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Material adverse change (MAC) clause
Practical Law ANZ Glossary w-004-1900 (Approx. 3 pages)
Glossary
Material adverse change (MAC) clause
In the context of the acquisition of a target company or business, a clause that aims to give the buyer the right to walk away from the acquisition before completion, if events occur that are detrimental to the target company. MAC clauses are a common feature of public and private acquisition documents.
In debt financing transactions, a term of art used as a threshold to measure the effect of some event. The language may vary slightly, but a typical definition that may be used in a loan facility with multiple obligors is:
"a material adverse change in the business, assets, properties, liabilities (actual or contingent), operations, condition (financial or otherwise) or prospects, of the Borrower, individually, or the Obligors taken as a whole."
The concept of material adverse change commonly appears in:
- Commitment letters (as a condition precedent to funding).
- The representations and warranties clause in a facility agreement, where the borrower often represents that there has been no material adverse change in its business, operations, assets, prospects or condition (financial or otherwise) since a specified date. The defined term "Material Adverse Change" is not generally used in this context because the representation itself usually refers to factors specific to the borrower.
The occurrence of a "Material Adverse Change" (as defined) may also constitute an event of default under some facility agreements, although it is uncommon for a lender to use a material adverse change as the sole reason to trigger a drawstop and accelerate repayment of the loan.
Often used interchangeably with the term "material adverse effect", although the definition of material adverse effect (MAE) will often be used when qualifying representations and warranties, covenants and other terms of the finance documents since it is more extensive.
The form and content of MAC clauses vary depending on the nature of the transaction and the practice in any relevant jurisdiction.
For information on the use of MAC clauses in finance documents, including consideration of whether COVID-19 will trigger MAC clauses in facility agreements, see Practice note, MAC clauses in financing transactions.