Material Adverse Change Clause

Quick Facts

Also called: MAC clause, Material Adverse Effect (MAE)

Purpose: Allows buyer to walk away if target's business deteriorates significantly

Key case: IBP v. Tyson Foods (2001)

Success rate: Courts rarely let buyers invoke MAC clauses

A Material Adverse Change (MAC) clause is a provision in M&A agreements that allows the buyer to terminate the deal if the target company experiences a significant negative change between signing and closing. It's intended as a "backstop" for truly catastrophic, unexpected events.

In Plain English

A MAC clause is the buyer's emergency exit. If something terrible happens to the target between handshake and closing—the business implodes, a major lawsuit hits, key customers flee—the buyer can walk away without paying the break-up fee. But courts interpret MAC clauses very narrowly, so buyers rarely succeed in invoking them.

How MAC Clauses Work

Signing: Buyer and seller sign merger agreement with MAC clause
Interim period: Weeks or months pass before closing
Something bad happens: Target's business deteriorates
Buyer invokes MAC: Claims right to terminate the deal
Dispute: Seller typically sues to force closing
Court decides: Was it really a "material adverse change"?

What Qualifies as a MAC?

Courts apply a very high standard:

Must Be:

Material: Significantly affects the target's value or earnings power
Long-term: Impact measured in years, not months
Unexpected: Not a known risk at signing
Company-specific: Not affecting the entire industry

Typically NOT a MAC:

Industry-wide downturns
General economic conditions
Stock market declines
Seasonal fluctuations
Changes in law affecting many companies
Known risks disclosed before signing

The IBP v. Tyson Foods Case (2001)

The landmark MAC case involved Tyson Foods attempting to exit its $3.2 billion acquisition of IBP (beef processor):

What happened:

After signing, IBP disclosed accounting issues at a subsidiary
IBP's earnings declined significantly
Tyson claimed material adverse change and refused to close

Court's ruling:

Tyson knew the beef industry was cyclical and entering a "trough"
Tyson had extensive information about IBP's challenges before signing
The decline was expected to be short-term
Tyson was forced to complete the acquisition

Vice Chancellor Strine's opinion established that MAC clauses aren't escape hatches for "buyer's remorse."

MAC Clause Carve-Outs

Modern MAC clauses include extensive carve-outs—events that explicitly do NOT count as a MAC:

Common Carve-Out	Rationale
Changes in general economic conditions	Not company-specific
Industry-wide changes	Affects all competitors equally
Changes in accounting rules	External requirement
Changes in law	Beyond company's control
War or terrorism	Extraordinary external events
Failure to meet projections	Results vs. projections are different
Pandemic/epidemic	Often explicitly excluded post-COVID
Actions required by the merger agreement	Buyer-approved actions

Exceptions to Carve-Outs

Some carve-outs have exceptions—events that don't count as MAC unless they disproportionately affect the target:

"Changes in general economic conditions shall not constitute a MAC except to the extent such changes disproportionately affect the Company relative to other participants in the industry."

This creates complex interpretive battles.

COVID-19 and MAC Clauses

The pandemic tested MAC clauses like never before:

Pre-COVID deals: Most MAC clauses didn't explicitly exclude pandemics
Disputes erupted: Multiple buyers tried to invoke MAC
Courts generally sided with sellers: Pandemic affected everyone, not just targets
Post-COVID: Pandemic carve-outs are now standard

Negotiating MAC Clauses

Sellers Want:

Broad carve-outs
"Disproportionate impact" exceptions narrowly defined
Short look-back period for measuring changes
High materiality threshold

Buyers Want:

Narrow carve-outs
Broad "disproportionate impact" language
Forward-looking assessment period
Lower materiality threshold

Why Buyers Rarely Win MAC Claims

Courts are reluctant to let buyers escape deals because:

Sophisticated parties: Both sides had lawyers; risks were allocated
Specific protections exist: Reps, warranties, indemnities address known risks
Buyer's remorse isn't grounds: Overpaying isn't the seller's problem
Deal certainty matters: M&A markets depend on enforceable contracts
High burden: Buyer must prove substantial, durationally significant impact

Practical Takeaways

For sellers: MAC clauses are heavily negotiated but rarely successfully invoked. Focus on broad carve-outs and clear language. If a buyer threatens MAC termination, expect to litigate—and expect to win.

For buyers: Don't rely on MAC clauses for protection—they're backstops, not escape hatches. Conduct thorough due diligence and negotiate specific representations and warranties for known risks. If you truly need to exit, expect a legal fight.

Break-Up Fee — What buyers pay if they walk (without valid MAC)
Tender Offer — Another path to acquisition
Earnout — Alternative way to bridge valuation gaps