Material adverse change
Encyclopedia
A material adverse change (also called a MAC) - also formulated as a Material adverse event or Material adverse effect (either, a MAE) - contingency is a legal provision often found in mergers and acquisitions
contracts and venture financing
agreements that enables the acquirer (or funder) to refuse to complete the acquisition or merger or financing with the party being acquired (often termed, the "target") if the target suffers such a change.
The rationale for such a clause is a means to protect the acquirer from major changes that make the target less attractive as a purchase. Large transactions often require a long period of time between actual agreement and the completion of the transaction (the "closing"). This time is used to obtain governmental or regulatory approvals (e.g., in the United States
, Hart-Scott-Rodino Antitrust Improvements Act
approval), to obtain shareholder or labor consents, and any other required third-party consents. During this period, the target continues to function pending the completion of the merger, and is subject to the normal risks of its business, the economy or acts beyond its control.
Each merger agreement that contains such a clause has a different definition of what, in its particular context, constitutes a material adverse change. Often this is one of the few or some times, the only way that an acquiring party can refuse to complete a contemplated acquisition. When the acquiring party cites the occurrence of a material adverse change to refuse to complete a merger or acquisition, litigation may ensue. One notable occurrence is the planned acquisition of SLM Corporation
(formerly known as Sallie Mae) by a group including Bank of America
and JPMorgan Chase. In the United States, much of this litigation occurs in the Delaware Court of Chancery
as many large American companies are organized under Delaware law. According to the precedent
s of that court, an acquirer seeking to avoid completion of a transaction based upon a MAC provision bears the burden of proving that a material adverse change as defined by the parties' agreement has in fact occurred.
It is also used in “Gas Sale and Purchase Agreements” and “LNG Sale and Purchase Agreements” and usually the party
suffering from the effects of Material Adverse Change can apply for contract price revision.
Mergers and acquisitions
Mergers and acquisitions refers to the aspect of corporate strategy, corporate finance and management dealing with the buying, selling, dividing and combining of different companies and similar entities that can help an enterprise grow rapidly in its sector or location of origin, or a new field or...
contracts and venture financing
Venture capital
Venture capital is financial capital provided to early-stage, high-potential, high risk, growth startup companies. The venture capital fund makes money by owning equity in the companies it invests in, which usually have a novel technology or business model in high technology industries, such as...
agreements that enables the acquirer (or funder) to refuse to complete the acquisition or merger or financing with the party being acquired (often termed, the "target") if the target suffers such a change.
The rationale for such a clause is a means to protect the acquirer from major changes that make the target less attractive as a purchase. Large transactions often require a long period of time between actual agreement and the completion of the transaction (the "closing"). This time is used to obtain governmental or regulatory approvals (e.g., in the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
, Hart-Scott-Rodino Antitrust Improvements Act
Hart-Scott-Rodino Antitrust Improvements Act
The Hart–Scott–Rodino Antitrust Improvements Act of 1976 is a set of amendments to the antitrust laws of the United States, principally the Clayton Antitrust Act. The HSR Act was signed into law by President Gerald R. Ford on September 30, 1976...
approval), to obtain shareholder or labor consents, and any other required third-party consents. During this period, the target continues to function pending the completion of the merger, and is subject to the normal risks of its business, the economy or acts beyond its control.
Each merger agreement that contains such a clause has a different definition of what, in its particular context, constitutes a material adverse change. Often this is one of the few or some times, the only way that an acquiring party can refuse to complete a contemplated acquisition. When the acquiring party cites the occurrence of a material adverse change to refuse to complete a merger or acquisition, litigation may ensue. One notable occurrence is the planned acquisition of SLM Corporation
SLM Corporation
SLM Corporation is a publicly traded U.S. corporation whose operations are originating, servicing and collecting on student loans.Managing more than $180.4 billion in debt for more than 10 million borrowers, the company primarily provided federally guaranteed student loans originated under the...
(formerly known as Sallie Mae) by a group including Bank of America
Bank of America
Bank of America Corporation, an American multinational banking and financial services corporation, is the second largest bank holding company in the United States by assets, and the fourth largest bank in the U.S. by market capitalization. The bank is headquartered in Charlotte, North Carolina...
and JPMorgan Chase. In the United States, much of this litigation occurs in the Delaware Court of Chancery
Delaware Court of Chancery
The Delaware Court of Chancery is a court of equity in the American state of Delaware. It is one of Delaware's three constitutional courts, along with the Supreme Court and Superior Court.-Jurisdiction:...
as many large American companies are organized under Delaware law. According to the precedent
Precedent
In common law legal systems, a precedent or authority is a principle or rule established in a legal case that a court or other judicial body may apply when deciding subsequent cases with similar issues or facts...
s of that court, an acquirer seeking to avoid completion of a transaction based upon a MAC provision bears the burden of proving that a material adverse change as defined by the parties' agreement has in fact occurred.
It is also used in “Gas Sale and Purchase Agreements” and “LNG Sale and Purchase Agreements” and usually the party
Party (law)
A party is a person or group of persons that compose a single entity which can be identified as one for the purposes of the law. Parties include: plaintiff , defendant , petitioner , respondent , cross-complainant A party is a person or group of persons that compose a single entity which can be...
suffering from the effects of Material Adverse Change can apply for contract price revision.
External links
- 2011 Annual MAC Survey from Nixon Peabody
- Several examples of MAC clauses
- Accredited Home Lenders v. Lone Star Funds: A MAC Case Study
- Drafting Material Adverse Change Clauses from McDermott Will & EmeryMcDermott Will & EmeryMcDermott Will & Emery LLP, also known by its initials, MWE, was founded in 1934 and is an international law firm headquartered in Chicago. It is one of the top 10 largest law firms in the United States and one of the 20 largest in the world...