Material adverse change
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A material adverse change (also called a MAC) - also formulated as a Material adverse event or Material adverse effect (either, a MAE) - contingency is a legal provision often found in mergers and acquisitions contracts and venture financing agreements that enables the acquirer (or funder) to refuse to complete the acquisition or merger or financing with the party being acquired (often termed, the "target") if the target suffers such a change.[1]
The rationale for such a clause is a means to protect the acquirer from major changes that make the target less attractive as a purchase. Large transactions often require a long period of time between actual agreement and the completion of the transaction (the "closing"). This time is used to obtain governmental or regulatory approvals (e.g., in the United States, Hart-Scott-Rodino Antitrust Improvements Act approval), to obtain shareholder or labor consents, and any other required third-party consents. During this period, the target continues to function pending the completion of the merger, and is subject to the normal risks of its business, the economy or acts beyond its control.
Each merger agreement that contains such a clause has a different definition of what, in its particular context, constitutes a material adverse change. Often this is one of the few or some times, the only way that an acquiring party can refuse to complete a contemplated acquisition. When the acquiring party cites the occurrence of a material adverse change to refuse to complete a merger or acquisition, litigation may ensue. One notable occurrence is the planned acquisition of SLM Corporation (formerly known as Sallie Mae) by a group including Bank of America and JPMorgan Chase.[2] In the United States, much of this litigation occurs in the Delaware Court of Chancery as many large American companies are organized under Delaware law. According to the precedents of that court, an acquirer seeking to avoid completion of a transaction based upon a MAC provision bears the burden of proving that a material adverse change as defined by the parties' agreement has in fact occurred.[3]
