The corona crisis has put new emphasis on the importance of the Material Adverse Change-clause (hereinafter referred to as the MAC-clause) in the Netherlands. The MAC-clause is common in M&A agreements and its purpose is to protect the buyer from circumstances that have a significant impact on the financial position of the target company. The MAC-clause determines when there is a material adverse event or material adverse effect on the target company.
MAC-clauses appear in various types of contracts, such as in purchase agreements, in (private and public) M&A transactions, financing and loan agreements and continuing performance agreements. In this article, corporate law attorney Dirk de Waard discusses the use and formulation of MAC-clauses in takeover contracts in the Netherlands.
The purpose and use of the MAC-clause: clear definition avoids disputes
The purpose of the MAC-clause is to give the buyer the right to terminate the agreement if the target experiences a material adverse change in the business. It’s up to the parties to clearly define what such a material adverse event or material adverse effect is. If they don’t, that can have serious consequences. For example, the extent to which a change is material or the degree of foreseeability of a change often leads to discussions that can result in lengthy procedures. A MAC-clause therefore needs to be clearly formulated to prevent disputes in M&A transactions.
The MAC-clause is essential in the period between signing and closing
The actual transfer of the company follows after signing the purchase agreement: the closing. Closing and signing can take place on the same day, but in practice there’s a number of months or even a year in between. Often because governments or competition authorities must approve the acquisition or because the shareholders must agree to the acquisition. In this interim period, the company is going concern and is subject to financial changes as a result of external circumstances. The MAC-clause seeks to contractually define this change in order to avoid any dispute or conflict at the time of closing. The MAC-clause is therefore regularly included in the form of a condition precedent or guarantee.
The MAC-clause can be included in the purchase agreement as a guarantee from the seller to the buyer at the time of signing. If it appears that a Material Adverse Change has occurred before the closing date, the seller is obliged to compensate the buyer for the resulting damage.
If the parties include a MAC-clause in the purchase agreement in the form of a condition precedent, the buyer will be able to dissolve the agreement in whole or in part if a material adverse change occurs. Another possibility is that the agreement is dissolved to then negotiate a lower purchase price.
Need advice about or assistance with contracting? VIOTTA is happy to help you
The Brexit, the COVID-19 pandemic and the Russian invasion of Ukraine illustrate the unforeseeability of material adverse circumstances and thus the importance of a MAC-clause in your purchase agreement. The specification of the MAC-clause depends on the interests of the parties involved and is usually a point of negotiation. The lawyers at VIOTTA are specialised in advising on and drafting MAC-clauses and are happy to help you. Please feel free to contact our corporate law attorney Dirk de Waard.