MAC Primer: An Overview to the Material Adverse Change Clause
In most acquisitions, the distance between signing and closing is measured in weeks, if not months. During this interim period the buyer’s ability to safeguard or control the target’s business is limited. This is an uncomfortable position that can be exacerbated if the transaction is consummated between strategic competitors or in a market with substantial volatility. Accordingly, this is a context in which astute counsel can provide significant value to clients through effective risk allocation. There are a number of contractual tools that can be employed to help mitigate the inherent risks during this gap period (i.e. indemnities, escrows, price adjustment clauses); one of the most basic tools at the drafter’s disposal is the material adverse change clause, commonly referred to as the “MAC clause”.
Understanding the MAC Clause
In essence, a MAC clause is a contractual trigger that releases a party from its obligation to complete a transaction where a “material adverse change” affects one of the parties or the underlying assets of the deal. Practically speaking, it can be used by a buyer to walk away from, or more likely to renegotiate, an acquisition in the event that the target’s business, operations or financial condition is significantly impaired prior to closing. This is a very powerful tool that warrants serious attention from parties on both sides of the deal table.
The core of a MAC clause is the definition of “material adverse change”. As such, this is often an area of heated negotiation. MAC clauses are malleable provisions; they can be drafted broadly, to give buyers an easy escape route, or narrowly to drag them along to closing. The scope of the final clause adopted by the parties usually reflects their relative bargaining power and their respective interests during the trajectory of the transaction.
The Drafter’s Dilemma
There are two principal characteristics that make MAC clauses difficult to draft. First, there is a dearth of authorities to provide any meaningful drafting guidance. In part, this is because MAC clauses are creatures of contract and thus are not governed by statute. In addition, they are infrequently litigated in Canada or the United States. Consequently, parties are often left to haggle over the “market standard”, and how such standard should be implemented in a particular deal. Second, MAC clauses are forward-looking in nature. Thus, drafting an appropriate MAC clause requires the parties to foresee future events and to consider their potential effect on the substance of the transaction. The combination of these two characteristics can make drafting a MAC clause a precarious exercise. The upcoming posts in our MAC clause series shed some light on this process by exploring some of the key drafting issues that should be considered in order to craft a MAC clause that works for you.