Material Adverse Change

Full Definition

A Material Adverse Change (MAC) or Material Adverse Effect (MAE) clause in an M&A agreement specifies what significant negative developments in the target's business would excuse the buyer from its obligation to close the transaction. The MAC clause typically grants the buyer the right to terminate the agreement (and not pay the purchase price) if the target experiences a "material adverse change" in its business, financial condition, operations, or results between signing and closing. Because transactions often have gaps of 3-6 months between signing and closing (for regulatory approval, financing, and other closing conditions), MAC provisions address the risk that significant negative developments in the target during this period should excuse the buyer. MAC definitions are heavily negotiated because they define the boundary between a change that excuses closing and a deterioration that the buyer must accept. Buyers seek broad MAC definitions covering any significant negative development. Sellers resist broad definitions, arguing that general market conditions, regulatory changes, industry-wide factors, and other external events beyond management control should not excuse buyers from closing obligations entered into with full knowledge of external conditions. Standard MAC exceptions (events that are excluded from MAC definitions even if materially adverse) typically include: changes in general economic conditions, changes affecting the industry broadly, changes in financial markets or interest rates, effects of natural disasters or acts of war, and effects resulting from the announcement of the transaction itself. Delaware courts (which govern most U.S. M&A disputes) have interpreted MAC clauses very narrowly—buyers almost never successfully invoke MAC to terminate transactions. The seminal Akorn v. Fresenius Kabi case in 2018 was one of the first cases where Delaware courts upheld a MAC claim, finding that Akorn's extraordinary regulatory compliance failures and financial performance deterioration qualified as MAC. Courts have consistently held that ordinary business deterioration, even significant, does not constitute MAC—the standard requires a durationally significant change that materially threatens the overall earning potential of the target in a meaningful way, not merely a bad quarter.

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