Material adverse change (or simply “MAC”) clauses are relatively common in M&A transactions and financing documents. A recent decision of the UK High Court provides a timely recap on how MAC clauses are interpreted and a lesson in how difficult they can be to apply in practice.


The case of Grupo Hotelero Urvasco S.A. v Carey Value Added S.L. [2013] EWHC 1039 (Comm) involved a hotel and apartment development in central London. The property developer entered into various facilities and guarantees with a financier in relation to the development.

The loan agreement contained a “no MAC” clause. The clause was in the form of a warranty by the developer:

“There has been no material adverse change in its condition (consolidated if applicable) since the date of this Loan Agreement.”

The developer’s parent company gave a corporate guarantee to the financier which contained a similar no MAC warranty. There were cross-default provisions in the loan agreement, so if a MAC occurred in relation to the guarantor this would have triggered a default under the loan agreement.

The financier was entitled to refuse a drawdown request under the loan if there was an event of default. A breach of the no MAC warranty would have been an event of default. The financier therefore needed to prove that a MAC had occurred, and that the warranty was therefore false, as at the drawdown date.

What happened?

The finance documents were entered into in December 2007. As the GFC bit hard, the property developer began to struggle mainly because of tightening credit and the collapsing value of its investments in the Spanish property sector. The property developer was nevertheless still servicing the debt on the London project, albeit some of its other financiers, contractors and suppliers were not being paid.

By June 2008 (just over 5 months after the loan agreement was entered into), the financier was due to pay the next tranche of funding to the developer. The financier was becoming increasingly worried by the developer’s position. News reports were circulating to the effect that the developer was “struggling to avoid receivership”, that it had “started to sell assets in an effort to gain liquidity” and needed to renegotiate its finances to “avert the crisis”. The financier itself was also experiencing difficulty in finding the funds needed to cover its loan commitment.

The financier invoked the MAC clause and refused to provide further funds. It stated that there had been a “substantial deterioration in the financial condition and prospects” of the developer. The property developer disagreed. It sued the financier for £71.38m in damages for breach of the loan agreement by failing to provide the funding when required.

In summary, the court found that, on the facts:

  • there hadn’t been a material adverse change in the financial condition of the developer; and
  • there had been a material adverse change in respect of the guarantor. Critically, however, the court held that the no MAC warranty in the guarantee wasn’t actually given by the guarantor on the drawdown date. Rather, it was given by reference to request dates, utilisation dates and interest periods under a different facility which didn’t coincide with the developer’s drawdown date under the loan agreement. As a result, there was no breach of warranty by the guarantor on the actual drawdown date and therefore no cross-default under the loan agreement.

Won the battle but lost the war

Whilst the developer won the battle on the MAC dispute, it was ultimately unsuccessful because the court found that other breaches and cross-defaults had occurred on the drawdown date.

Key Points

The key points to consider are:

  • financial condition” will usually be assessed by reference to the borrower’s specific circumstances. This will primarily be determined by the borrower’s financial statements and management accounts. These accounts aren’t necessarily decisive and other compelling evidence will also be considered (as it was in this case, e.g. the group’s failure to pay other creditors, the group’s decision to suspend payment of bank debt, a third party claiming under a bank guarantee given by the group and the collapse of the group’s “speculative business model”). However, factors such as external economic and general market changes usually won’t be considered because the “enquiry becomes wide ranging and imprecise”.
  • materiality” will usually be assessed by reference to the impact of the change on the borrower’s ability to meet its interest and principal repayment obligations. In the court’s view: “to be material, the adverse change must be material in a substantial way to the borrower’s ability to perform the transaction in question … Unless the adverse change in its financial condition significantly affects the borrower’s ability to perform its obligations, and in particular its ability to repay the loan, it is not a material change”.
  • a MAC clause is intended to protect against unknown and unforeseen events. It can’t be invoked for pre-existing circumstances unless “conditions worsen in a way that makes them materially different in nature”.
  • in order to be “material” the change must not merely be temporary.

Observations and Lessons

Despite MAC clauses being widely used, there’s relatively little case law on them.

The key observations and lessons from this case are:

  • Don’t forget that a MAC clause is dependent on a change occurring. It’s not enough to simply show that something adverse has occurred. This may seem obvious, but the financier in this case encountered difficulties in proving that the deterioration in the developer’s financial condition actually occurred between December 2007 and June 2008, rather than at some prior or subsequent time.
  • The financier also had difficulty in establishing the financial condition of the developer as at the drawdown date on 6 June 2008. It appears this was because balance sheet financial information wasn’t readily available for the developer or the guarantor in respect of that particular date. The financier therefore had to use a wide range of other financial information applicable to the general period to show that a material adverse change had occurred. The court was satisfied on the “totality of the evidence” that a MAC had occurred in respect of the guarantor; however, it’s important to note the court’s comment that it will “normally be fatal” to a MAC claim if you don’t analyse the financial condition that existed on the precise date the warranty was given.
  • Parties should ensure the no MAC warranty is given on an ongoing basis or at least on the actual drawdown date. This was how the developer’s warranty was expressed in the loan agreement. However, as mentioned, the timing of the no MAC warranty given by the guarantor didn’t coincide and therefore couldn’t be used as the basis for a cross-default.
  • Due to the difficulty in proving a MAC, it’s advisable to draw on a selection of claims in addition to a MAC provision, as these will often help to “paint the picture” of the change as being sufficient to satisfy reliance on the MAC. Additionally, be cautious with relying on a fall in share price/market capitalisation as being a MAC, as this may be considered temporary or due to general market changes. If this is an important default trigger for your transaction you should consider prescribing specific metrics which will trigger a default separately. Likewise, parties should consider using quantitative thresholds so as to give greater certainty as to whether a change is material.