Key takeaways
- A MAC clause is a closing condition: if a material adverse change occurs between signing and closing, the buyer can refuse to close without being in breach.
- Delaware courts have found a MAC to justify termination only once in modern history (Akorn v. Fresenius, 2018). The threshold is extremely high. But the threat of invoking MAC is real even when the outcome is uncertain.
- The definition of what constitutes a MAC, and the list of exclusions from that definition, is where the real negotiation happens.
- Sellers should negotiate broad MAC exclusions: general economic conditions, industry-wide trends, changes in law or GAAP, and known conditions disclosed in the representations should all be excluded.
- The buyer's financing MAC is a separate issue: whether a buyer's inability to obtain committed financing constitutes a MAC is a distinct negotiation from the business MAC.
<5%
Approximate rate at which MAC clauses are formally invoked in closing disputes
$50K–$250K
Typical legal cost of a MAC dispute between signing and closing
30–90 days
Typical signing-to-closing period during which MAC exposure exists
1
Number of times Delaware courts have found a MAC sufficient to permit termination (Akorn, 2018)
Between the date a purchase agreement is signed and the date the transaction closes, something can go wrong. A key customer leaves. A regulatory issue surfaces. A major contract is terminated. Revenue declines materially. The MAC clause addresses who bears the risk of those events: does the buyer still have to close at the agreed price, or do they have an exit?
In practice, MAC clauses are invoked rarely, and successfully invoked even more rarely. Delaware courts, whose law governs most private M&A, apply an extremely high bar for what constitutes a material adverse change. But the clause matters not because buyers win MAC disputes, but because the threat of invoking MAC changes the negotiating dynamic between signing and closing.
What a MAC definition covers
A MAC definition typically covers any event, circumstance, development, or change that has, or would reasonably be expected to have, a material adverse effect on the business, financial condition, results of operations, or prospects of the company.
The phrase "material adverse effect on prospects" is the most dangerous for sellers. Courts have interpreted "prospects" to cover forward-looking deterioration that has not yet appeared in historical financials, which means a buyer can argue MAC based on what they believe will happen, not just what has already happened.
The standard negotiating response is to add a durational qualifier: the MAC definition requires that the adverse effect be "reasonably expected to be materially adverse on a long-term basis." This prevents a buyer from invoking MAC based on a temporary disruption.
Never accept a MAC definition that includes "prospects" without a durational modifier. A MAC clause that covers "any event that could adversely affect the company's prospects" is a buyer option, not a closing condition.
MAC exclusions: what sellers must negotiate
The most important seller negotiation in the MAC clause is the list of exclusions. These are events that, even if they adversely affect the business, are carved out from the MAC definition and cannot be used to justify termination.
Standard MAC exclusions sellers should require
General economic conditions
Changes in the overall economy, interest rates, credit availability, or financial markets that affect the company but affect all businesses in its sector. The buyer knew they were buying a business exposed to macroeconomic risk.
Industry-wide conditions
Changes that affect the industry as a whole, not just the specific company. A regulatory change that affects all competitors equally is not a MAC on the company specifically.
Changes in law or GAAP
New legislation, regulations, or accounting standards that affect the company. If the rule changes, that is not a MAC attributable to the company.
Known conditions disclosed in representations
Any risk that was disclosed in the representations and warranties cannot later be used as a MAC. If the company disclosed a pending regulatory review, a deterioration related to that review is excluded.
Changes in the price of traded securities or commodities
Market price movements are macro events, not company-specific events.
Acts of God, natural disasters, pandemics
Excluded in most post-COVID purchase agreements, with a qualifier that allows MAC if the company is disproportionately affected relative to peers.
Actions taken at buyer's direction
If the buyer approved or directed a business decision that caused harm, the seller cannot be held to a MAC standard for that outcome.
The disproportionate impact qualifier appears in most of these exclusions: even if the exclusion applies in general, if the specific company is disproportionately harmed relative to industry peers, the MAC definition may still be triggered. Sellers should push to narrow or remove the disproportionate impact carve-out.
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Most MAC invocations are tactical rather than genuine. A buyer who discovers an unfavorable condition between signing and closing, but not one that would likely meet the legal standard for MAC, may threaten to invoke MAC as leverage to renegotiate price or terms.
Sellers facing a MAC threat have three options: close on the original terms and let the buyer breach, negotiate a price reduction to resolve the dispute, or litigate to compel closing. All three options are expensive, disruptive, and damaging to the post-close relationship.
"A $18M manufacturing company signed a purchase agreement in February. In March, a major customer representing 22% of revenue announced it was moving to a competitor. The buyer threatened MAC. The seller's counsel argued the customer loss was a known risk disclosed in the representations and was company-specific rather than industry-wide, meaning the MAC exclusions applied. After 60 days of negotiation, the parties agreed to a $1.4M purchase price reduction in exchange for the buyer waiving the MAC claim and closing. The seller's legal fees for the dispute: $280K."
The takeaway: even a defensible MAC exclusion position costs money to enforce. The best protection is a narrow MAC definition with broad exclusions negotiated before signing, not after a dispute arises.
Financing MAC vs. business MAC
A separate and often confused issue is whether a buyer's inability to obtain financing constitutes a MAC. In most private M&A, buyers do not have a financing contingency in the purchase agreement. If they sign a purchase agreement without a financing condition and later cannot obtain their debt financing, they are in breach, not protected by a MAC.
Some buyers, particularly in a difficult credit environment, will request a financing condition that allows them to terminate if their committed financing falls through. Sellers should resist this. A financing contingency converts the deal from a firm commitment to an option. If the credit markets deteriorate between signing and closing, the buyer has an exit the seller did not intend to grant.
If a buyer insists on some financing protection, the seller should require a reverse termination fee: a cash payment from the buyer to the seller if the buyer fails to close due to a financing failure. The reverse break fee should be large enough to compensate the seller for the cost of a failed process, including banker fees, legal fees, and the opportunity cost of a six-month process. Typically 3–6% of the purchase price.
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Disclaimer: Financial figures and case studies in this article are illustrative, based on representative middle market assumptions, and are not guarantees of outcome. Statistical references are drawn from cited third-party research; individual transaction and operational results vary based on business characteristics, market conditions, and deal structure. This content is for informational purposes only and does not constitute legal, financial, or investment advice. Consult qualified advisors for guidance specific to your situation.
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