or the interpretation thereof, occurring after the date of the MIPA. This exclusion protects Seller against MAE claims arising from legislative or regulatory developments that are beyond Seller's control, such as changes to copyright law, data privacy regulations, postal rates affecting distribution costs, or tariffs on paper imports.
Exclusion (4) — Changes in GAAP or Accounting Standards. Changes in Generally Accepted Accounting Principles ("GAAP") or other applicable accounting standards, or in the interpretation or enforcement thereof. This exclusion is particularly relevant because changes in accounting standards could cause the Business's financial results to appear materially different without any change in the underlying economics of the Business. For example, changes in revenue recognition standards or lease accounting treatment could affect reported metrics.
Exclusion (5) — Natural Disasters and Force Majeure. Earthquakes, hurricanes, floods, fires, or other natural disasters, weather events, or acts of God. This exclusion addresses catastrophic physical events that are unforeseeable and beyond the control of either party.
Exclusion (6) — Pandemics and Public Health Emergencies. Epidemics, pandemics, disease outbreaks, or public health emergencies, including any COVID-19-related measures or variants thereof. Since the onset of the COVID-19 pandemic, this exclusion has become a standard feature of MAE definitions. Although the acute phase of the pandemic has passed, the exclusion addresses the possibility of future variants or entirely novel pathogens.
Exclusion (7) — Acts of War or Terrorism. Acts of war (whether or not declared), armed hostilities, sabotage, terrorism, military action, or any escalation or worsening thereof. This exclusion allocates geopolitical risk to Buyer, including the risk of armed conflicts, terrorist attacks, or cyber warfare that may disrupt markets or supply chains.
Exclusion (8) — Announcement or Pendency of the Transactions. Any effects arising from the announcement, pendency, or consummation of the transactions contemplated by the MIPA, including any impact on relationships with customers, suppliers, distributors, employees, authors, content licensors, or governmental authorities resulting therefrom. This exclusion is particularly important in the context of a carve-out divestiture, where the announcement of MPH's separation from the Aurelius platform may itself cause disruption to key commercial relationships. As discussed further in Section V.A below, five major author/content license agreements require consent for assignment in connection with the transaction, as do the Oakbridge Distribution Alliance Agreement and four of ten real property leases.
Exclusion (9) — Compliance with the MIPA. Any action taken or omitted to be taken by Seller or the Company at the written request of Buyer, or expressly required by the terms of the MIPA. This exclusion prevents Buyer from asserting an MAE claim based on actions that Seller was compelled to take (or refrain from taking) under the MIPA or at Buyer's direction, such as compliance with interim operating covenants or actions taken to satisfy closing conditions.
Our recommended formulation for the initial draft tracked standard market practice and was consistent with Calderwood & Harkness LLP's precedent forms for sell-side carve-out transactions. The selection and ordering of exclusions followed our firm's established template, with the inclusion of the pandemic exclusion reflecting post-2020 practice and the specificity of the announcement/pendency exclusion reflecting the particular sensitivities of the carve-out structure.
B. Buyer's Counter-Proposals on Exclusions
Buyer's counsel, Hathaway, Locke & Barnett LLP, proposed a number of substantive modifications to the exclusions in its June 14, 2024 markup. The following summarizes Buyer's principal counter-proposals:
1. Disproportionate-Impact Qualifier (Carve-Back). The most significant modification proposed by Buyer's counsel was the addition of a proviso to exclusions (1) through (7) in the following form: "except, in each case, to the extent that such change, event, occurrence, effect, condition, or development has a disproportionate adverse impact on the Business relative to other participants in the industries and markets in which the Business operates." This qualifier is commonly referred to as a "disproportionate-impact qualifier" or, from the Buyer's perspective, a "carve-back to the carve-outs." Its effect is to partially restore the excluded categories to the MAE analysis to the extent that the Business is disproportionately affected by the relevant exogenous event relative to its industry peers. This is the most consequential of Buyer's proposed modifications and is analyzed in detail in Section IV of this memorandum.
2. Narrowing the Announcement/Pendency Exclusion. Buyer's counsel proposed two alternative formulations to narrow exclusion (8). The primary proposal would limit the exclusion to effects arising "solely from the identity of Buyer" — that is, effects attributable to the specific characteristics, reputation, or known intentions of Ridgeline Publishing Acquisition Corp. and its Sponsor, Pinnacle Ridge Capital Partners Fund IV, L.P. Under this formulation, if customers, authors, or employees of MPH react negatively to the mere fact that the Business is being sold — regardless of the buyer's identity — those effects would not be excluded from the MAE definition. In the alternative, Buyer proposed a more nuanced approach that would exclude from the carve-out any loss of employees, customers, or suppliers that could independently constitute a breach of a specific representation made by Seller in the MIPA. This alternative effectively prevents the announcement/pendency exclusion from overriding specific representations about the stability of key commercial and employment relationships.
