Suppose you had an acquisition or a merger agreement that contained the traditional contract language making a condition of closing that there be no material adverse change (“MAC”) to the business, properties, or financial condition of the parties, and the deal was for a company in New Orleans that was swamped by Hurricane Katrina and the subsequent flooding.

Hibernia, a financial company based in New Orleans, had conducted a shareholder meeting in August at which 94% of the shareholders agreed to have the company be acquired by Capital One in exchange for cash and stock. The transactions was scheduled to close in early September.

About one-third of the Hibernia branches were damaged by Katrina. Some are still closed.

Capital One stated that it intends to go forward with the transaction, albeit at a price of $30.49 per share rather than the original deal price of $33 per share.

Shareholders will receive revised proxy materials for a new vote. It is anyone's guess whether the same overwhelming vote for the deal will be obtained. Regulators will also take another look at the transaction before it goes forward.

So close to the disaster, it is hard to know whether the discount on the price (about 9%) is wildly off the mark, either in the favor of the buyer or the seller, once insurance, the extent of physical damage, the loss of information and records, and loss of business is all taken into account.

For the transaction to move forward, the fairness opinion from the buyer's perspective and seller's perspective should be revisited. Generally, the fairness opinion speaks as of the time it is delivered, usually at the time of board approval of the transaction. Presumably, the givers of the fairness opinions back at the time of the original transaction no longer want to stand by those opinions in light of subsequent facts.

MAC clauses are fairly standard pieces of M&A contracting, sometimes getting significant attention in the negotiating process and sometimes not. They are kind of like spare tires: You have to have them because something could go wrong, but if you really expected something was going to go wrong, that would be the subject of substantive negotiation in the agreement. The MAC clause is designed to address a “worst case” scenario.

Katrina was the worst case.

On the basis of the MAC clause, it seems that Capital One could have walked away from Hibernia completely rather than renegotiating price.

MAC clause termination of agreements on the basis of short-term stock price fluctuations or interruptions in earnings have not been upheld. But what meaning would a MAC clause have if a deal could not be terminated when one-third of the target company's branches are closed by the largest natural disaster in American history? It sounds material, and pretty adverse, and it surely would represent a change.

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Bruce Dravis is a partner at Downey Brand LLP, operating primarily in the firm's Sacramento and Roseville offices, specializing in corporate, securities and business law. His column appears in The Daily Recorder on the third Monday of each month. (Editor's note: Mr. Dravis' column this month, obviously, is running on Friday, due to a scheduling issue.)