Page 49 - M & A Disputes

Chapter 4

Material Adverse Change Clauses

Material adverse change (MAC) clauses and material adverse effect (MAE) fn 1 clauses provide a mech-
anism to terminate a merger or an acquisition agreement prior to closing in the event that a material
change occurs that damages the target’s business operations or assets. fn 2

A MAC clause is generally a representation by the seller that, since a given date (typically the date that
the agreement was signed), there has been no MAC in the business, operations, properties, prospects, as-
sets, or condition of the target. In addition, the seller represents that no event has occurred or no circum-
stances exist that may result in such MAC. When the target’s financial performance declines after the
signing of a merger agreement, the buyer may attempt to invoke the MAC clause to avoid consummat-
ing a merger. This will occur if the buyer believes that the merger is no longer advantageous. The seller,
for the inverse reason, will seek to hold the buyer to its bargain or else will seek damages in the amount
of any merger premium, if one exists, that was set out in the merger agreement. fn 3

The seller may also seek damages in the form of a breakup fee or termination fee in order to compensate
the seller for the time and resources used to facilitate the deal. Breakup fees can range from 1% to 3% of
the anticipated purchase price or higher, depending on the specific transaction process. The buyer may
also seek damages in the form of a breakup fee, depending on the facts and circumstances of the dispute.

The specific wording of the seller’s representation may vary from one agreement to another. The practi-
tioner is advised to consult legal counsel to gain an understanding of the proper interpretation of the
MAC clause unique to each contract. For example, some MAC clauses are specific to the business oper-
ations of the target and explicitly exclude changes that impact the target’s industry as a whole (for ex-
ample, a significant change in industry-related regulation). Other MAC clauses include both target-
specific and industry-wide events. In the former case, the practitioner will likely have to demonstrate
that the alleged adverse change had a disproportionate impact on the target business compared with oth-
er comparable businesses in the industry.

The practitioner may be engaged by either party to a MAC-related dispute to analyze the impact of the
alleged MAC on the operations of the target company, the projected duration of the adverse effect, and
how the target company was affected by the downturn relative to the industry. For example, a practition-
er may be engaged by the buyer to analyze and potentially demonstrate that a MAC occurred; converse-

fn 1 The differences between material adverse change (MAC) clauses and material adverse effect clauses are not substantial. In this
practice aid, the two terms may be used interchangeably.

fn 2 This section focuses on MAC clauses in the context of acquisition agreements and related financing agreements. MAC clauses
may be used in other commercial context, as well.

fn 3 It is also common for the deal’s financing agent to invoke the MAC clause in the financing documents (which usually parallels
the MAC clause in the acquisition agreement) to avoid funding an acquisition or a merger that it believes is no longer advantageous.
In such a case, this action by the financing agent usually will add another level of complexity, requiring additional advice from anoth-
er set of experts acting solely on behalf of the financing agent. A court’s review about whether a MAC has occurred with respect to
the financing agent is analyzed in the same manner as a court would analyze a MAC alleged by a buyer.

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