3. Addition of a "Known Trends" Exception. Buyer's counsel proposed that the exclusions set forth in the MAE definition should not apply to any change, event, or condition that was known to Seller prior to the date of the MIPA and was not disclosed in the Seller Disclosure Schedules. The stated rationale for this proposal was that Seller should not be permitted to rely on the exclusions to avoid the consequences of adverse trends or conditions that Seller was aware of but failed to disclose. In effect, this proposal would convert certain aspects of the MAE definition into a disclosure-based warranty.
4. Removal or Narrowing of the Pandemic Exclusion. Buyer initially proposed removing exclusion (6) — the pandemic exclusion — in its entirety, arguing that the COVID-19 pandemic is no longer an acute concern and that retaining the exclusion is unnecessary. In the alternative, Buyer proposed limiting the exclusion to "government-mandated shutdowns or quarantine orders," thereby excluding from coverage broader pandemic-related effects such as reduced consumer demand, supply chain disruptions, or shifts in content consumption patterns that might be attributable to a public health event but do not involve a direct governmental mandate.
5. Decline in Operating Metrics — Clarifying Language. Buyer proposed adding clarifying language providing that a decline in the Business's revenue, EBITDA, or other financial or operating metrics shall not, in and of itself, be deemed excluded from the MAE definition, while acknowledging that the underlying causes of such decline might independently qualify for exclusion. This proposal addresses the "symptom vs. cause" distinction recognized in Delaware case law, pursuant to which a decline in financial performance (the "symptom") is relevant evidence of an MAE, even if the root cause of the decline (e.g., a general recession) may itself fall within an exclusion.
C. Calderwood & Harkness LLP's Recommended Positions
Based on our review of Buyer's counter-proposals, our assessment of current market precedent, and our evaluation of the specific risks and sensitivities of this transaction, we recommend the following negotiating positions on each of Buyer's proposals:
Disproportionate-Impact Qualifier. We recommend accepting the disproportionate-impact qualifier in principle, subject to certain important modifications discussed in detail in Section IV below. The qualifier is widely accepted in the M&A market, and resistance to its inclusion would consume negotiating capital disproportionate to the benefit obtained. The key is to ensure that the qualifier is structured to capture only the incremental (disproportionate) impact, that the comparator group is defined broadly, and that the qualifier does not apply to the transaction-specific exclusions.
Announcement/Pendency Exclusion. We recommend resisting Buyer's proposed narrowing of exclusion (8). The broad formulation — covering effects arising from the announcement, pendency, or consummation of the transactions — is critical in a carve-out context. The announcement of MPH's separation from Aurelius's larger publishing and media platform may itself cause disruption, wholly apart from the identity of the buyer. Specifically, five major author/content license agreements (representing approximately $34,000,000 in annual royalty obligations) require consent for assignment, as do the Oakbridge Distribution Alliance Agreement (which governs MPH's primary third-party distribution channel and was secured through a consent obtained July 2, 2024) and four of the ten real property leases. A narrower formulation that limits the exclusion to effects arising "solely from the identity of Buyer" would expose Seller to MAE risk from the consent-seeking process itself and from market reaction to the announced divestiture. We believe the broad formulation is defensible and market standard for sell-side carve-out transactions.
Known Trends Exception. We recommend rejecting this proposal. The Seller Disclosure Schedules, to be prepared and delivered in connection with execution of the MIPA, will comprehensively disclose known matters, including known adverse trends or conditions. A "known trends" exception to the MAE exclusions creates significant interpretive ambiguity — what constitutes a "trend" that was "known" is inherently subjective, and this formulation would effectively shift the burden to Seller to anticipate and disclose the future trajectory of known conditions. This is not market standard for sell-side transactions, and we are not aware of any significant precedent transaction in which such an exception was included in the MAE definition in a sell-side carve-out.
