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Vol. 2009-07 | July, 2009

“MAC” – Matrerial Adverse Changes Clause

In acquisitions and in construction contract financing, MAC clauses are commonly used to provide a means of allocating risks occasioned by adverse or negative business or economic conditions that occur between the agreement and closing.

In merger agreements, the MAC clause provides both parties certain remedies, or the right to fully cancel the merger, in the event that stated, specific negative events occur. These negative events may include a sudden or sharp decline in sales or a regulatory change or economic problem that would seriously impair the ability of the merged company to function.

NOTICE is essential. Since the exact wording of each MAC clause varies from transaction to transaction, it may also be the subject of much scrutiny and negotiation. Once included however, a MAC is generally not a basis for immediate termination of a contract, unless expressly provided. Then, only where the affected party has failed to provide adequate performance assurance, after receiving a written notice and sufficient opportunity to preserve the integrity of a transaction does a MAC become a terminating event that entitles the unaffected party to terminate the contract.

Lenders will generally also be entitled to exercise remedies relating to project accounts or other collateral security if an event of default or MAC arises during the project. Given the expected downturn in business activity and tightening of credit markets, the trend in contract terms generally and MAC clauses specifically, may be starting to shift in favor of buyers as they seek more flexibility in terminating transactions. Mac clauses which are vague may exclude intended or other, unanticipated conditions, and while counsel may advise clients to make their MAC clauses less vague, this too has dangers, in that if a clause is too specific, factors that are not cited explicitly may be assumed by the courts to be excluded.

The clause has usually been a “compromise of uncertainty, with both sides taking a risk” on the assumption that the courts will uphold the clause only if there is a big and prolonged change in the nature of the business. Even in the recent headlined cases, courts and regulators, it is said, have shown no sign of “being sympathetic to buyer’s remorse”.

Where, however, a buyer has identified certain concerns, those should be addressed either with a carefully tailored MAC clause or as a separately stated closing condition. There is no substitute for properly drafted agreements, tailored to the Client’s requirements.

“The way to get things done is not to mind who gets the credit of doing them.”
Benjamin Jowett

AUTHOR / EDITOR: J. NORMAN STARK is an Attorney-at-Law, a Registered Architect, (AIA, NCARB) Registered Landscape Architect, Interior Designer, Planner and Senior Appraiser (ASA), admitted to practice law before the Bar of Ohio, the US District Courts, Ohio and Illinois (Central Dist.), the US Court of Appeals, and the United States Supreme Court. He is a Mediator, Arbitrator and Litigator with experience in Business, Construction Law, and Public Works, and with additional experience in Real Estate, Construction Attorney (Legal Project and Crisis Management), and as an Expert Witness (Forensic Architect). His office is in Cleveland, Ohio.