Material Adverse Change Clauses: Your Exit from a Bad Deal
What Is a Material Adverse Change?
A material adverse change (MAC) — sometimes called a material adverse effect (MAE) — is a significant negative change in a company's business, financial condition, or operations. MAC clauses in contracts allow one party to back out of a deal or renegotiate terms if such a change occurs between signing and closing.
These clauses are most commonly found in mergers and acquisitions (M&A), loan agreements, and major commercial contracts.
How MAC Clauses Work
In a typical acquisition agreement, the buyer agrees to purchase the target company subject to certain conditions. One condition is that no material adverse change has occurred. If the target company's business deteriorates significantly before closing, the buyer can invoke the MAC clause to walk away or renegotiate.
What Qualifies as "Material"?
Courts have set a high bar. In the landmark case Akorn v. Fresenius Kabi (2018), the Delaware Court of Chancery held that a MAC must be:
- Substantial — Not just a temporary dip, but a significant impact on the company's long-term earning power.
- Durationally significant — The change must be expected to persist, not just a short-term fluctuation.
Minor revenue declines, seasonal variations, and short-term market disruptions typically do not qualify.
Common MAC Clause Exclusions
MAC clauses often exclude changes caused by:
- General economic or market conditions
- Industry-wide changes affecting all competitors equally
- Changes in law or accounting standards
- Natural disasters or pandemics
- Actions taken with the other party's consent
These exclusions are heavily negotiated because they determine how much risk each party bears.
Where You Might See MAC Clauses
- Merger and acquisition agreements
- Loan commitments and credit facilities
- Major supply or vendor contracts
- Investment agreements
When to Consult a Lawyer
MAC clauses involve complex legal analysis and are among the most litigated provisions in deal contracts. If you believe a material adverse change has occurred — or someone is claiming one against your business — consult an attorney immediately.
This article is for informational purposes only and does not constitute legal advice. Consult a licensed attorney for guidance specific to your situation.