MAC clauses in M&A transactions

The problem: who bears the risk between signing and closing

In M&A transactions, signing the agreement and transferring the shares rarely happen at the same time. Weeks or months may pass between signing and closing: the time needed to obtain merger control clearance, golden power approval, or the consent of lending banks or contractual counterparties.

During that period the price is fixed, but the company keeps trading. It may lose a key customer, suffer an industrial accident or be hit by a sector-wide crisis. The question is simple: if the business the buyer has agreed to purchase changes radically, is the buyer still obliged to close?

The MAC clause (material adverse change, or MAE, material adverse effect) is the contractual answer to that question. Its few lines decide who bears the risk of the unforeseen, which is why they are among the most heavily negotiated in the whole agreement.

What it is and where it sits in the agreement

The MAC clause has no single form. In sale and purchase agreements it usually appears in three places:

• as a condition to closing: the buyer's obligation to complete is conditional on no MAC event occurring between signing and closing;
• as a representation and warranty: the seller states that no material adverse change has occurred since the date of the last accounts, and repeats the statement at closing (bring-down);
• as a materiality qualifier: many warranties are breached only if the inaccuracy has a MAC effect, in which case the definition works as a threshold.

Italian law has no statutory definition of MAC. The clause is an exercise of freedom of contract (art. 1322 of the Italian Civil Code) and operates as a contractual allocation of risk. It sits alongside statutory remedies such as termination for supervening excessive onerousness (art. 1467 of the Civil Code), which, however, require stricter conditions and an extraordinary and unforeseeable event.

There is one point specific to Italian law. If the MAC is drafted as a condition precedent, it cannot depend on the mere discretion of the buyer, who is the party obliged to pay: a purely potestative condition renders the commitment void (art. 1355 of the Civil Code). Wording such as "in the buyer's sole and absolute discretion" should therefore be avoided in favour of objective, verifiable parameters.

Anatomy of the definition

A well-drafted MAC definition has three elements: the subject matter, the threshold and the exceptions. Each one shifts risk from one party to the other.

The subject matter. The clause usually refers to the company's business, assets and financial condition, and results. Whether to include "prospects" is much debated: it broadens the buyer's protection, but introduces an uncertain parameter that is hard to prove. The tense also matters. An event that "has had" an adverse effect is different from one that "would reasonably be expected to have" such an effect: the second formula looks forward, and therefore favours the buyer.

The threshold. The adjective "material", on its own, leaves the decision to the court. To reduce uncertainty, the parties can anchor the threshold to quantitative parameters, such as a fall in EBITDA or revenue beyond a certain percentage, measured over a defined period. Without parameters, courts tend to require a significant and durable deterioration, not a temporary dip.

The exceptions (carve-outs). These are events that, even if adverse, do not count as a MAC. The most common cover:

• general economic and financial market conditions;
• conditions in the industry in which the company operates;
• war, acts of terrorism, natural disasters, epidemics and pandemics;
• changes in law or in accounting standards;
• the announcement of the transaction and actions taken at the buyer's request or in performance of the agreement.

The exceptions are often qualified by a carve-back: the general event counts again if it affects the company disproportionately compared with its competitors in the same industry. This is one of the points where the choice of words most affects the outcome of any dispute.

What the courts teach

The richest case law comes from Delaware, whose law governs most US corporate transactions, and it is a point of reference for anyone negotiating agreements of Anglo-American style in Italy too.

• A very high threshold. As early as IBP v. Tyson Foods (2001) the Court of Chancery made clear that the event must significantly affect earnings over a long period, measured in years rather than months. In Hexion v. Huntsman (2008) the buyer failed to prove a MAC and could not avoid closing.
• The first recognised case. Only in 2018, in Akorn v. Fresenius, did a Delaware court allow a buyer to walk away on MAC grounds, in the face of a sudden and lasting collapse in the company's results and serious regulatory irregularities.
• The pandemic. In AB Stable v. MAPS Hotels (2020) the court held that the effects of Covid-19 fell within the carve-out for calamities and therefore did not amount to a MAC. The buyer was nonetheless able to walk away by another route: the seller had breached its obligation to run the business in the ordinary course. In England, in Travelport v. WEX (2020), the High Court applied the pandemic carve-out and rejected the disproportionate-effect argument.

In Italy there is no settled line of authority on MAC clauses. An Italian court would construe them under the general rules on contractual interpretation (art. 1362 et seq. of the Civil Code) and the principle of good faith (art. 1366 of the Civil Code), placing the burden of proof on the party invoking the event (art. 2697 of the Civil Code). The lesson from across the Atlantic still holds: a generic clause is unlikely to release the buyer, and the outcome turns on the wording of the definition.

Drafting a clause that works

An effective MAC comes from a few precise choices, made during the negotiation and not left to later interpretation.

1. Quantify where possible. A threshold tied to a financial metric, measured over a defined period and under specified accounting principles, narrows the scope for dispute.
2. Tailor the exceptions to the deal. A standard list does not fit every company. For a business exposed to a commodity, a key customer or a public concession, it is worth stating expressly whether that risk is included or excluded.
3. Coordinate the MAC with the interim conduct covenants. AB Stable shows that the seller's undertakings to run the business in the ordinary course can protect the buyer as much as the MAC, or even more. The two clauses should be drafted together.
4. Link the MAC to the pricing mechanism. With a locked box, economic risk passes to the buyer from the reference date, and the MAC remains the only way out. With a closing adjustment (completion accounts), part of the deterioration is already reflected in the price.
5. Define the remedies. Besides the right not to complete, alternatives can be provided: a renegotiation of the price within set deadlines, an automatic reduction beyond a certain threshold, a termination fee (break fee).

The clause should also be coordinated with any W&I policy. Insurance cover usually excludes matters known between signing and closing, so the interim risk remains governed by the agreement.

Buyer and seller compared

Each element of the definition has a buyer-friendly and a seller-friendly version. The final agreement almost always lands somewhere in between, depending on the parties' bargaining power and the expected length of the interim period.

Precise wording is the real safeguard. A tailor-made MAC clause reduces the risk of litigation and gives both parties a shared test for deciding, at the most delicate moment of the deal, whether closing must take place.