Material Adverse Change Clauses

What a MAC clause does

A MAC clause appears in two forms in an M&A agreement:

• As a condition precedent.The buyer's obligation to complete is conditional on the absence of any MAC between signing and closing.
• As a representation and warranty. The seller warrants at signing, and bring-down at closing, that no MAC has occurred.

Either way, if a MAC occurs, the buyer can refuse to close, walk away without damages, or use the threat of walking away to renegotiate price or terms.

What counts as “material adverse change”

The definition is the heart of the clause. A well-drafted MAC clause defines an adverse change in the business, assets, liabilities, results of operations, condition (financial or otherwise), or prospects of the target. It then qualifies that with materiality, and excludes events that are not specific to the target.

Typical carve-outs

• General economic, financial market, or political conditions;
• Changes affecting the industry generally;
• Changes in law, regulation, or accounting standards;
• Acts of war or terrorism, pandemics, or natural disasters (this carve-out became standard post-COVID);
• Actions taken with the buyer's consent or as required by the M&A agreement.

Carve-outs are typically subject to a “disproportionate impact” qualifier, if a generally-applicable event hits the target much harder than its peers, it may still qualify as a MAC.

How Malaysian courts approach MAC

There is limited reported Malaysian appellate authority directly interpreting a MAC clause in an M&A context. The position is inferred from general principles of contract interpretation, under which Malaysian courts apply the English literal-and-contextual approach to commercial agreements.

Persuasive guidance comes from Commonwealth jurisdictions, notably:

• Akorn Inc v Fresenius Kabi AG (Delaware, 2018), the buyer successfully invoked MAC after a regulatory deterioration at the target; the decision sets a high evidentiary bar.
• Travelport Ltd v WEX Inc [2020] EWHC 2670 (Comm): English court considered the operation of a MAC clause in a COVID-19 context.

Malaysian courts would likely follow this line and require the buyer to demonstrate, with evidence, that the contractual definition has been satisfied. The threshold is intentionally high.

Drafting points that decide whether the clause works

• “Prospects” is doing heavy lifting.Including “prospects” in the definition gives the buyer more latitude; sellers often resist it because it captures forward-looking deterioration that may not have crystallised.
• Quantitative thresholds.Some clauses tie “material” to a numerical threshold (e.g. 10% reduction in EBITDA for two consecutive quarters). Easier to enforce, but cuts both ways.
• Carve-out scope. The narrower the carve-outs, the more useful the MAC to the buyer. Sellers push for broad carve-outs covering anything not specifically about the target.
• Time horizon.The carve-out for “general economic conditions” is more credible if the gap between signing and closing is short. Long gaps invite genuine MAC events.
• Bring-down certificate. A signed certificate from the seller at closing confirming no MAC has occurred is the operational mechanism that makes the clause bite.

Where MAC clauses fit in the deal

MAC clauses are not a substitute for due diligence; they cover the gap between signing and closing, not pre-existing risks the buyer should have found in DD. They are also not a substitute for warranties, warranties cover the period before signing; MAC covers the period between signing and closing. The two operate in tandem.

If you are drafting or negotiating a MAC clause in an SPA or investment agreement, please contact us. The carve-outs and quantitative thresholds chosen now decide who carries the risk if the world changes between signing and completion.