Pandemic Exclusion. We recommend retaining the broad pandemic exclusion. While the acute phase of the COVID-19 pandemic has passed, the exclusion addresses the risk of future variants, novel pathogens, and public health emergencies that cannot be predicted. Market practice continues to include broad pandemic exclusions in post-2020 transactions. We note that the World Health Organization and the Centers for Disease Control and Prevention have continued to issue guidance regarding emerging infectious diseases, and the publishing industry — with its reliance on in-person events such as book fairs, author tours, and academic conferences — remains exposed to pandemic-related disruption. The disproportionate-impact qualifier, which Buyer has proposed to apply to exclusions (1) through (7) including the pandemic exclusion, provides Buyer with adequate protection against disproportionate pandemic-related harm to the Business.
Decline in Operating Metrics. We recommend accepting Buyer's proposed clarifying language. This formulation is consistent with Delaware law and, in particular, with the analytical framework applied by the Court of Chancery in Akorn. The proviso does not materially disadvantage Seller because it merely confirms that a decline in financial metrics is not per se excluded from the MAE analysis — the underlying causes of such a decline may still be excluded if they fall within one of the enumerated exclusions. This is an analytically sound distinction that is unlikely to change the outcome of any MAE determination and can be conceded without material risk.
IV. Disproportionate-Impact Qualifier — Detailed Analysis
A. Description of Buyer's Proposed Language
Buyer's counsel proposed a carve-back to exclusions (1) through (7) of the MAE definition, reading substantially as follows:
"provided, however, that any change, event, occurrence, effect, condition, or development referred to in clauses (1) through (7) above may be taken into account in determining whether a Material Adverse Effect has occurred or would reasonably be expected to occur to the extent that such change, event, occurrence, effect, condition, or development has a disproportionate adverse impact on the Business, taken as a whole, relative to other participants in the industries and markets in which the Business operates."
The operative effect of this qualifier is to create a partial exception to the exclusions. If a general industry downturn, macroeconomic recession, change in law, pandemic, or force majeure event affects the publishing industry broadly but impacts MPH more severely than its competitors, Buyer could argue that the disproportionate portion of the impact — i.e., the quantum by which MPH's adverse experience exceeds that of its peers — should be taken into account in the MAE analysis, notwithstanding the general exclusion.
For example, if a change in copyright law were to reduce revenue across the publishing industry by an average of five percent (5%), but MPH's revenue were to decline by fifteen percent (15%) due to the particular composition of its content portfolio, the disproportionate-impact qualifier would permit Buyer to argue that the incremental ten percentage points (10%) of revenue decline (i.e., the excess over the industry average) should be considered in the MAE determination. Absent the qualifier, the change in law would be entirely excluded under exclusion (3), and the full fifteen percent (15%) revenue decline would be outside the scope of the MAE analysis.
The practical significance of this qualifier is substantial, particularly in industries — such as publishing and media — that are undergoing significant structural transformation. Companies within the industry have widely divergent exposures to trends such as digitization, shifts in educational content delivery, and changes in consumer reading habits. A broadly applicable industry trend that affects all participants will not, in all likelihood, affect them equally, and the disproportionate-impact qualifier ensures that company-specific vulnerabilities are not entirely shielded from MAE scrutiny.
B. Market Precedent
The disproportionate-impact qualifier is one of the most well-established features of negotiated MAE definitions in M&A transactions. Based on Calderwood & Harkness LLP's review of precedent transactions, the qualifier appears in a significant majority of negotiated MAE definitions across industries and transaction types.
In recent sell-side carve-out transactions in the media and publishing sector — the most directly relevant comparator set — approximately eighty to eighty-five percent (80–85%) of negotiated MAE definitions included some form of disproportionate-impact exception. The qualifier has been consistently endorsed by Delaware courts as a commercially reasonable allocation of risk, and its absence would be unusual in a transaction of this magnitude.
The key negotiation points on the disproportionate-impact qualifier typically involve three principal issues:
Comparator group. How the reference class of "other participants" is defined directly affects the practical operation of the qualifier. A narrow comparator group — for example, limited to companies of a similar size, with a similar product mix, or operating in the same geographic markets — increases the likelihood that MPH's experience will appear disproportionate, because its idiosyncratic vulnerabilities are more likely to stand out against a small set of closely comparable peers. Conversely, a broad comparator group — encompassing the full range of publishing, media, and content companies — tends to dilute the significance of company-specific effects, because the average industry experience is calculated across a wider and more diverse population.
Scope of application. Some formulations apply the disproportionate-impact qualifier to all exclusions, while others apply it only to a subset (typically excluding the transaction-specific exclusions for announcement/pendency effects and MIPA compliance). Application to all exclusions is more aggressive from a buyer's perspective, while limiting the qualifier to the systemic/exogenous exclusions (such as general economic conditions, industry trends, and force majeure) is the more common approach.
