Don and Mel celebrated the day they signed their merger agreement. They hoped their new company would grab a large share of the local tourism trade by combining Don’s sports pub with Mel’s chain of movie theaters. However, the COVID-19 quarantine began shortly after the merger agreement was signed and before the closing. Don decided to back out of the agreement, claiming the transaction was no longer viable due to the theater’s financial losses. Both parties had their lawyers review the merger agreement’s material adverse change clause.
Material Adverse Change Clauses, Generally
Contracts are full of terms, conditions, and provisions. Many contracts also include some form of a material adverse change clause (MAC). The primary effect of this clause is that a party can use it to back out of a deal. Typically, the move to cancel the merger agreement may come about because something happened to greatly reduce the value of the deal to one party.
Problems with Material Adverse Change Clauses
The parties to the transaction may negotiate the terms of the agreement for months. However, the language in the clause itself may be ambiguous and open to interpretation. When one party triggers the clause, the other may disagree that it applies to their particular deal.
The MAC clause sometimes hinges on the interpretation of the words “material adverse change.” People may disagree on what truly constitutes a material adverse change. In fact, some events often are excluded from MAC clauses:
“(1) a general economic downturn,
(2) changes or conditions broadly affecting the target company’s industry as a whole,
(3) decreased market price or trading volume of a target’s securities,
(4) geopolitical matters, such as war or terrorism, and
(5) natural disasters or “acts of God,” such as hurricanes or earthquakes.”
MAC clauses tend to be highly individual and customized for a particular transaction.
When This Clause Can Help
Sometimes a deal truly has changed from the time it was negotiated until it closes. Buyer or merging parties may use the material adverse change clause as a type of insurance against having to complete a deal that’s gone bad.
The COVID-19 shutdown is an example of a situation where a MAC clause could come into play. However, some parties actually include the triggering events related to diseases and viral outbreaks. Including this language may be rare, but could spell disaster for the party who is forced to complete the merger.
Learn More About Material Adverse Change Clauses
Attorney Richard Sierra at the Florida Small Business Center assists clients like you with business and litigation matters. As always, Our Goal Is to Help You Succeed™. For an appointment, you may call us at 1-866-842-5202 or use the contact form on our website. We represent clients throughout the State of Florida, including Coral Springs, Coconut Creek, Boca Raton, Delray Beach, Pompano Beach, Sunrise, Fort Lauderdale, Miami, West Palm Beach, Jupiter, Deerfield Beach, Stuart, Port St. Lucie, Orlando, Naples, Fort Myers, Sarasota, Tampa, and surrounding communities.