Imagine. You are about to buy a bakery store in the center of the city. Next to the store, there is a large school. This store is worth its price because of its recurring (school) clientele. All of a sudden the whole country goes into lockdown: no pupils, no teachers anymore… In one week’s time, your approaching acquisition seemingly lost its purpose.
Or even better, in the run-up to your bakery purchase, you find a better opportunity. This can be a bakery store with an excellent location, at the border of a corporate zone. Lots of office workers and salarymen will buy your sandwiches. However, you have already committed to purchasing the bakery store in town.
For this reason, all share purchase agreements or promises to purchase should contain a material adverse change clause (also called the MAC clause). A MAC shall allow (mostly) the buyer to cancel an ongoing acquisition in the run-up to the closing.
MATERIAL ADVERSE CHANGE CLAUSES
There is a huge variety of MACs. One way to oversee this variety is to consider the extent to which parties are involved. MAC-clauses can cover situations out of the control of the parties. Examples are a changed market, hazards in the world economy, external events with an impact on business e.g. pandemics, terrorist attacks, hazards of nature, etc.
These clauses can also cover situations, partially or fully, in control of the parties, that are related – even indirectly – to the target company. Examples are breach or non-obtaining of a financial covenant (such as redefining the financial structure of the target company), failure to obtain or to retain an industrial license or soil certificate…
There are also situations where parties wish to undo the contract in very specific, personal, conditions, which might even have nothing to do with the target company or impact on it. You find a better offer (see the second example above), certain stakeholders lack the approval of the deal, etc.
As the seller also wants certainty, sometimes a reverse break-up clause is combined with the MACs. This allows the buyers to break up the deal, in exchange for paying a break-up fee to the seller.
MAC clauses are crucial instruments to cope with material adverse changes– of any kind – that undo the attractiveness of a deal.
At VGA, we are happy to assist you on any M&A-related matter, including the drafting of SPAs. Feel free to contact us here.
Contact
