How SPAC Investors Might Rethink Material Adverse Effect

By James Hu, Matthew Kautz and Suni Sreepada (September 15, 2021, 5:51 PM EDT) -- In the age of unicorns, startups and other technology ventures that may do business for years without booking any significant amount of revenue, the critical matter of determining a material adverse effect in a transaction acquires an unsettling ambiguity.

What does it mean to factor in the earnings potential of a target company when the target has no record of earnings?

According to rulings in the Delaware courts, confirming the existence of a material adverse effect requires a finding of an effect that would substantially threaten the overall earnings potential of the target in a durationally significant manner.

Take, for example,...

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