The Application of the MAC Clause in M&A Transactions: in Theory and Practice

Introduction

To prevent adverse impacts on commercial transactions arising during the period from contract formation to closing (the “interim period”), parties often include clauses in investment and merger agreements to allocate risks associated with material adverse changes affecting the transaction. A Material Adverse Change (MAC) Clause grants the right to withdraw from a transaction if a material adverse change occurs to the target company during the transaction process.

In practice, however, the primary function of a MAC clause is not to provide the buyer with a straightforward exit, but rather to offer leverage in renegotiating deal terms when unexpected adverse events occur. Accordingly, from a functional perspective, the MAC clause serves to allocate risk, preserve deal stability, and encourage continued performance, rather than to terminate agreements. 

The Structure of a MAC Clause

The structure of a MAC clause generally consists of three components. 

First, the general statement, which sets out the basic scope of a material adverse effect. A material adverse effect usually refers to any effect, change, event, or circumstance that (1) prevents, materially delays, interferes with, or hinders completion of the merger or compliance with obligations under the merger agreement, or (2) has a material adverse effect on the business, operations, or financial condition of the target company. 

Second, the carve-outs, which limit the buyer’s right to terminate the transaction. Because the buyer is expected to conduct due diligence and evaluate the target’s condition before signing, many MAC clauses exclude changes arising from (1) general economic, political, or market conditions; (2) changes in applicable laws or accounting standards; or (3) fluctuations in stock price or trading volume of the target company. The buyer typically bears these risks.

Third, the exceptions to the carve-outs. Certain events—such as a decline in the company’s credit rating, a drop in share price, or failure to meet projections—may not themselves constitute a MAC, but their underlying causes may still qualify. Moreover, if a carve-out event (such as an industry downturn or macroeconomic shift) disproportionately affects the target relative to its peers, the excess impact may still be deemed a MAC. 

The Application of the MAC Clause

Given the complexity of commercial transactions and the impossibility of anticipating all adverse changes in advance, courts in common law jurisdictions face challenges in determining whether a MAC has occurred. 

Under U.S. and U.K. common law, a relatively consistent analytical framework has evolved. In IBP v. Tyson Foods, a 64% quarterly earnings decline caused by severe weather was held not to be a MAC. The court emphasized that short-term fluctuations do not impair long-term earnings power, and the relevant period should be measured in years. Hexion v. Huntsman reaffirmed this, stating that a ~20% short-term EBITDA drop did not constitute a MAC unless the downturn was expected to persist into the future, placing a heavy burden of proof on the buyer.

This longstanding reluctance to find a MAC was broken in Akorn v. Fresenius, reflecting a key turning point. The target suffered severe, year-long deterioration (annual revenue down 25%, EBITDA down 86%), leading the court to recognize a MAC for the first time. The ruling clarified that even with industry-wide headwinds, a MAC may be triggered if the impact on the target is materially disproportionate to its peers. The case established that durational and fundamental business decline can satisfy the MAC threshold, without lowering the bar, but rather defining the high standard of “durational significance.”

While few MAC-related precedents exist in the U.K., Bermuda, the BVI, or the Cayman Islands, their reasoning largely aligns with U.S. law. In Brigadier Acquisition v. Moss Bros, applying Rule 13.5 of the City Code on Takeovers and Mergers, the U.K. Panel held that terminating an event must be of “very material significance,” a standard still below frustration but nonetheless demanding. The bidder failed to meet the burden and could not withdraw. 

In summary, common law courts apply a three-step result-cause analysis: 

1. Materiality of the result: Is the deterioration substantial, durable, and significant? 

2. Nature of the cause: Is it an internal business risk or an external risk? 

3. Exceptions to carve-outs: Did the change disproportionately affect the target?

   
   

Overall, courts apply a high, seller-friendly threshold. They distinguish between strategic and financial investors (defaulting to the former), require long-term, sustained effects, and favor maintaining deal stability unless clear, substantial harm is proven.

Conclusion

In transactional practice, parties should incorporate fundamental factors significantly impacting investment decisions into the assessment of adverse changes when drafting contracts. These include the target company’s qualifications, assets, and debts. Parties should also clearly define the criteria for determining “materiality” for quantifiable aspects. Beyond these fundamentals, additional principled provisions should be included, granting the target company reasonable opportunities and time for remediation. 

When negotiating and drafting MAC clauses, counsel should also strive to clearly define the target company’s industry to prevent disputes. In litigation, counsel may follow the judicial reasoning of equitable courts in interpreting material adverse change clauses, focusing on establishing the materiality of adverse changes. When two legal systems’ remedies overlap or conflict, it is essential to precisely define the scope of each system’s application, clarify their boundaries, and determine the order of priority based on the specific facts of the case.

Jing Lu is currently pursuing an LL.M. at New York University School of Law, specializing in Corporations. She serves as a research project member at the Grunin Center for Law and Social Entrepreneurship and a graduate editor for the NYU Journal of Law and Business. Jing earned her LL.B. from Zhejiang University, graduating with a dual focus in law and finance. She is also pursuing a Master of Laws at Renmin University of China, specializing in Commercial Law. Before attending NYU, she gained extensive experience in corporate and finance law through internships at leading international and domestic law firms, including Baker McKenzie, where she interned on a team focusing on cross-border M&A.