In any signed but not-yet-closed M&A transaction, there is a gap between signing and closing — days, weeks, or months — during which unexpected events can materially affect the target company's value. The material adverse change (MAC) clause — also called the material adverse effect (MAE) clause — is the mechanism that allocates risk during this period. Few provisions in a purchase agreement attract more negotiation, more drafting precision, or more post-signing litigation than this one.

What a MAC Clause Does

A MAC clause typically appears in two places in an acquisition agreement: as a condition to closing (the buyer may walk away if a MAC has occurred since signing) and as a qualifier to representations and warranties (many reps speak as of a date, subject to "no MAC has occurred"). If the target has suffered a MAC between signing and closing, the buyer generally has the right to terminate the agreement and not close — without being in breach.

MAC clauses are one of the most litigated provisions in corporate law. The high-profile disputes during COVID-19 and before — Akorn v. Fresenius Kabi, AB Stable VIII v. MAPS Hotels, and others — have produced a relatively clear body of Delaware case law on what constitutes a MAC and what does not. Understanding that case law is essential for anyone negotiating a MAC provision.

The Standard Definition and Its Components

A MAC definition typically includes three components:

  • The general clause: Any event, change, development, or occurrence that has or would reasonably be expected to have a material adverse effect on the business, assets, liabilities, financial condition, or results of operations of the target.
  • Carve-outs: Specific categories of events that expressly do not constitute a MAC, regardless of their effect on the target. These carve-outs define the real scope of the MAC risk allocation.
  • The disproportionate effect exception: A provision that restores MAC treatment for events that technically fall within a carve-out but hit the target company disproportionately relative to industry peers. This exception is heavily negotiated and, when absent, can have significant consequences.

The general clause is broad; the carve-outs define how much risk the seller actually retains. Sellers push for broad carve-outs. Buyers push for narrow ones — and for robust disproportionate effect exceptions on systemic risk categories.

Standard Carve-Outs — What the Market Excludes from MAC

Market-standard MAC definitions exclude the following categories of events from constituting a MAC:

  • Changes in general economic conditions — a recession, interest rate movements, or broad market decline that affects all companies.
  • Changes in the target's industry generally — a sector-wide downturn, not specific to the target.
  • Changes in law or regulation — including new legislation affecting the industry. Note: the application of existing law specifically to the target may still qualify as a MAC.
  • Changes in GAAP or accounting standards — restatements or reclassifications required by accounting rule changes.
  • Acts of war, terrorism, natural disasters, pandemics, and similar force majeure events — systemic risks outside the target's control.
  • Changes in the target's stock price (if public) — though the underlying cause of the price change may itself be a MAC.
  • Failure to meet financial projections or forecasts — but, again, the underlying cause of the shortfall may still be a MAC.
  • Changes resulting from the announcement of the deal itself — including customer or employee departures attributable to deal uncertainty.
  • Actions taken by the target with the buyer's written consent — operational decisions the buyer approved during the interim period.

The disproportionate effect exception is critical in practice. A seller who carves out pandemics must negotiate carefully: if the pandemic carve-out does not include a disproportionate effect exception, a pandemic that devastates the target's revenue while sparing competitors does not constitute a MAC. Delaware courts have enforced broad pandemic carve-outs even when the pandemic hit the target far harder than its industry peers — unless the agreement specifically included a disproportionate effect exception restoring MAC treatment in that scenario.

What Delaware Courts Have Required to Find a MAC

Delaware courts have consistently held that a MAC requires more than a short-term or temporary downturn. The leading case — IBP, Inc. v. Tyson Foods, Inc. (2001) — established that a MAC must represent a substantial threat to the overall earnings potential of the target in a durationally significant way. A bad quarter does not constitute a MAC; a sustained, fundamental deterioration in business prospects may.

Akorn, Inc. v. Fresenius Kabi AG (2018) is one of the rare cases in which a Delaware court found that a MAC had occurred. The court noted that a 21% revenue decline, combined with the discovery of pervasive regulatory compliance failures, was sufficient. But courts emphasize that proving a MAC is a high burden for buyers — deal certainty is a fundamental value in Delaware corporate law, and courts are reluctant to allow buyers to escape signed deals based on events that were foreseeable at signing or that fall within negotiated carve-outs.

AB Stable VIII LLC v. MAPS Hotels and Resorts One LLC (2020) — decided during the COVID-19 pandemic — held that COVID-19 did not constitute a MAC because it fell within the pandemic and general economic conditions carve-outs, and no disproportionate effect exception had been negotiated. This decision confirmed that sellers can effectively exclude systemic risks from MAC coverage through careful drafting, and that buyers who fail to negotiate disproportionate effect exceptions on those carve-outs will not find relief in Delaware courts.

Negotiating Points for Buyers and Sellers

Buyers should: push for a narrow general MAC definition, limit carve-outs (particularly for force majeure and pandemics) by insisting on disproportionate effect exceptions, consider specifying quantitative thresholds in the MAC definition (e.g., a 15% decline in EBITDA for two consecutive quarters constitutes a MAC), and include specific representations about the absence of known undisclosed liabilities that could independently trigger a breach.

Sellers should: push for broad carve-outs covering general economic, industry-wide, regulatory, and force majeure risks, resist disproportionate effect exceptions on systemic risk categories, insist on a specific carve-out for changes resulting from the deal announcement itself, and resist bright-line quantitative thresholds that create automatic MAC triggers if performance dips temporarily below a specified level.

For cross-border transactions involving targets in Latin America — where political instability, currency devaluation, and regulatory change risk are elevated — the MAC negotiation typically includes additional carve-outs for country-specific risks. Sellers of LATAM assets should pay particular attention to how local economic or political events are categorized, and whether the buyer has retained rights to walk based on developments that are endemic to operating in those markets.