Under the Hood: Guidelines for Drafting Material Adverse Change Clauses
There are a number of ways in which a MAC clause can be drafted. Typically, these provisions begin with a broad definition of the type of event that will constitute a “material adverse change” on the business or assets being acquired. This is often followed by a list of explicit “carve-outs” which designate the events that fall outside this definition. By negotiating the definition and carve out sections of the MAC clause, parties may allocate the risk of adverse changes to either the seller by including them in the definition of material adverse change, or to the buyer by explicitly carving them out.
Some of the key “breaking points” which determine the operation of a MAC clause include:
- the time period during which a change can trigger the clause;
- the magnitude of the adverse change required to trigger the clause;
- whether the definition of “materiality” measures the effect on the target alone or the proportionate effect on the target relative to other actors in the market; and
- whether a change in tax, regulatory or corporate laws is to be excluded from the definition of a “material adverse change”.
Negotiation of each of these issues, and a host of other inflection points, will determine the scope of the MAC clause and thus define the type of event that will trigger a MAC release.
For a discussion of other MAC-related issues, stay tuned for more posts on this topic.