An underwriting agreement contains a 'market out' clause. Under which circumstance would this clause most likely be invoked?
- AWhen the offering is oversubscribed
- BA pre-closing material adverse change✓ Correct answer
- CWhen the underwriter wants to renegotiate a higher spread
- DWhen the SEC requests additional disclosures after the effective date
Why B — A pre-closing material adverse change
A market out clause allows the underwriters to terminate their purchase obligation if certain adverse events occur between pricing and closing, such as a material adverse change in the issuer's condition, a significant disruption in the financial markets, or the outbreak of hostilities. This provision protects underwriters from being forced to close a transaction when circumstances have materially changed since the agreement was executed. The clause is standard in virtually all firm commitment underwriting agreements and is heavily negotiated between issuers and underwriters.
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