M&A Vocabulary – Explained by the experts: MAC Clause

In this ongoing series, a number of different M&A experts from the global offices of Rödl & Partner present an important term from the specialist language of the mergers and acquisitions world, combined with some comments on how it is used. We are not attempting to provide expert legal precision, review linguistic nuances or present an exhaustive definition, but rather to give a basic understanding or refresher of a term and some useful tips from our consultancy practice.

In complex transactions, the parties to the contract may agree on so-called Material Adverse Change (MAC) clauses, in order to cover significant changes to the subject matter of the contract. Especially in the period between the signing and actual closing of a merger or acquisition, the contractual terms and conditions agreed by the parties may be affected by unforeseen circumstances that have a negative impact on the target company. The question then arises as to whether the buyer is still obliged to fulfil their agreed obligation, or is entitled to either withdraw from the contract, or alternatively to renegotiate its terms without being accused of breaking them.

Allocation of this “pre-closing” risk in a MAC clause can, therefore, be very useful in some individual cases, and in practice is frequently done during intensive negotiations. MAC clauses are often complex and need to be worded very precisely. The fundamental question to be answered is which circumstances are to be regarded as “significant” within the meaning of the clause. This can be achieved by explicitly listing individual features which would have a significant negative impact (for example considerable decline in turnover, the loss of important customers or major compliance infringements), or by defining a general provision. In the latter case, certain specific features that favour the vendor might be listed that should not be included (so-called carve-out clauses). In addition, MAC clauses should be used to manage those events which are excluded from the definition. Some examples of events that are not generally regarded as MAC events are terrorist attacks, natural disasters and changes in the political or economic situation of a country or its relevant legislation. Basically, a MAC clause can only relate to circumstances outside the buyer’s control, as there would otherwise be no need to provide them with protection.

The clauses should also define the exact legal consequences, such as a right to adjust the purchase price or to withdraw from the transaction. The MAC provisions can also be included in the representations and warranties provided by the vendor, e.g. in the form of an assurance to the buyer that a significant adverse change shall not occur from a specific date, or within the period between signing and closing. In this case, the buyer would usually not be entitled to refuse to complete the transaction, but instead could seek compensation. MAC provisions are often also presented as terms of closing. In this case, the buyer would be entitled, should a major adverse change occur, to withdraw from the deal without becoming liable for a breach of contract. When a MAC clause is invoked, in practice, this rarely leads to a failure of the transaction, but instead generally triggers further negotiations on the purchase price.