Full impact vs. incremental impact. A critical drafting distinction is whether, once disproportionate impact is established, the full impact of the excluded event may be taken into account in the MAE analysis, or only the disproportionate (incremental or excess) portion. The former is significantly more favorable to the buyer, as it effectively eliminates the exclusion in its entirety once disproportionate impact is shown. The latter — the incremental-impact-only formulation — limits the buyer's ability to count only the quantum of impact that exceeds the industry average. The incremental-impact-only formulation is more seller-protective and is the version we have consistently recommended in our precedent forms.
C. Our Recommended Position
In light of the foregoing market analysis, we recommend that Seller accept the disproportionate-impact qualifier in principle. Resistance to its inclusion would be inconsistent with prevailing market practice, would consume negotiating capital that could be better deployed on other provisions, and would risk creating an adversarial dynamic on a point where Buyer's expectations are well-grounded in precedent.
However, we recommend negotiating the following modifications to Buyer's proposed language:
1. Incremental Impact Only. We recommend insisting that the qualifier specify that only the disproportionate (i.e., incremental or excess) portion of the impact may be taken into account in the MAE analysis — not the full impact of the excluded event. The qualifier should include language such as "solely to the extent of such disproportionate adverse impact" or "only to the extent of the incremental impact in excess of the impact experienced by other participants." This formulation ensures that the exclusion continues to operate with respect to the baseline level of impact experienced across the industry, with only the excess being added back to the MAE calculus. This is the formulation used in our firm's standard precedent forms and is widely accepted by buyer's counsel in negotiated transactions.
2. Comparator Group. We recommend defining the comparator group as broadly as possible to reduce the risk that MPH's particular vulnerabilities — for example, its concentration in certain academic publishing verticals or its dependence on the Oakbridge Distribution Alliance — will make it appear disproportionately affected relative to a narrow set of closely comparable peers. Specifically, we propose the following comparator group definition: "other companies operating in the book publishing, periodical publishing, educational content, and media distribution industries in North America." This formulation captures a sufficiently broad range of industry participants to provide a meaningful average against which MPH's experience would be measured, while remaining germane to the industries in which the Business actually operates.
3. Exclusion from Transaction-Specific Carve-Outs. The disproportionate-impact qualifier should not apply to exclusion (8) (announcement/pendency effects) or exclusion (9) (MIPA compliance). These exclusions are transaction-specific in nature, and the concept of "disproportionate impact relative to other industry participants" is analytically inapposite — other industry participants are not involved in this transaction and would not experience any announcement or compliance effects. This limitation is standard and should not be controversial.
4. Burden of Proof. To the extent possible within the confines of a contractual definition, we recommend including language that reinforces Buyer's burden of demonstrating disproportionate impact. While the allocation of the burden of proof for an MAE claim is ultimately a matter of governing law (and Delaware law places the burden on the party asserting the MAE, i.e., the Buyer), a drafting clarification can be helpful. Consider language such as: "it being understood that the party asserting that a Material Adverse Effect has occurred shall bear the burden of demonstrating the existence and extent of any such disproportionate adverse impact."
D. Resolution Reached (as of Memo Date)
As of the date of this memorandum, June 18, 2024, the parties have reached agreement in principle on the following terms regarding the disproportionate-impact qualifier:
• The disproportionate-impact qualifier will apply to exclusions (1) through (7) only, and will not apply to exclusion (8) (announcement/pendency effects) or exclusion (9) (MIPA compliance).
• The language will specify "solely to the extent of such disproportionate adverse impact," adopting the incremental-impact-only formulation. This is a meaningful concession by Buyer's counsel, which had initially proposed a formulation that could have been read to permit consideration of the full impact once disproportionality was established.
• The comparator group will reference "other participants in the industries in which the Business primarily operates." Buyer's counsel agreed to drop the reference to "and markets" from the initial proposal ("the industries and markets in which the Business operates"), in response to our argument that the inclusion of "markets" could create an overly broad comparator set encompassing digital media companies, streaming platforms, and other technology-driven content businesses against which MPH's legacy publishing and print distribution operations would inevitably compare unfavorably. The use of "industries" rather than "industries and markets" ensures that the comparison is conducted at the industry level rather than at the product-market level.
