From Volume 88, Number 3 (March 2015)
The definitive agreement in mergers and acquisitions (“M&A”) transactions is one of the most heavily negotiated agreements in the field of commercial contracts. Besides establishing basic terms, such as defining the target and setting the form and amount of consideration, both buyer and seller attempt to allocate risk in order to achieve an acceptable level of deal certainty. Between an agreement’s signing and its closing, weeks, if not months, can pass as the purchaser performs due diligence and the parties obtain the necessary voting and regulatory approvals. In the interim, either the purchaser or the target may have a change of heart or a decline in performance. One way of allocating such risk during this period is through the use of a Material Adverse Change (“MAC”) or Material Adverse Effect (“MAE”) clause. In essence, MAC clauses allow a party to the agreement—most often the purchaser—to walk away free of penalty if the other party experiences an adverse change that is sufficiently material. However, despite the apparent simplicity of such clauses, vague drafting and a dearth of case law have made issues of interpretation exceedingly imprecise and unpredictable.