Why MAC clauses matter between signing and closing
A Material Adverse Change clause, often referred to as a MAC clause, is an important risk allocation mechanism in M&A transactions. It is designed to address what happens if the target business is materially affected by adverse events between signing and closing.
In many M&A transactions, signing and closing do not take place on the same day. There may be a gap because regulatory approvals, shareholder approvals, financing, works council consultation, FDI screening or other closing conditions must be satisfied. During that interim period, the buyer has signed the deal but does not yet control the target.
A MAC clause seeks to allocate the risk of serious adverse developments during that period. For buyers, it can provide protection if the business deteriorates significantly before closing. For sellers, the clause should be drafted narrowly enough to prevent the buyer from using ordinary business risks or market volatility as an excuse to walk away.
What is a MAC clause?
A MAC clause defines the circumstances in which an adverse change or event is serious enough to affect the transaction. Depending on the drafting, it may give the buyer a right not to complete, a termination right, a claim for damages or a basis to renegotiate the purchase price.
The key issue is materiality. Not every negative development should qualify as a MAC. The clause should make clear whether it applies only to the target business itself or also to wider market, industry, geopolitical, financing or legal developments.
A well-drafted MAC clause usually distinguishes between company-specific risks and general market risks. For example, a sudden loss of a key customer, major contract breach, regulatory issue or significant deterioration in financial performance may be treated differently from general inflation, interest rate movements, war, pandemics, supply chain disruption or sector-wide downturns.
MAC as a condition to closing
In many transactions, the MAC clause is included as a condition to closing. This means that the buyer is not obliged to complete the transaction if a Material Adverse Change has occurred before closing.
This is particularly relevant where there is a long period between signing and closing. The longer the interim period, the more important it becomes to define the risk allocation clearly.
For sellers, a broad MAC condition can create closing uncertainty. For buyers, a narrow MAC condition may provide insufficient protection against a serious deterioration of the target. The drafting should reflect the commercial bargain, the due diligence findings and the risk profile of the target business.
MAC as a warranty or covenant
A MAC concept can also appear as a warranty or covenant. For example, the seller may warrant that no Material Adverse Change has occurred since a specified date, such as the locked box date, accounts date or signing date.
If that warranty is inaccurate, the buyer may have a claim for breach of warranty, subject to the limitations in the purchase agreement. This is different from a closing condition. A warranty claim may lead to damages, while a closing condition may give the buyer a right not to close.
MAC concepts may also be linked to interim operating covenants. The seller may be required to conduct the business in the ordinary course between signing and closing and to notify the buyer of material adverse developments.
Negotiating a MAC clause
A MAC clause is often heavily negotiated because it sits at the intersection of legal drafting, deal certainty and commercial risk.
Buyers will usually want the clause to cover significant deterioration in financial performance, loss of key contracts, regulatory intervention, litigation, insolvency events, loss of licences, material breaches of law and other target-specific events.
Sellers will usually want carve-outs for general economic conditions, changes in law, market-wide developments, changes affecting the industry as a whole, geopolitical events, pandemics, interest rate movements and matters already disclosed during due diligence.
A common compromise is to include exceptions for general market events, unless those events have a disproportionate adverse effect on the target compared with similar companies in the same sector.
MAC clauses and due diligence
The MAC clause should not be negotiated in isolation. It should be aligned with the due diligence findings, disclosure, warranties, indemnities, closing conditions and interim covenants.
If a particular risk is known before signing, it should usually be dealt with specifically through disclosure, a specific indemnity, a purchase price adjustment, a covenant or a condition precedent. A generic MAC clause should not be used as a substitute for clear allocation of known risks.
For professional buyers, private equity funds and strategic acquirers, the MAC clause is one part of the wider buyer protection package in a Dutch acquisition agreement. For sellers, the clause must be controlled to avoid undermining deal certainty.
Dutch law considerations
Under Dutch law, the wording of the contract is critical. If parties want a buyer to have a right not to close because of a Material Adverse Change, that right should be clearly drafted in the acquisition agreement.
Dutch courts will look at the text of the clause, the agreement as a whole, the circumstances of the case and the parties’ reasonable expectations. Ambiguous wording can create uncertainty and increase the risk of dispute.
In cross-border transactions, US or UK-style MAC language should not simply be copied into a Dutch law SPA or APA. The clause should be adapted to Dutch law, the transaction structure and the role it is intended to play in the agreement.
Practical drafting points
A strong MAC clause should address:
- the relevant measurement period;
- whether the clause applies to events, changes, circumstances or effects;
- whether financial thresholds are used;
- whether the impact must be short-term or durationally significant;
- which general market or industry events are excluded;
- whether disproportionate impact exceptions apply;
- whether disclosed matters are excluded;
- the consequence of a MAC occurring.
The most important drafting question is not whether the agreement contains a MAC clause, but what exactly it allows a party to do.
Need advice on a MAC clause?
Dirk de Waard advises buyers, sellers, investors and M&A advisers on Dutch acquisition agreements, including MAC clauses, closing conditions, warranties, indemnities, disclosure, interim covenants and transaction risk allocation.
He assists clients with Dutch M&A transactions, private equity investments, asset purchase agreements and share purchase agreements.
Contact Dirk de Waard at dirk.dewaard@viottalaw.com to discuss a Dutch M&A transaction or MAC clause.