Open Item: Geographic Limitation. One item remains unresolved as of the date of this memorandum. Seller has proposed that the comparator group be limited to participants operating in North America, reflecting MPH's geographic footprint (the United States and Canada). Buyer has proposed that the comparator group include global publishing companies, arguing that the publishing industry is inherently global in scope and that North American-only comparisons could exclude relevant data points. Our recommendation is to press for the "North American" limitation, which is supported by the fact that MPH's operations are exclusively North American and that its competitive dynamics, regulatory environment, and market conditions are those of the North American publishing industry. If Buyer insists on a broader reference, we propose "primarily North American" as a compromise formulation.
V. Analysis of Additional Contested Provisions
A. Announcement / Pendency Exclusion
The scope of the announcement/pendency exclusion (exclusion (8)) has been a point of significant discussion between the parties. As described above, Seller's initial draft broadly excluded from the MAE definition any effects arising from "the announcement, pendency, or consummation of the transactions contemplated by the MIPA, including any impact on relationships with customers, suppliers, distributors, employees, authors, content licensors, or governmental authorities resulting therefrom."
Buyer's counsel proposed narrowing this exclusion to cover only effects arising "solely from the identity of Buyer." Under Buyer's proposed formulation, if customers, authors, employees, or other stakeholders of the Business react negatively to the fact that MPH is being sold — regardless of who the buyer is — those reactions would not be excluded from the MAE analysis. The exclusion would operate only to protect against adverse reactions attributable specifically to the identity, reputation, or perceived intentions of Ridgeline Publishing Acquisition Corp. and Pinnacle Ridge Capital Partners.
We recommended resisting this proposed narrowing. In a carve-out divestiture, the announcement of the Business's separation from a larger corporate platform (here, Aurelius's diversified media and publishing group) is itself a significant event that may cause apprehension among key stakeholders. Authors may be concerned about the loss of Aurelius's marketing reach and distribution capabilities. Employees may fear headcount reductions. Customers — particularly institutional customers such as university libraries and school districts that have longstanding procurement relationships with the Aurelius family of brands — may reconsider their purchasing commitments. These concerns are inherent in the carve-out structure and are not dependent on the identity of the buyer.
The importance of the broad exclusion is underscored by the consent requirements associated with several of MPH's most significant commercial agreements. As noted above, five major author/content license agreements require consent for assignment in connection with the transaction. The Oakbridge Distribution Alliance Agreement — which governs the distribution of MPH's publications through Oakbridge's national warehouse and logistics network and accounts for approximately twenty-two percent (22%) of MPH's unit volume — also required consent, which was obtained on July 2, 2024. Additionally, four of MPH's ten real property leases contain change-of-control or assignment provisions requiring landlord consent. The process of seeking these consents inevitably involves disclosure of the pending transaction and may itself trigger adverse reactions. A narrower announcement/pendency exclusion would expose Seller to MAE risk arising from these consent-seeking activities, which is an inappropriate allocation of risk in a transaction where Seller is contractually obligated to use commercially reasonable efforts to obtain such consents.
Resolution. After extensive discussion, the parties agreed to retain the broad formulation of the announcement/pendency exclusion, covering effects arising from "the announcement or pendency" of the transactions contemplated by the MIPA. However, Buyer obtained a limited proviso carving back the exclusion for purposes of the specific representation regarding customer and supplier relationships. Specifically, the parties agreed on the following formulation:
"provided, however, that this clause (8) shall not apply for purposes of Section 3.23 [Material Customer and Supplier Relationships]."
The practical effect of this carve-back is that while the announcement/pendency exclusion will continue to shield Seller from MAE claims based on customer or supplier reactions to the announced transaction, it will not prevent Buyer from asserting a claim under the specific representation in Section 3.23 that there has been no material adverse change in the Business's relationships with its top twenty (20) customers and top ten (10) suppliers. In other words, if the announcement of the transaction causes the loss of a material customer, Buyer could assert a breach of Section 3.23 (subject to the materiality qualifier in that section) but could not separately argue that the customer loss constitutes a Material Adverse Effect.
We believe this resolution is commercially reasonable. It preserves the broad protective scope of the announcement/pendency exclusion for purposes of the MAE closing condition and the general representation bring-down, while giving Buyer a targeted remedy under the specific customer/supplier representation. The remedy for a breach of Section 3.23 would be subject to the MIPA's indemnification framework (including the $72,000,000 cap and $4,800,000 basket), which limits Seller's exposure.
B. Known Trends Exception
Buyer's counsel proposed an exception to the MAE exclusions for changes, events, or conditions that were known to Seller prior to the date of the MIPA and were not disclosed in the Seller Disclosure Schedules. The stated rationale for this proposal was to prevent Seller from relying on the exclusions to shield the consequences of adverse trends or conditions that Seller was aware of but failed to disclose.
