Material adverse change clause

A material adverse change (MAC) clause — also called a material adverse effect (MAE) clause — is a provision that lets a buyer refuse to close (or, in some deals, terminate) if, between signing and closing, the target suffers a major adverse change in its business, results or condition. It allocates the risk of the target's value deteriorating during the gap between the two dates, and it is one of the most heavily negotiated — and litigated — provisions in any merger agreement.

Why it exists

Many deals sign and close on different dates, with weeks or months in between for consents, financing and regulatory clearance. The buyer has agreed a price based on the company as it was at signing. The MAC clause answers: what if the business falls apart before closing? It gives the buyer an exit for a sufficiently severe deterioration — while protecting the seller from a buyer using ordinary bumps as a pretext to escape a deal it has come to regret (often because the buyer's circumstances or the market changed).

A deliberately high bar — and the carve-outs

Courts, particularly in Delaware, set the threshold for a MAC extraordinarily high. The change must be material and "durationally significant" — measured in years, not quarters — not merely a short-term or cyclical dip. On top of that, MAC definitions contain extensive carve-outs that allocate systemic risk to the buyer: changes are typically excluded if they arise from

• general economic, financial-market or political conditions;
• industry-wide developments;
• changes in law or accounting standards;
• the announcement of the deal itself; or
• pandemics, natural disasters and acts of war (carve-outs that became central in 2020).

These exclusions usually apply only to the extent the target is not disproportionately affected relative to its industry peers — the residual sliver of company-specific, durable harm is what a MAC actually captures.

Rarely successfully invoked

For decades, no Delaware court found that a MAC had occurred — buyers routinely asserted a MAC as leverage to renegotiate price, but almost never won on it. That changed with Akorn, Inc. v. Fresenius Kabi (2018), the first Delaware decision to uphold a buyer's termination for a MAC, where the target's performance collapsed and it had serious, concealed regulatory (data-integrity) failures. Even so, Akorn is the exception that proves the rule: MAC clauses are easy to write, very hard to invoke. (Earlier landmarks like IBP v. Tyson and Hexion v. Huntsman had set the demanding standard.)

Practical role

Because winning a MAC fight is so difficult, the clause's real-world function is often leverage: a buyer experiencing remorse may threaten a MAC to re-trade the price, while the seller — knowing courts rarely uphold MACs — resists. Related provisions matter alongside it: the "bring-down" of representations (reps must remain true at closing, often qualified by materiality/MAC), and the ordinary-course covenant (the seller must run the business normally between signing and closing). A buyer that genuinely wants out usually has better luck arguing a breach of the ordinary-course covenant than proving a freestanding MAC.