A Material Adverse Change (MAC), also known as Material Adverse Event (MAE), clause enables a party to withdraw from a contract in circumstances where there is a material change after its signing. Such clauses are usually found in acquisition and financing agreements. In acquisition agreements, the MAC clause gives the buyer the option of withdrawing from the transaction whereas in financing agreements, it gives the lender the option of not disbursing the amount agreed to be advanced.
MAC clauses are essentially definitions that reflect the allocation of risks between contracting parties. The risks allocated to the seller or borrower (as appropriate) are covered by the MAC clause whereas all other risks are allocated to the buyer or lender, respectively. Generally, systemic and industry-wide risks are allocated to the buyer/ lender while risks that are specific to the business/ borrower are allocated to the seller/ borrower. The MAC clause is used in conjunction with other provisions of an agreement. For instance, in acquisition agreements, the absence of any MAC could be a condition precedent for closing or a representation/ warranty by the seller. Additionally, the occurrence of a MAC could also be a ground for termination by the buyer. Similarly, in financing agreements, the absence of any MAC could be a condition precedent to drawdown/ disbursement under a facility or a representation/ warranty by the borrower. At the same time, the occurrence of a MAC could also be an event of default entitling the lender to accelerate/ recall the loan.
Continue Reading Invoking Material Adverse Change based on Covid-19: Easier said than done