Material Adverse Change (MAC)

A Material Adverse Change clause allows the buyer to withdraw if something seriously goes wrong at the target company between signing and closing. This refers to severe negative events that significantly reduce the value. The clause protects the buyer from unpleasant surprises shortly before closing. The real dispute lies in the definition, since a generally worded clause is barely enforceable in practice.

Two elements are therefore negotiated. First, the materiality threshold, often made concrete through measurable criteria such as a fall in revenue or EBITDA by a defined percentage over a defined period, because that can be argued without a court having to interpret an open-ended term. Second, the carve-outs, which exclude general market developments, sector trends, changes in law or accounting rules, war and catastrophe events, and consequences of the transaction itself. A carve-back regularly applies where the target is disproportionately affected by such developments.

Economically the clause therefore allocates interim risk: the buyer bears general market risk, the seller company-specific risk. In sellers' markets and in auctions the clause is often deleted entirely or narrowly limited, because sellers regard it as completion risk and prefer bidders without such reservations. Buyers should bear in mind that the clause bites only on substantial and lasting deterioration and is rarely invoked successfully in practice. It therefore works less as a right to withdraw than as a bargaining position for a price adjustment. The burden of proof also needs settling, since the buyer must establish that the conditions are met and can barely do so under generally worded clauses. For the seller a narrowly drafted clause underpinned by figures is therefore often a better solution than a blanket exclusion.

Note: This explanation is for general information only and does not constitute legal advice. The legal position depends on the individual case and may change with new legislation or case law. For a binding assessment, please consult a qualified lawyer.