We recommended rejecting this proposal on several grounds. First, the Seller Disclosure Schedules — which are currently being prepared and are expected to be delivered in final form in connection with the execution of the MIPA on the anticipated signing date of July 19, 2024 — will comprehensively disclose all known material matters, including adverse trends, litigation, contract disputes, customer attrition, and other developments. The disclosure schedules are the appropriate mechanism for addressing known conditions, and the representations and warranties themselves (which are qualified by the disclosure schedules) provide Buyer with protection against undisclosed known matters.
Second, a "known trends" exception introduces significant interpretive ambiguity into the MAE definition. The concept of a "trend" is inherently imprecise — virtually any change in business conditions could be characterized as a "trend" with the benefit of hindsight. Similarly, the concept of "known to Seller" raises difficult questions about the level of knowledge required (actual knowledge vs. constructive knowledge, knowledge of which officers or employees), the degree of specificity required, and the timeframe within which the knowledge must have existed. These ambiguities would create fertile ground for post-closing disputes and would undermine the certainty that the MAE definition is intended to provide.
Third, this formulation is not market standard for sell-side transactions. In our experience, known trends exceptions appear primarily in buyer-favorable MAE definitions and are not typical in carve-out transactions where the seller is a sophisticated corporate parent.
Resolution. Buyer's counsel withdrew this proposal after we identified the foregoing concerns and pointed out that the Seller Disclosure Schedules would address known conditions and that the representation regarding absence of certain changes since the balance sheet date (Section 3.7) separately covers known deterioration in the Business's operations. We noted that Buyer would have full recourse under the indemnification framework for any undisclosed matters that constitute breaches of the representations qualified by the disclosure schedules, and that the practical protection afforded by a "known trends" exception would be duplicative of these existing protections.
C. Pandemic Exclusion
Buyer initially proposed removing exclusion (6) — the pandemic exclusion — from the MAE definition in its entirety. Buyer's counsel argued that the acute COVID-19 pandemic is no longer a significant risk and that retaining a broad pandemic exclusion is unnecessary and overly protective of Seller. In the alternative, Buyer proposed limiting the exclusion to "government-mandated shutdowns or quarantine orders," which would narrow the exclusion to direct governmental interventions while leaving broader pandemic-related effects (such as reduced demand, supply chain disruptions, or behavioral changes) within the scope of the MAE analysis.
We recommended retaining the broad pandemic exclusion for several reasons. First, while the acute phase of the COVID-19 pandemic has passed, the risk of future variants or entirely novel pathogens remains real. The World Health Organization has continued to monitor emerging infectious diseases, and the possibility of a new pandemic cannot be dismissed. Second, the publishing industry is particularly susceptible to pandemic-related disruption due to its reliance on in-person events (book fairs, conferences, author tours), physical retail distribution, and institutional procurement cycles that can be disrupted by public health measures. Third, market practice continues to favor the inclusion of broad pandemic exclusions in MAE definitions. Based on our review of recent precedent transactions (2022–2024), the vast majority of negotiated MAE definitions in media and publishing transactions include a pandemic exclusion, and the few that do not were negotiated in unique circumstances that are not applicable here.
We further noted that the alternative proposed by Buyer — limiting the exclusion to "government-mandated shutdowns or quarantine orders" — would be inadequate because some of the most significant pandemic-related impacts on the publishing industry during the COVID-19 pandemic were not the result of direct government mandates but rather of voluntary behavioral changes, supply chain disruptions, and shifts in consumer preferences. A narrowly drawn pandemic exclusion would fail to protect Seller against these types of indirect but economically significant effects.
Resolution. The parties agreed to retain the broad pandemic exclusion in its current form. The disproportionate-impact qualifier will apply to the pandemic exclusion, as it falls within exclusions (1) through (7). This outcome is consistent with our recommendation and provides Buyer with adequate protection against the risk that a future pandemic disproportionately affects MPH relative to its industry peers, while preserving Seller's protection against pandemic-related effects that are broadly shared across the industry.
D. Decline in Operating Metrics
Buyer proposed adding a clarifying proviso addressing the "symptom vs. cause" distinction — that is, the distinction between a decline in financial performance (the symptom) and the underlying cause of that decline. Specifically, Buyer proposed that any decline in the Business's revenue, EBITDA, or other financial or operating metrics shall not, in and of itself, be deemed excluded from the MAE definition, while acknowledging that the underlying causes of such a decline might independently qualify for exclusion under one of the enumerated carve-outs.
