MAC or Material Adverse Change Clauses

MAC or Material adverse change clauses constitute a legal figure which purpose is to cover the parties of a contract against the risk of an adverse material change that may frustrate the purpose of the contract or render it meaningless.

MAC clauses originally derive from Common Law and have traditionally been used in merger and acquisition (M&A) transactions, and financing operations. However; these can also be included in other kinds of contracts, such as successive contracts, supply contracts or lease contracts.

A MAC clause conditions the completion of a particular operation or transaction to the non-occurrence of certain negative, relevant and sudden events or circumstances that would substantially change the situation existing at the time the contract was signed. For example, we could consider a drastic loss in the value of the target company in the framework of a share purchase transaction.

As a rule, MAC clauses grant the relevant party the right to terminate a contract in the event of a material adverse change. In addition, they may also be configured as a right to modify the initial contractual terms, or as a suspensive clause so that the transaction never takes place.

As mentioned earlier, MAC clauses are particularly relevant in mergers and acquisitions (M&A) transactions, such as in the case of a sale, specifically where there is a temporary deferral between the signing of the contract (signing) and the closing of the transaction (completion). This delay may occur because the transaction is subject to the fulfilment of certain conditions, such as obtaining a particular authorisation or required consent, or because it is pending financing to undertake the investment.

In such cases, MAC clauses are very useful because between the signing and closing of the transaction unforeseen circumstances may occur that may cause one of the parties (usually the buyer) to consider the deal frustrated by a sudden change in circumstances. The inclusion of these clauses eases the contractual exit without a breach of contract.

In short, MAC clauses are a contractual allocation of the risks of a transaction and become essential in contracts of a complex nature or in volatile or highly uncertain markets.

In any case, in order to provide these clauses with maximum legal certainty, it is essential to define with the utmost detail those circumstances that are substantial or material and hence will enable one of the parties to withdraw from the transaction, as well as its effects. Otherwise, MAC clauses may lose their effectiveness and force the parties to enter into disputes over their interpretation and application.

The MAC clauses share similar features with the so-called rebus sic stantibus clause. This figure applies when, under unforeseeable circumstances, there is a break or an absolute disproportion of the balance between the parties, which causes the fulfilment of the contract in the initially agreed conditions excessively burdensome for one of them.

The fundamental problem of the rebus sic stantibus clause is that its application is certainly restrictive by the Courts. Thus, agreeing to MAC clause is always a better alternative, as it constitutes an express and binding contractual agreement between the parties, based on the contractual freedom that governs the setting of the terms of a contract.

This article is not considered as legal advice

José María Mesa

A licensed attorney with both Business Administration and Law degrees, José María Mesa is specialized in the areas of commercial contract, corporate law and mergers and acquisitions. Working languages: Spanish and English. For any query Contact José María Mesa