The use of a MAC-clause in M&A-practice

In view of recent events regarding the COVID-19 virus, the Material Adverse Change (MAC)-clause is regaining importance. A MAC-clause is a frequently used clause in an acquisition agreement that gives (one of) the parties the right to terminate the agreement if material adverse changes occur between signing and closing. What is the legal qualification of such a MAC-clause? What are the points of attention when drafting MAC-clauses?


Material Adverse Change (MAC)


What is a MAC-clause?


A MAC-clause is a clause that is often used in M&A-practice. This particular clause gives the parties, usually only the purchaser, the right to walk away from the deal in the event of a material adverse change occurring between the signing and the closing (the so-called “interim-period”) of the transaction. This way, parties try to contractually allocate the risk related to the interim-period.


The interim-period can vary from one or more weeks to several months, in some cases even more than one year. During this period, it is possible (cf. outbreak COVID-19) that the economic and/or financial situation changes to such an extent that (from the purchaser’s perspective) it is no longer opportune or desirable to proceed with the transaction (or at least not at the conditions initially agreed upon).


How is the MAC-clause drafted?


The MAC-clause can be drafted in several ways. The material adverse change (or the “materiality”) can be defined very broad or very narrow, and is always drafted taking into account the specific circumstances of the transaction. This means that, although useful examples exist among M&A practitioners, an off-the-shelf MAC-clause does not exist.


The most clear way of expressing materiality is by referring to (in principle) clearly measurable financial parameters. This may mean, for example, that the valuation, the turnover, EBITDA, etc. of the target company declines by a number of percentage points.


The materiality can also be expressed subjectively. This means that the change is considered to be material by the party relying on the MAC-clause. Such a clause therefore is even more subject to the interpretation of the parties (and ultimately the courts) and thus leaves more room for discussion. It does, however, have the advantage that in these circumstances there is a de facto contractual leverage that would not exist otherwise (after all, for the parties concerned the agreement is the law). This way, other conditions can be negotiated considering the changed circumstances.


A final possibility is to have the materiality assessed by an independent third party.


MAC-clauses are also often subject to so-called carve-outs, in which parties explicitly exclude certain situations or circumstances from the scope of the MAC.


Legal qualification




Depending on how the MAC-clause is drafted from a legal point of view, the qualification and the associated legal consequences may differ. It is important that the parties consider this carefully when drafting the clause.


Condition precedent or subsequent


Firstly, the MAC-clause can be qualified as either a condition precedent or a condition subsequent. It is important that the situations referred to in the clause are sufficiently uncertain, in order to qualify as a condition.


In the case of a condition precedent, the MAC-clause is usually drafted negatively. For example, the performance of the agreement (i.e. proceeding with closing) is subject to the absence of a MAC. If the MAC is qualified as a condition subsequent, the agreement will be automatically dissolved in case a MAC occurs.


Unilateral termination clause


Secondly, the MAC can also be qualified as a unilateral termination clause. This gives the contractual right to (one of) the parties, provided certain circumstances occur, to unilaterally terminate the agreement.




Thirdly, it is also argued – although fiercely contested – that the MAC-clause is a hardship-clause. A hardship clause aims to regulate the contractual bond (usually by renegotiating the contractual terms and conditions), in case abnormal and unforeseeable circumstances occur after the entry into force of the agreement.


Although both clauses have some similarities, the main distinction lies within the scope. Hardship-clauses are situated at the level of the performance of the agreement. Such clauses are, therefore, often included in contracts where there are several consecutive performances over a longer period (for example supply contracts). The MAC-clause usually concerns a one-off execution (i.e. transfer of ownership and payment of the purchase price). In addition, the consequences of both clauses also differ. For example, hardship-clauses will often result in the renegotiation of the terms and conditions of the agreement, where the MAC-clause usually refers to the termination of the agreement. In practice, however, this does not prevent the purchaser from using the MAC-clause as a means of pressure to renegotiate the terms and conditions.


Points of attention


Seller’s perspective


Obviously, a seller wants transaction certainty and wants the transaction to proceed as agreed. From that perspective, the seller will (i) not accept a MAC-clause or (ii) limit the scope of application of the MAC-clause as much as possible. These restrictions can be done by using carve-outs, as mentioned above. In addition, the seller will want to define the MAC objectively, so that it depends as little as possible on the parties’ interpretation.


Purchaser’s perspective


From the purchaser’s perspective, the story is different. The purchaser is better protected with a very broad definition of MAC. However, case law is reluctant when it comes to too broadly defined MAC-clauses. It is, therefore, recommended that the parties tailor the MAC-clause to specific (and by preference measurable) elements rather than attempting to capture general economic trends. However, this is a double-edged sword, given that a very detailed MAC-clause can be interpreted as exclusive and exhaustive.


Obviously, drafting and negotiating up a MAC-clause is not easy. It is a search for a balance in the interests of the parties and for an optimal risk allocation.

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