M&A Vocabulary – Understanding Experts: “MAC Clause”

In complex transactions, the contracting parties may agree on so-called Material Adverse Change (MAC) clauses to account for significant changes to the subject matter of the contract. Particularly during the period between signing and actual completion of a transaction, the contractual terms agreed upon by the parties may be affected by unforeseen circumstances with negative impacts on the target company. This raises the question of whether the buyer remains subject to their agreed obligations or is entitled to withdraw from the contract or renegotiate its terms without being liable for breach of contract.

The contractual allocation of this “pre-closing” risk within the MAC clause may therefore be appropriate in individual cases and is often undertaken in practice through intensive negotiations. MAC clauses are often complex and should be precisely formulated. The fundamental aspect is always the provision defining which circumstances are to be understood as “material” within the meaning of the clause. This can be done by specifically naming individual cases of material adverse change (for example, significant revenue declines, loss of major customers, or serious compliance violations) or by formulating a general provision. In the latter case, specific cases may in turn be named in favor of the seller that are not to be covered (so-called carve-out clause). In addition, MAC clauses must regulate those circumstances that are to be excluded from the definition. Some examples of events that typically do not qualify as a MAC are terrorist attacks, natural disasters, and changes in the political or economic situation of a country or its relevant legislation. In principle, a MAC clause may only refer to circumstances that are not within the buyer’s control, as otherwise their need for protection would be negated.

The clause should also regulate the exact legal consequences, such as a right to adjust the purchase price or to withdraw. MAC provisions can also be integrated into the representations and warranties provided by the seller, e.g., in the form of a representation to the buyer that a material adverse change has not occurred since a specific date or within the period between signing and closing. In this case, the buyer would typically not be entitled to refuse to complete the transaction, but could claim damages. MAC provisions are also frequently formulated as a closing condition. In that case, the buyer would be entitled to withdraw from the transaction upon the occurrence of a material adverse change without being liable for breach of contract. However, if the MAC clause is actually triggered, this rarely leads to the transaction actually failing in practice, but typically results in renegotiations regarding the purchase price.

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