This distinction has been recognized and applied by the Delaware Court of Chancery. In Akorn, Vice Chancellor Laster noted that financial metrics and operating performance are relevant evidence of whether an MAE has occurred, even if the root causes of the decline in performance fall within an MAE exclusion. The rationale is that the exclusions operate at the level of causation rather than the level of symptoms: a general recession (exclusion (1)) may cause a decline in revenue, but the decline in revenue itself is not excluded — it is the cause (the recession) that is excluded. If the revenue decline exceeds what would be attributable to the excluded cause, the excess may be evidence of a company-specific Material Adverse Effect.
We recommended accepting this clarification. It is consistent with Delaware law, does not materially disadvantage Seller, and avoids a drafting ambiguity that could otherwise be exploited in litigation. The practical effect is minimal: the underlying causes of a financial decline may still be excluded under the enumerated carve-outs, and Buyer would need to demonstrate that the decline is attributable to factors other than the excluded causes (or to the disproportionate impact of the excluded causes) in order to establish an MAE.
Resolution. The parties agreed to include the following clarifying proviso as a separate paragraph within the MAE definition:
"For the avoidance of doubt, the fact that the Business fails to meet any internal or published projections, forecasts, budgets, or estimates of revenue, earnings, or other financial metrics shall not, in and of itself, constitute a Material Adverse Effect (it being understood that the underlying causes of any such failure may be taken into account in determining whether a Material Adverse Effect has occurred to the extent not otherwise excluded by clauses (1) through (9) above)."
This language extends the symptom-vs-cause framework to cover not only actual declines in operating metrics but also failures to meet projections or forecasts. This is a common and unobjectionable formulation that is consistent with standard practice.
VI. Comparison to Calderwood & Harkness LLP Recommended Formulation
The following table provides a summary comparison of the key elements of (a) Calderwood & Harkness LLP's recommended MAE formulation for sell-side carve-out transactions, (b) the initial draft circulated on May 28, 2024, and (c) the current negotiated position as of June 18, 2024, incorporating Buyer's markup and the resolutions reached to date.
Overall Assessment. The negotiated MAE definition is commercially reasonable and protective of Seller's interests. The definition retains the structural framework and substantive content of our recommended formulation, with modifications that fall within the range of market-standard Buyer-protective provisions. The principal concessions to Buyer — the disproportionate-impact qualifier, the customer/supplier representation carve-back from the announcement exclusion, and the symptom-vs-cause clarification — are all within market norms and do not create material incremental risk for Aurelius.
The disproportionate-impact qualifier, while it theoretically expands the scope of events that can be considered in an MAE analysis, is tempered by the incremental-impact-only formulation, which ensures that only the excess impact borne by the Business relative to its industry peers is taken into account. The customer/supplier carve-back from the announcement exclusion is limited to a single representation (Section 3.23) and does not affect the operation of the exclusion for MAE closing condition purposes. The symptom-vs-cause clarification is a codification of existing Delaware law and does not alter the substantive allocation of risk.
We do not believe that the aggregate effect of these concessions materially increases Seller's exposure to an MAE claim, whether pre-closing (in the context of the closing condition) or post-closing (in the context of the indemnification framework).
VII. Remaining Open Items and Recommendations
The following items remain open or require further action in connection with the MAE definition:
1. Comparator Group Geographic Limitation. As discussed in Section IV.D above, the parties have not yet agreed on whether the comparator group in the disproportionate-impact qualifier should be limited to North American participants or should include global publishing companies. We recommend pressing for the "North American" limitation, which is supported by MPH's exclusively North American geographic footprint and the fact that the competitive dynamics, regulatory environment, and market conditions relevant to the Business are those of the North American publishing market. If Buyer's counsel insists on a broader reference, we propose "primarily North American" as a compromise formulation that acknowledges the global nature of the publishing industry while anchoring the comparison in North American market conditions.
2. Interaction with R&W Insurance. Seller intends to procure a representation and warranty insurance ("R&W Insurance") policy in connection with the transaction. The anticipated insurer is Kelvantis Omnivrel Insurance Company, and the policy is expected to bear policy number RWI-2024-MPH-00417, with a coverage limit of $72,000,000 (matching the indemnification cap under the MIPA). The R&W Insurance policy will incorporate the MAE definition from the MIPA, and the scope of coverage under the policy will be directly affected by the contours of the MAE definition.
