Material Adverse Change Definition Clause

Summary

This clause defines the term "material adverse change" also sometimes called "material adverse effect." This clause includes practical guidance and drafting notes. Click here to see recent examples of Material Adverse Change definitions in Market Standards--M&A, the searchable database of publicly filed M&A deals from Practical Guidance that enables users to search, compare, and analyze its comprehensive database of transactions using over 150 detailed deal points to filter search results. The term "Material Adverse Change" or "Material Adverse Effect" is often defined in M&A agreements to capture the concept of a change to the entity, business, or assets being sold. MAC definitions are customarily incorporated in acquisition agreements in two sections: the representations and warranties and the closing conditions. Representations and Warranties. In the representations and warranties section, the MAC may be used to qualify certain representations and warranties so that any inaccuracies that fall below the MAC threshold will not cause the representing party to be in breach. For example: There are no Actions pending, or, to the Knowledge of Seller, threatened, against Seller or any Subsidiary, which [pro-buyer:, individually or in the aggregate], [pro-buyer: have had or] would reasonably be expected to have a Material Adverse Effect. The MAC can also be used in a standalone representation, as an affirmative statement that there has been no occurrence of a MAC since a baseline date: Since the Balance Sheet Date (can be another date; buyers tend to prefer an earlier date and sellers tend to prefer a later date), there have been no Events that [buyer-favorable:, individually or in the aggregate,] [pro-buyer: have had or] would reasonably be expected to have a Material Adverse Effect. In most M&A transactions, the seller makes extensive representations and warranties about the business or assets to be acquired. Qualifying the seller's representations and warranties with a MAC definition or including a standalone MAC representation shifts the risk of immaterial inaccuracies to the buyer. In a stock-for-stock transaction, the buyer may give representations and warranties about its own business or assets (versus in a cash transaction, in which the buyer will give fewer representations and warranties focused primarily on its ability to consummate the transaction). In such a case, the buyer may also use the MAC definition to qualify its representations and warranties. Closing Conditions. In the closing conditions, the MAC definition is used to give the buyer the right not to close the transaction or, alternatively, renegotiate the terms of the acquisition if the seller experiences a MAC between an agreed-upon date (the baseline date) and the closing date. The MAC can be used in its own closing condition as follows: Since the date of this Agreement, no changes have occurred that [buyer-favorable:, individually or in the aggregate,] [buyer-favorable: has resulted or] would reasonably be expected to result in a Material Adverse Change. The MAC can also be used to qualify a "bring-down" condition. A bring-down condition requires a party's (usually the seller/target's) representations and warranties to be true and correct as of the closing date. By qualifying a bring-down condition with a MAC, the risk of immaterial inaccuracies in the seller's representations and warranties shifts from the seller to the buyer, since the buyer will still be obligated to close. For example: The representations and warranties of Seller contained in this Agreement (disregarding any Material Adverse Effect, materiality or similar qualifiers therein) shall be true and correct as of the Closing Date as though made on and as of such date (unless any such representation or warranty is made only as of a specific date, in which event such representation and warranty shall be true and correct as of such specified date), except to the extent that the failure of such representations and warranties [buyer-favorable:, individually or in the aggregate,] to be so true and correct [has not had, and] would not reasonably be expected to have[,] a Material Adverse Effect. The first parenthetical in the above example is known as a "materiality scrape." This prevents a representation or warranty that is already qualified by a MAC or other materiality standard from being qualified again through the bring-down condition (known as "double materiality"). For further discussion, see Bring-Down Condition (with Materiality Scrape). Note that, if the agreement contains a standalone MAC representation, such representation will be brought down if the agreement also has a bring-down condition. In such a case, including a standalone MAC closing condition would be redundant unless the standalone MAC representation is explicitly time-limited (e.g., from the benchmark date to the date of the agreement). A MAC closing condition or the combination of a MAC representation and bring-down closing condition will typically give the buyer the right to terminate the agreement due to the failure of a closing condition. For a full listing of key content covering sustainability finance and ESG, see Sustainable Finance and ESG Resource Kit." For further discussion of material adverse change definitions and how they are used in acquisition agreements, see: • Material Adverse Change Definitions • Representations and Warranties in Acquisition Agreements • Conditions to Closing in Acquisition Agreements Click here to see recent examples of Material Adverse Change definitions in Market Standards—M&A, the searchable database of publicly filed M&A deals from Practical Guidance that enables users to search, compare, and analyze its comprehensive database of transactions using up to 150 detailed deal points to filter search results.