MAC clause in a business acquisition: termination, risk and drafting

MAC stands for material adverse change. The clause allocates the risk that something material changes between signing and completion: a large customer drops out, a central permit is withdrawn, a damage situation first becomes apparent after signing. If such a change occurs in the defined sense, the buyer can step back from the contract or demand adjustments.

The MAC clause is not a statutory tool but a pure agreement of the parties. It is usually shaped as an additional condition precedent to completion: completion can only be demanded if no MAC event has occurred by completion. Even so it is not standard but a matter of negotiation. Buyers want it broad, sellers want it narrow.

Internationally the hurdles are high. Case law typically requires a material, durable deterioration that cannot be explained by general market developments. A mere downturn or industry-wide problems usually do not suffice. We explain the term itself in the glossary.

The central question of every MAC clause is the threshold. The more precisely it is drafted, the better the clause holds in dispute. Quantitative anchors are common: a certain drop in EBITDA, a defined equity loss, the loss of large customers with a fixed share of revenue. A mere general clause without a key figure remains soft.

Mirror-like the carve-outs belong in the clause. General economic developments, industry-typical fluctuations, consequences of the agreed transaction itself and political or legislative major events are mostly carved out in practice. They do not affect the specific target company but act on all market participants and should therefore not lead to a termination right.

Inside this carve-out catalogue a back-exception is often agreed: even general developments can trigger the MAC clause where the target company is disproportionately affected. The protection is thereby steered to those cases in which a target-specific crisis really exists. How this mechanism relates to the warranty catalogue is covered by the post on the SPA warranty catalogue.

If a MAC event in the agreed sense occurs, the typical legal consequence is a termination right of the buyer. Intermediate steps are however also possible: an adjustment of the purchase price, an extension of the long-stop date or an obligation to renegotiate. Which consequence fits depends on the character of the transaction. On strategic acquisitions a renegotiation is often more realistic than a full termination.

In practice invoking a MAC clause comes with high hurdles. The buyer has to set out and prove the occurrence of the threshold, the durability of the change and the lack of connection to carved-out events. A mere deterioration of the order book does not suffice. That is another reason every wording in the threshold and the carve-outs matters.

If the seller defends against the invocation, the dispute quickly turns into an expert procedure. Whoever wants to use the clause in a serious case therefore documents the change on an ongoing basis: current figures, written communication with customers, statements of external advisers. An initial assessment of the risks is provided by our M&A transaction risk profile.

The MAC clause does not stand alone. It sits alongside the other conditions precedent, the long-stop date and the bring-down of the warranties at completion. These tools mesh: while the conditions precedent set the main switches, the MAC clause covers the residual uncertainty of the interim phase. Whoever uses all tools without alignment risks contradictions in the contract.

The long-stop date sets the time frame by which the conditions must have occurred. A MAC clause should classify itself clearly, whether it works only up to that date or knows its own deadlines. Otherwise dispute arises over which deadline applies in the serious case.

Finally the MAC clause overlaps with the bring-down of the warranties. A bring-down requires the warranties to continue to be true at completion, a MAC clause targets the overall economic position. A clean clause assigns both tools, so that the buyer does not run two parallel disputes over the same matter. How the warranties relate to this is shown in the post on the warranty catalogue.