Through reviewing nearly 300 M&A transaction agreements, we gleaned insight into how businesses are approaching material adverse change clauses (MACs).
Our analysis of MAC clauses in acquisition agreements shows a dealmaking climate highly sensitive to developments both in the United States and around the world. Here, we explore how dealmakers have woven some common threads into recent MAC language.
The MAC clause is used to delineate the circumstances under which a bidder would be permitted to exit a transaction without liability—and the language included in the deals we surveyed appears to create a broader scope of “materially adverse” events.
While targets typically strive to narrow the definitional elements and expand the exceptions in a MAC to shift risk to the bidder, bidders have been increasingly successful in shifting risk to the target by expanding MAC elements and reducing the number and scope of the exceptions allowed. The result? Bidders are enjoying a greater ability to walk away from the deal or to renegotiate the terms. In addition, some bidders have successfully invoked MAC provisions in order to re-price a deal.
Pro-bidder language dominates
One favored phrasing in a MAC arises when a party identifies a listed event that “would reasonably be expected to” result in a material adverse effect. This broadens the scope of events qualifying as materially adverse by allowing the bidder to account for effects on the target that are foreseeable but not yet revealed on an income statement or balance sheet. This clause incorporates a prospective element into the MAC clause formulation, creating a significant advantage for bidders.
The shift toward a more objective test in determining whether a change constitutes a MAC continued this year.
- 81% of the deals reviewed this year contained the pro-bidder “would reasonably be expected to” language in the MAC definition—an increase of 16% since our last survey, and a substantial increase of 52% from a decade ago.
We also saw an increase in the usage of pro-bidder “disproportionately affect” language in the MAC exceptions during the survey period. The pro-bidder “disproportionately affects” qualification ensures that exclusions favoring the target apply only when the target is facing challenges similar to its peers and its industry, not when it is an outlier in terms of its vulnerability to systemic threats.
- “Disproportionately affect” language appeared in 91% of the deals we reviewed in this survey—up from 83% in the deals contained in our last survey.
These trends demonstrate the universal acceptance of MAC clauses in M&A documents though the use of a MAC closing condition tends to vary slightly from year to year.
Expect the unexpected
Caution and an ever-present concern for unforeseeable changes seem to have inspired negotiators of nearly all sizable M&A transactions to include detailed MAC clauses. Very few deals we surveyed contain MAC language pertaining to general business risk such as labor issues or customer attrition. Instead, external conditions were paramount in the agreements we surveyed, and bidders increasingly carved out exceptions to protect themselves in the event that a target was impacted by unexpected events.
This approach reflects the heightened importance of carefully delineating material events that could threaten deal certainty.
Nixon Peabody has a pulse on the M&A landscape, and we help sophisticated companies and investors navigate the MAC trends created by a rapidly changing marketplace. Our team looks forward to connecting with you about how MACs can help your business strengthen new opportunities and close deals.