In Italy, material adverse change (MAC) clauses are commonly used in many corporate transactions including, without limitation, merger and sale agreements, initial public offering documents, finance agreements and general contractual agreements. Despite the frequency with which such provisions are implemented, MAC clauses as such are not statutorily regulated under Italian law. Nor has Italian local case law specifically dealt with their enforcement.
In order to understand the use and enforceability of MAC clauses in Italy, it is necessary to analyze them under general principles of Italian contract law.
Freedom to Contract
Article 1322 of the Italian Civil Code sets forth the general principle of freedom to contract under Italian law. Accordingly, MAC clauses as a general matter should be valid and enforceable under Italian law. However, the applicable Italian legal principles and standards used to determine the enforceability of a MAC clause will vary depending on the wording and intended scope of the MAC clause that is being enforced. A MAC clause being enforced as a contractual condition will be evaluated under Italian law differently than a MAC clause being enforced to terminate a contract.
MAC Clauses as Conditions
Articles 1353-1361 of the Italian Civil Code govern generally the enforceability of contractual conditions. Pursuant to these provisions, MAC clauses enforced as a condition to performance under the contract will be evaluated with respect to the following factors:
- The MAC clause should not be impossible, unlawful or contrary to law or to the public order.
- In case of condition precedent, the triggering of the MAC clause should not depend on the mere will of one party to the contract.
- Throughout the period when the condition should be satisfied, the buyer (if condition precedent) or the seller (if condition subsequent) should be entitled to carry out seizures, attachments or other activities to conserve the assets.
The MAC condition is deemed to have occurred by operation of law if the condition created by such MAC clause does not occur as a result of action, or inaction, on behalf of the party having a contrary interest to such condition being satisfied.
Once satisfied, the legal effects of the condition are deemed retroactive to the time of execution of the contract, unless otherwise agreed by the parties.
The legal effects of a condition being satisfied do not apply automatically but need to be either acknowledged by or notified to the other party, and can also be waived if desired.
MAC Clauses as Termination Clauses
Article 1456 of the Italian Civil Code governs generally the enforceability of contractual termination rights. Pursuant to this provision, upon the occurrence of a termination event, the contract is deemed legally terminated upon notice by the applicable party of its intent to exercise the termination right. Italian case law deems ineffective those termination clauses making generic reference to all (or substantially all) obligations and covenants contained in a contract. Accordingly, it can be inferred that a MAC clause being enforced as a termination clause will be deemed unenforceable if it is overly generic or unspecific.
MAC Clauses in Takeover Documents
MAC clauses are also often used in offering documents in connection with a proposed takeover or a tender offer. Except for certain subjective conditions that are controlled solely by the bidder, generally under Italian law the bidder in a voluntary takeover is free to make an offer subject to as many conditions and relating to such matters as it considers appropriate (however, in mandatory bids, conditions must be objective, such as applicable regulatory clearances). The Italian Stock Exchange Commission (Consob) has clarified that conditions preventing the target from taking frustrating action or those relating to MACs are valid, provided that the events triggering the lapsing or termination of the offer satisfy a qualitative and quantitative test.
Drafting Guidelines for MAC Clauses
Since under Italian law a MAC clause may be deemed unenforceable if it is overly generic or unspecific (especially when enforced as a termination clause), making specific conditions trigger a MAC clause is recommended. Triggering conditions based on objective events are usually easier to enforce than those based on subjective events. Because the buyer is more likely to seek enforcement of a MAC clause, when drafting a MAC clause the buyer must consider what protections and remedies it will most likely seek. If the buyer wants the MAC clause to provide the greatest protection as a termination clause, the MAC clause should be carefully crafted so that it is triggered by breach of specific material covenants only. Alternatively, if the buyer wants the MAC clause simply as a contractual condition, conditions precedent are preferred to conditions subsequent, because conditions precedent are more easily enforceable. In any case, if a condition subsequent is to be agreed upon, it is recommended that the parties specify when and how the unwinding of the contract takes place, both between the parties and vis-à-vis third parties possibly involved in the execution and performance of the contract.