Material Adverse Change

A Material Adverse Change (MAC) is a significant, unexpected, and durable decline in a target company’s business that substantially impairs its value or earnings potential. In M&A, a MAC clause permits the buyer to walk away from or renegotiate an acquisition if such an event occurs between signing and closing.

Why MAC matters in M&A

When Buyer agrees to acquire Target for $5 billion on January 1, the deal typically doesn’t close until March or June. During that window, Target’s business can deteriorate. A major customer leaves, a product recall occurs, or a new competitor emerges. Buyer paid for the Target described in the due diligence report, not the Target that exists six months later.

Without a MAC clause, Buyer is stuck: it must either pay the agreed price for a weaker business or walk away and face litigation. With a MAC clause, Buyer has a contractual exit if the change is “material”—large enough to warrant bailing out. This protects Buyer from overpaying for a deteriorated asset; conversely, it protects Seller’s employees and creditors, because a buyer who fears a subsequent MAC claim might decline the acquisition altogether, or demand a lower price to cover the risk.

Defining “material”: the contract

MAC definitions vary widely, but most require both a quantitative threshold and a qualitative judgment. A typical MAC clause reads:

“A ‘Material Adverse Effect’ means any event, change, effect, condition, or circumstance that, individually or in the aggregate, has had or would reasonably be expected to have a material adverse effect on the business, results of operations, or financial condition of the Company. Notwithstanding the foregoing, a Material Adverse Effect shall not include: (a) changes in general economic, regulatory, or political conditions; (b) general conditions affecting the industry in which the Company operates; (c) pandemics or natural disasters (unless the Company is disproportionately affected)…”

The key word is material, and courts have set a high bar. In IBP, Inc. v. Tyson Foods, Inc. (2001), Delaware held that a MAC must represent a substantial and sustained impact—not a temporary setback. IBP lost a customer and saw earnings decline, but the court found this didn’t meet the MAC threshold because the company’s underlying business remained viable.

Quantitative MAC thresholds

To avoid ambiguity, many acquisition agreements define MAC numerically: “any event that reduces EBITDA by more than 20% compared to the most recent forecast” or “reduces cash flow by more than 15% for two consecutive quarters.” These bright-line rules reduce litigation but create negotiating leverage: a buyer might push for a 15% threshold (easier to claim MAC), while a seller argues for 25% (MAC claim is harder).

A $2 billion acquisition might have a MAC clause pegged to a $200 million drop in annual EBITDA. If the target’s EBITDA falls from $1 billion to $800 million, that’s a 20% decline and likely triggers MAC. If it falls from $1 billion to $950 million, the buyer probably cannot claim MAC—the change doesn’t exceed the agreed threshold.

Carve-outs and exclusions

Every MAC clause contains exclusions—changes that do not trigger MAC, even if they are material. The reason is fairness: some business risks are general and not specific to the target.

• General economic conditions: A recession that affects all companies in the sector doesn’t excuse Buyer from closing. Why? Because both Buyer and Seller knew a downturn was possible; Buyer could have negotiated a lower price to reflect this risk, or Seller could have insisted on a MAC carve-out for recession.

• Industry-wide changes: If a new competitor emerges or a technology shifts, and all players in the sector are affected equally, MAC usually doesn’t apply. The target is not uniquely harmed.

• Pandemics and natural disasters: COVID-19 created a flurry of MAC disputes. Many agreements signed before 2020 had no pandemic carve-out; when lockdowns destroyed target businesses, buyers tried to claim MAC. Judges disagreed on whether a pandemic is an “industry-wide” force (carve-out applies) or a specific shock to a particular business (MAC applies). Post-COVID deals now explicitly carve out pandemics—or, in some cases, explicitly include them.

• Regulatory and legal changes: If new tax law or environmental regulation hits the target, is that MAC? Depends on the carve-out language. Most agreements exclude general changes in law, but permit MAC claims if the change disproportionately affects the target.

Contested MAC disputes

MAC disputes are frequent because the definition is inherently subjective. Here are three famous cases:

1. Akorn, Inc. v. Fresenius Kabi AG (2018): Fresenius agreed to buy Akorn (a specialty pharmaceutical company) for $4.3 billion. After signing, the FDA cited Akorn for manufacturing defects; revenues collapsed. Fresenius claimed MAC. Delaware’s Court of Chancery agreed, ruling that the combination of FDA actions and revenue decline represented a MAC. Akorn lost $1 billion in shareholder value as a result.

2. AB Stable 8 v. MAPS Hotels and Resorts (2020): Stable 8 (a private equity firm) agreed to buy a Scottsdale hotel. COVID lockdowns ensued, and the hotel’s revenue fell 80%. Stable 8 claimed MAC. A lower court granted the claim, but the decision was controversial because it opened the door to coronavirus-era MAC claims. The case was eventually settled.

3. Huntsman Corporation v. Hexcel Corporation (2008): Huntsman agreed to buy Hexcel, but after Lehman Brothers collapsed and credit markets froze, Huntsman couldn’t finance the deal. Huntsman claimed MAC due to the financial crisis. The court rejected the claim, finding that Huntsman’s financing failure—not Hexcel’s business—was the real problem. This set a precedent that buyer’s financial woes do not constitute target MAC.

MAC pricing adjustments

Not all MAC claims result in deal termination. In many cases, Buyer and Seller negotiate a repricing: the purchase price is lowered to reflect the target’s deteriorated value. If the target’s EBITDA declines 10% (below a 15% MAC threshold, so no walk-away right), Seller and Buyer might agree that the price drops 10% as well. This avoids litigation and lets the deal close.