Material Adverse Effect (MAE) clauses, also known as Material Adverse Change (MAC) clauses, are widely used in mergers and acquisitions agreements. Often included to allow the buyer to abandon the deal in the event of adverse changes to the business between signing and closing, material adverse effect clauses are not as straightforward as they appear and may not produce the expected result. Harris Beach attorneys David M. Clar and Kelly S. Foss explain the state of the law on such clauses in New York, offer suggestions for drafters, and provide tips for litigators.
Many Reasons to Include the Material Adverse Effect Clause
In “sign and close” contracts governing mergers and acquisitions, buyers routinely demand the inclusion of a “Material Adverse Effect” or “Material Adverse Change” (MAC) clause that permits them to avoid closing the transaction in the event a material adverse effect occurs. In other circumstances, contracting parties include a material adverse effect clause, sometimes in the form of a representation and warranty or covenant, allowing for indemnification or recovery of damages. Although material adverse effect clauses are clearly commonplace in mergers and acquisitions contracts, the extent to which these provisions actually permit buyers to avert closings is less clear. A lack of clarity tends to cause confusion and frustration, particularly on the part of sellers confronted with buyers invoking material adverse effect clauses. Sellers frequently choose to renegotiate the purchase price downward due to uncertainty about their prospects in litigation or because a closing delay would seriously impact the business. On the other side of the equation, buyers also struggle to understand when their invocation of a material adverse effect clause to avoid a closing would be deemed justified by a court.
Negotiating, Interpreting, and Drafting Material Adverse Effect Clauses
This article seeks to educate parties negotiating material adverse effect clauses or engaged in disputes over the applicability of a material adverse effect clause under New York law. In particular, this article examines how courts interpret and apply material adverse effect clauses, and provides some practical tips for drafters.