Material Adverse Change (MAC) Clause
A contractual provision permitting one party (typically the buyer) to walk away from a transaction or refuse to close if specified categories of adverse events occur to the target business between signing and closing. Allocates signing-to-closing risk.
A material adverse change (MAC) clause, sometimes called a "material adverse effect" or "MAE" clause, is a contractual provision permitting one party (typically the buyer) to walk away from a transaction or refuse to close if specified categories of adverse events occur to the target business between signing and closing. The MAC clause is the principal contractual mechanism for allocating signing-to-closing risk.
Standard structure
Most MAC clauses define "material adverse change" as a change, event, or development that has a material adverse effect on the target's business, operations, financial condition, or results of operations, taken as a whole. The definition is then qualified by extensive carve-outs.
Standard carve-outs
Excluded from MAC: (1) general economic, financial, or political conditions; (2) industry-wide conditions; (3) acts of war, terrorism, or pandemic; (4) changes in law or accounting principles; (5) actions taken at buyer's request or required by the agreement; (6) failure to meet projections (with the underlying cause potentially still constituting MAC). Some carve-outs include "disproportionate effect" qualifiers, the carve-out applies only to the extent the adverse event affects the target similarly to other industry participants.
Texas case law
Texas appellate courts have not produced as developed a body of MAC jurisprudence as Delaware. Delaware decisions are the most developed body of MAC case law, and a Texas court may treat them as persuasive. In Akorn, Inc. v. Fresenius Kabi AG, 2018 WL 4719347 (Del. Ch. Oct. 1, 2018), aff'd, No. 535, 2018 (Del. Dec. 7, 2018) (order), the Court of Chancery applied the standard of In re IBP, Inc. Shareholders Litigation and Hexion Specialty Chemicals, Inc. v. Huntsman Corp.: the change must substantially threaten the target's overall earnings potential in a durationally significant manner, measured in years rather than months.
Despite the prevalence of MAC clauses, successful invocations are rare. Under Delaware decisions, a buyer that invokes a MAC clause to avoid closing bears the burden of proof, and it is a heavy one. Practical use of MAC clauses is more often as renegotiation leverage than as a basis for termination.