Any further modifications to the MAE definition must be promptly communicated to the R&W insurance underwriter, David Kowalski at Kelvantis, to ensure that the policy language is updated to reflect the final negotiated definition and that no coverage gaps arise. In particular, the underwriter should be advised of the disproportionate-impact qualifier and the customer/supplier representation carve-back from the announcement exclusion, as these modifications expand the theoretical scope of MAE claims that could trigger coverage. The retention under the R&W Insurance policy is expected to be $4,800,000, aligning with the MIPA basket/deductible.
3. Closing Condition Certification. The MAE definition will be referenced in the bring-down closing certificate to be delivered by Seller at Closing. The target closing date is November 8, 2024, as set forth in the MIPA. Seller's designated officer will certify that no Material Adverse Effect has occurred since the date of the MIPA. It is essential that the language of the officer's certificate track the defined term precisely — any deviation between the certificate language and the MAE definition could create interpretive disputes. We will prepare the form of closing certificate for inclusion as an exhibit to the MIPA and will coordinate with Seller's internal legal counsel to identify the appropriate certifying officer.
4. Timing and Next Steps. We recommend finalizing the MAE definition in the next draft exchange with Hathaway, Locke & Barnett LLP. Our objective should be to resolve all remaining open points — including the comparator group geographic scope — by early July 2024, in advance of the anticipated signing date of July 19, 2024. Prompt resolution will also allow adequate time for the R&W insurance underwriter to review and confirm coverage based on the final MAE definition.
VIII. Conclusion
The negotiated Material Adverse Effect definition in the MIPA is substantially consistent with Calderwood & Harkness LLP's recommended formulation and with current market practice for sell-side carve-out transactions in the media and publishing sector. The definition appropriately allocates exogenous, systemic, and transaction-related risks to Buyer through the nine enumerated exclusions, while preserving Buyer's ability to invoke the MAE for company-specific adverse developments and for the disproportionate impact of otherwise-excluded events.
The principal modifications negotiated by Buyer — the disproportionate-impact qualifier (with the incremental-impact-only formulation), the limited carve-back of the announcement/pendency exclusion for the customer/supplier representation, and the symptom-vs-cause clarification — are all within the range of market-standard Buyer-protective provisions and do not create material incremental risk for Aurelius. Buyer's counsel's more aggressive proposals — including the known trends exception, the removal of the pandemic exclusion, and the narrowing of the announcement/pendency exclusion to effects arising solely from the identity of Buyer — were either withdrawn or resolved in Seller's favor.
Subject to resolution of the comparator group geographic scope (for which we recommend the "North American" limitation) and coordination with the R&W insurance underwriting process at Kelvantis Omnivrel Insurance Company, we recommend that Seller accept the current formulation of the MAE definition.
We will circulate a revised draft of the MIPA reflecting the agreed MAE definition, together with updated Seller Disclosure Schedules, for Beatrice Holloway's review prior to the next exchange with Buyer's counsel, which we anticipate scheduling for the week of June 24, 2024.
Please do not hesitate to contact me if you have any questions or would like to discuss any aspect of this memorandum.
Appendix A: Side-by-Side Comparison Table
The following table provides a detailed side-by-side comparison of the MAE definition across three iterations: (1) Calderwood & Harkness LLP's recommended formulation for sell-side carve-out transactions, (2) the Seller's initial draft circulated on May 28, 2024, and (3) the current negotiated position as of June 18, 2024, incorporating Buyer's markup and the resolutions reached to date.
Appendix B: Key Defined Terms Cross-References
The following is a list of the principal sections of the MIPA that reference or incorporate the defined term "Material Adverse Effect," together with a brief description of the context in which the definition is used.
Article III — Representations and Warranties of Seller
• Section 3.5 (Financial Statements): The representation that the financial statements of the Business present fairly, in all material respects, the financial position and results of operations of the Business is qualified by the MAE definition insofar as certain balance sheet items are described as not giving rise to liabilities that would constitute a Material Adverse Effect.
• Section 3.6 (Absence of Undisclosed Liabilities): The representation that the Business has no liabilities other than those reflected in the most recent balance sheet is qualified by an exception for liabilities that would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.
• Section 3.7 (Absence of Certain Changes): The representation that, since the balance sheet date, the Business has been conducted in the ordinary course and there has been no Material Adverse Effect. This is a direct invocation of the MAE definition as a standalone representation.
• Section 3.12 (Material Contracts): The representation regarding the validity and enforceability of material contracts is qualified by the MAE definition, such that breaches or defaults that would not reasonably b