Material Change in Material Adverse Change Clauses: The Case for Greater Precision in Contract Drafting to Achieve a More Equitable Balance of Risk Between Merging Parties

Paul Hirschhorn

ABSTRACT

Material adverse change (or material adverse effect) (hereinafter “MAC”) clauses are important provisions in merger and acquisition contracts that allow a buyer to exit a merger deal when certain conditions are met. The purpose of the MAC clause is to allocate risks between the buyer and seller in case some event materially alters the selling company, and consequently, the deal. Over the course of the last 23 years, a number of large cases have been heard in the Delaware Chancery where an acquiror attempts to exercise the termination right of the MAC clause. Thus far, only one decision has allowed for the termination of the merger agreement. The consistent seller-friendly decisions in Delaware Chancery MAC jurisprudence demonstrates the asymmetry in risk allocation between parties and leads to questions regarding the efficacy of MAC clauses in protecting an acquiring party. This paper will suggest alterations to MAC drafting practices that could result in a more equitable balance of risk for both parties and will allow for the exercise of the termination right when proper.

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