This textbook case occurred recently in a deal during the pivotal phase between the signing of the LOI (Letter of Intent) and the closing of the transaction. At this delicate stage, the seller saw their primary client abruptly pull out, leading to a major loss of revenue and potentially threatening the company's going concern.
Given such a "material change" in the transaction context, what are the implications for the parties? Can the buyer, if already contractually bound, still walk away? To mitigate this risk—which fortunately remains fairly rare—a Material Adverse Change (MAC) clause can be included in the acquisition agreement. This practice, originating from Anglo-Saxon jurisdictions, is increasingly finding its place in domestic transactions.
A MAC clause allows the buyer to terminate the acquisition agreement if a "material adverse event" occurs. The event itself can vary in nature, but its impact on the target company's financial condition must be significant enough that a reasonably prudent buyer, had they known of it, would not have entered into the contract. It may involve an event that negatively impacts the balance sheet, profitability (income statement), or the target company's outlook. The primary goal of a MAC clause is to protect the buyer by allowing them to walk away without incurring penalties.
The seller, on the other hand, will typically seek to narrow the scope of this clause. Naturally, a MAC clause should not be triggerable if the event was already known or should have been known by the buyer at the time of signing. Another way to prevent the clause from being used as a pretext is to incorporate a financial threshold proportional to the deal size. Finally, it is also possible to specify the exact types of events that can trigger the MAC clause, though this negotiation can be delicate. Changes in general market conditions, for instance, are often a major point of contention between the buyer—who prefers the broadest possible clause—and the seller, who wants to minimize termination risk.
Courts tend to interpret termination requests restrictively, as they go against the original intention of the parties to complete the sale. Furthermore, the consequences of a termination are often severe. Indeed, as observed during the subprime crisis in the United States (1), MAC clauses can be notoriously difficult to enforce.
While a MAC clause can effectively mitigate buyer risk, it is by no means an absolute guarantee or an easy exit strategy. In any case, the clause should be drafted with precision, anticipating the most plausible scenarios.
It is also worth noting that other legal mechanisms protect the buyer against unexpected issues. In cases of seller fraud or willful misrepresentation leading to a defect in consent, annulment of the sale can be sought under the Civil Code (2) and the legal maxim fraus omnia corrumpit, although the scope of this rule is not absolute. However, the primary mechanism protecting the buyer remains the representations and warranties agreement (R&W), a central pillar of any share purchase agreement. Rather than terminating the sale, this guarantee allows the buyer to obtain financial compensation for damages through a purchase price reduction, subject to specific conditions defined in the acquisition agreement.
Acquiring a company means taking entrepreneurial action, and taking action inherently involves risk. However, this does not mean moving forward blindly. A thorough risk assessment alongside appropriate mitigation mechanisms are essential components of sound management.
