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.
The material adverse change (“MAC”) clause is a contract provision that periodically dominates the headlines, usually in the wake of a major financial downturn, and the most recent downturn has not been an exception. A MAC clause dispute typically occurs when one side of an agreement no longer wants to complete a merger or acquisition, and often the stakes are high: in the midst of the credit crisis and economic turmoil that began in 2007, MAC disputes erupted in at least thirteen high-profile transactions—the four largest disputes ranging from $1.5 billion to $25.3 billion. As recently as fifteen years ago, the MAC clause was essentially an uncontroversial boilerplate provision, but the clause has since changed dramatically. This Note explores the modern MAC clause in the United States through a comparative analysis with the United Kingdom, which has effectively prohibited a transformation of the traditional MAC clause.