5 May 2017

MAC-clauses in M&A contracts

Category: Mergers and acquisitions

MAC-clauses are an integral part of M&A contracts. MAC is the abbreviation for “Material Adverse Change”. M&A transactions oftentimes take a long time, leaving long periods of time between “signing” the contract and “closing” it.

What is a MAC

MAC-clauses define what a material adverse change is and what the consequences are if it takes place.

A MAC-clause can either be formulated as a condition precedent or serve as a warranty.

If a MAC that is formulated as a condition precedent for the transaction occurs, the consequence thereof would be, depending on the exact wording of the SPA, that the transaction has no effect. The buyer can then in principle not be held liable for possible damage suffered by the seller or the target company.

Is the MAC used as a warranty, it will, if the MAC occurs, lead to the buyer having the possibility to rely on it even after the closing is completed. The buyer can then hold the seller accountable if it discovers that a MAC had occurred pre-closing.

Examples for MAC

Parties to a SPA can define in the SPA what a material adverse change entails. Changes may include turnover decreases, loss of material clients, increase of raw material, changes in the industry, legislative changes etc. Frequently, a broad definition is included that may serve as a catchall provision.

A seller should ensure that the MAC-clause excludes changes which the target company cannot control like “acts of God”, earthquakes, fires and the like.

For when the event, defined under the MAC provision, occurs the acquirer has the right to rescind the contract without being held liable for possible damages.

Further information

Should you have any questions or queries concerning the MAC provisions and how to include them in an M&A contract, please do not hesitate to contact Arjen Paardekooper who would be more than happy to advise you on any questions you may have.