11 December 2015

MAC the knife: when does a MAC kill a deal?

Material adverse change ("MAC") clauses appear in both European and US acquisition agreements and, for deals with conditions to closing, give the buyer the ability to walk-away if an event occurs after signing which causes significant damage to the target's business before the acquisition is completed. These clauses are obviously resisted by sellers, who want certainty, but can be very important to buyers who are otherwise at risk of being obliged to proceed with what turns out to be a bad deal.

MAC clauses are still less common in Europe than they are in the US.  For example, King & Wood Mallesons data suggest that in 2015 approximately one third of UK deals with conditions to closing included a MAC clause, compared with two thirds in the US. In fact, domestic US deals would include MAC clauses as a matter of course.

In the US, MAC clauses have historically been generic: they do not specifically define what constitutes a "material adverse change", but commonly include a list of exceptions for the benefit of the seller. UK MAC clauses, on the other hand, tend to define the specific financial or other effects that would give rise to a walk-away right. And while in both the US and the UK there has been limited case law analysing MAC clauses, the few decisions to date have strongly indicated that it may be very difficult for a buyer to use a generic MAC clause to walk-away from a deal.

In the US, the Delaware court in 2001 famously described the MAC clause as "a backstop" in the landmark Tyson Foods case, emphasising that the significance of a material adverse effect which was being relied upon should be measured from the longer-term perspective of a reasonable buyer, and that events constituting the alleged adverse effect must be consequential to the target's earnings potential over a commercially reasonable period, which should be measured "in years rather than months".  This set a high bar for their enforceability.

In the UK, two more recent court decisions – one in 2013 involving Grupo Hotelero Urvasco, and another this summer following a dispute between Ipsos and Aegis Group – have analysed MAC clauses, and have also emphasised the need for the buyer to meet a very high standard to establish that a material adverse effect has occurred. These private M&A decisions are in line with a 2001 ruling by the Takeover Panel in the WPP matter.   In the Urvasco case, referring to the Delaware decision, the court made it clear that UK and US courts are closely aligned in their reluctance to enforce a broadly worded MAC clause.

Given this close alignment of US and UK law, it is curious that prevailing market practice of drafting MAC clauses in the UK and US remains different.  Perhaps US buyers prefer ambiguity to certainty, allowing them to threaten litigation and use a MAC clause as leverage to seek a price reduction, or perhaps the institutional structures produce incentives for lawyers to produce "good enough" drafting, rather than reducing risks and costs. But, in any event, it is clear that the buyers will need to focus at the outset on the specific scenarios which worry them if they are going to successfully kill a deal by relying on a MAC in the courts.  In an uncertain world, a MAC can have huge value – but if an acquirer asks for too much, the MAC won't be worth the paper it is printed on.

A Guide to Doing Business in China

We explore the key issues being considered by clients looking to unlock investment opportunities in the People’s Republic of China.

Doing Business in China
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