Material Adverse Change (MAC): risk allocation in an uncertain M&A market

The M&A market is under pressure. Geopolitical tensions, high interest rates, persistent inflation and ever-increasing regulation are making transactions less predictable than ever. While sellers focus on deal certainty, buyers seek protection against unexpected value erosion of the target between signing and closing. In that tension field, one provision has once again taken centre stage: the Material Adverse Change (MAC) clause. But how robust is this protection in reality? And when does a MAC work in practice – both legally and strategically?

The MAC in practice: three manifestations

The MAC clause is intended to protect the buyer against material negative changes affecting the target. In an SPA, the MAC typically appears in three forms:

• As a condition precedent: Closing is conditional upon the absence of a MAC in the period between signing and closing.
• As a seller warranty: The seller warrants that no MAC has occurred since a specified reference date (e.g. the balance sheet date).
• As a qualification to a warranty: By qualifying a warranty with a MAC, a (high) threshold is introduced that must be exceeded before a breach of warranty can be established.

The MAC as a “walk-away right”

The MAC is most commonly used (and discussed) as a condition precedent. In M&A transactions, there is often a period between signing the SPA and closing, for example to obtain merger control clearance. During that interim period, buyers want protection against developments that negatively affect the value of the shares. Closing is therefore made conditional on no MAC having occurred prior to closing. If a MAC does occur, the buyer may refuse to complete the transaction.

At least in theory. In practice, MACs are rarely invoked to actually walk away. More often, they serve as leverage for renegotiation – for example of the purchase price, warranties or specific indemnities. The MAC is therefore less an ultimate legal remedy and more a negotiating tool.

When is a change “material”?

An “adverse change” refers to a deterioration caused by a change in circumstances. The real challenge lies in the word “material”. That term is vague, open-ended, context-dependent and rarely explicitly defined in the SPA.

Parties often assume that materiality will become self-evident when the moment arises. Case law shows that this is far from obvious. There is no generally accepted test or benchmark for materiality. Whether an adverse change is material depends on the specific facts and circumstances of the case.

One way to create greater certainty is to include a quantitative threshold, such as a specific decline in EBITDA or a defined reduction in value. This allows parties to determine themselves when a change qualifies as “material”. In practice, however, there is no “one size fits all” threshold: different companies, sectors and transactions require different metrics.

In the Phoenix/Philips judgment of 2007, guidance was given on the interpretation of a MAC formulated as a warranty. To assess whether a MAC had occurred, the court itself looked to the target’s EBITDA, even though the MAC definition in the SPA did not refer to EBITDA or any other financial metric. The court held that EBITDA – precisely because incidental, non-structural costs and income are eliminated – provides an appropriate insight into the target’s structural profitability. Only if a change has a materially adverse effect on the business as a whole, and that effect is structural and durable, can a MAC be established. A temporary downturn is insufficient.

The judgment underscores that the bar is set high, and that external shocks and short-term effects will rarely support a successful reliance on a MAC.

MAC carve-outs: who bears which risk?

MAC definitions are often drafted very broadly (“any material adverse change in the assets, business, operations or financial condition”). Their scope is therefore frequently limited by exceptions, known as MAC carve-outs. These carve-outs explicitly shift risk from the seller to the buyer.

Common carve-outs include general economic or market developments, changes in law or regulation, war, terrorism or natural disasters, pandemics or epidemics, as well as matters disclosed prior to signing.

Buyers then often seek to mitigate this by including a disproportionality exception: if the target is disproportionately affected compared to its industry peers, a MAC may still be deemed to have occurred – effectively a carve-out to the carve-out.

Strategic tool

A successful invocation of a MAC clause in case law is relatively rare. Nevertheless, the clause plays an important role in M&A transactions. If a negative development arises between signing and closing (such as the sudden loss of key customers or unexpected financial setbacks), the MAC provides the buyer with a valuable negotiating tool. This may lead, for example, to an adjustment of the purchase price or to more favourable terms.

For this reason, careful and thoughtful drafting of the MAC clause is crucial. The clause must be sufficiently specific to avoid interpretative disputes, while at the same time retaining enough flexibility to adequately address unforeseen and unexpected events. A well-balanced MAC clause strengthens the buyer’s position without unnecessarily burdening the transaction with legal uncertainty.

Three practical points of attention

• Define “material” where possible: Objective criteria or financial thresholds reduce interpretation risk and help prevent disputes.
• Draft carve-outs precisely: Clearly identify exceptions, but retain room for disproportionate effects.
• View the MAC as a negotiating tool: Its value lies less in legal enforceability than in bargaining power.

Conclusion

The MAC clause is not a universal remedy, but a strategic safety net in an uncertain M&A market. It forces parties to reflect on risk allocation during the vulnerable period between signing and closing.

Careful drafting in the transaction documentation is essential to retain control over the interpretation of the MAC. In times of volatility and shifting market dynamics, more than ever, the strength of the MAC lies not in legal enforceability, but in its negotiating value.

An effective MAC clause is not a standard provision, but bespoke – tailored to the sector, deal structure and risk profile. Van Doorne’s Corporate/M&A team is happy to assist.