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A material adverse change (“MAC”) clause is one type of provision common to M&A and lending agreements. MAC clauses are frequently used as risk-shifting devices in both public and private transactions. The general purpose of a MAC clause is to give either the buyer or the funder the right to withdraw from the transaction if certain events occur that are detrimental to the target company or the borrower. In a private transaction, these detrimental events may include matters that are detrimental to the target business, its assets, or the profits of the target company.
MAC clauses are generally only relevant in private transactions when a gap occurs between the exchange and completion of the deal. A gap can occur for a variety of reasons, such as the need to secure necessary regulatory approvals. Although most sale and purchase agreements will contain some form of a MAC clause, the nature and extent of the clause will depend on several deal-specific factors.
The primary factor is the bargaining power of the parties and which party will be responsible for any gap between exchange and completion. Also relevant is the use of any external finance to fund the acquisition. Financial institutions will require certain provisions in the agreement, and will typically insist on a MAC clause. The final factor that will inform the extent of the MAC clause is the nature of the target company’s business. Businesses operating in heavily regulated environments will typically encounter extensive MAC clauses that attempt to shift the additional risks from one party to the other.
A buyer faces several considerations with respect to MAC clauses. The first is simply whether to have a general purpose MAC clause or whether to craft a clause to address specific concerns the buyer has given the circumstances of the transaction. General MAC clauses are enforced very narrowly by most courts, so a general MAC clause would ideally be augmented by some objective definitions that describe what constitutes a MAC. If a general MAC clause is included in the sale and purchase agreement, the MAC needs to fit into the overall context of the agreement in order to have the desired effect.
As mentioned above, lenders will often insert MAC clauses into the lending facility agreement. If the buyer is using external finance to fund the transaction, any MAC clause in the sale and purchase agreement needs to match the MAC clause used by the lender. And depending on negotiating power, the buyer should consider what alternative protections may be available beyond a MAC clause. A buyer could attempt to secure promises from the seller regarding how the target company will be managed in the interim period before the transaction is completed. A buyer might also negotiate warranties from the seller that cover the interim period and take effect again after the transaction is completed.