COVID-19 and Material Adverse Change (MAC) Clauses in M&A Deals
What is a MAC Clause?
A ‘material adverse change’ clause (a ‘MAC’ clause or sometimes called a ‘material adverse effect’ or ‘MAE’ clause) is a risk allocation provision which commonly appears in merger, stock or asset purchase agreements as part of an M&A transaction. The two primary functions of a MAC clause are to (1) provide the buyer with a costless cancellation right if during the period that occurs after the definitive acquisition agreement has been signed but before closing there is a material adverse event that negatively impacts the target company, or its business or value, and (2) qualify some or all of the seller’s representations and warranties (‘reps’) made in the definitive agreement.
What Does a Typical MAC Clause State and How Does it Work?
The typical MAC clause is defined as any development, event, change, condition or state of facts which has had, or would reasonably be expected to have, a material adverse change (or effect) on the business, assets, financial condition or results of operations of the subject party. However, and for the benefit of the seller, most MAC clauses will also specifically exclude effects related to things like (1) general economic, financial, credit or other broad industry or market conditions at large, and (2) political conditions, acts of war or terrorism, natural disasters or acts of God.
In a deal cancellation context, if an event included in the definition of the MAC clause occurred between signing and closing, the buyer has the legal right to terminate the consummation of the transaction without liability to the seller (note that usually even the most well-drafted MAC rep will be highly contested and subject to dispute by the parties as to whether the event constitutes a MAC occurrence or carve-out like “general economic conditions”, etc.).
In a seller representation and warranty context, a MAC event can impose liability on the seller if there is a breach of a seller’s rep around a MAC event. For example, if a seller with unionized employees made a “No MAC” rep, closed the transaction, and after the closing a labor strike occurred based on facts or events in motion pre-closing, the seller would have likely breached the rep (this assumes such an event was not carved out from the MAC definition as a specific exclusion for which the buyer could not claim a breach). Although the deal has closed in this example and therefore cannot be terminated, the seller would have breached the MAC rep, giving rise to a viable indemnification claim by the buyer. This is one of many examples of how a MAC rep might come into play depending on the business or industry of the specific seller.
The Likely Impact on Material Adverse Change (MAC) Clauses Due to COVID-19
Historically, most MAC clauses have not included ‘diseases’ or ‘pandemics’ as specific carveouts from the type of negative events for which buyers can otherwise recover from sellers. However, this is likely to change forever due to the COVID-19 pandemic, just as terrorism carveouts became common following the events of September 11, 2001.
A seller will want to carve out the effects of COVID-19 (or any disease or pandemic) as part of the risk allocation process of an M&A transaction. Buyers will also need to think through and address their own protections as part of MAC clause in the COVID-19 deal world.
The practical effects and considerations of MAC clauses in M&A deals have become even more important and top-of-mind ‘overnight’, if you will, and may be permanent long after the COVID-19 pandemic has subsided. The attorneys at Linden Law Partners are specialists on every legal aspect of M&A transactions and positioned to help clients successfully navigate the post COVID-19 deal landscape. Contact us here for help.