Completion of acquisitions of private companies in the United States is almost universally conditional on the absence of a material adverse change (MAC). This is either through the inclusion of an explicit condition or a condition that a warranty confirming the absence of a MAC be true at completion.

Such conditionality is much less prevalent in private company acquisitions governed by English law. This is substantially attributable to a different paradigm regarding the allocation of risk. In the US market, until the time of completion, a purchaser is not considered to assume risk with respect to the target and so customarily protects its ability to walk away from a transaction that does not match the agreement struck with the seller. By contrast, in English law transactions a purchaser is regarded as assuming risk from the time of entering into the contract, subject only to legally required conditions.

However, in an increasingly international market influenced by US purchasers and parties drawing on experience in the US market, MAC conditions are more frequently seen in English law transactions and there have been a number of recent cases that assist in the drafting of such conditions.

Terms narrowly construed

In the interests of promoting certainty, a court can be expected to read MAC conditions narrowly. In Grupo Hotelero Urvasco SA v Carey Value Added SL ([2013] EWHC 1039 (Comm)), in the context of a loan agreement, the court considered that in testing the financial condition of a company the assessment will begin with the relevant financial information. During the course of a financial year, reference can be made to interim or management accounts. Consequently, the assessment of a company's financial condition is not forward looking.

In Ipsos SA v Dentsu Aegis Network Ltd ([2015] EWHC 1726 (Comm)), in the context of a company acquisition, the court determined that a downward revision of a forecast did not naturally amount to an "act, omission or the occurrence of a fact, matter, event or circumstance". In the court's view, the facts causing the revision in forecasting were more likely to be changes that may be the basis for invoking a MAC condition.

MAC read in context of whole agreement

As would be expected when construing a contractual provision, the court will not consider a MAC condition in isolation. In Ipsos v Aegis, the court considered that allowing a revision to forecasts to amount to a MAC would, in substance, provide a buyer with assurances as to the accuracy of those forecasts which would be inconsistent with the parties' exclusion of any warranties relating to the accuracy of forecasts provided by the seller to the buyer.

Effect of change must be significant

In Grupo Hotelero, the court held that for an adverse change to be material it must significantly affect the ability of the borrower to perform its obligations. However, there is no clear parallel to be drawn with an acquisition agreement. Satisfying a test that a circumstance has had a significant effect on the ability of the target to operate its business is no clearer than evaluating whether the change in circumstance is material.

A buyer would clearly be assisted if the MAC condition included a subjective standard, as was the case in Cukurova Finance International Limited v Alfa Telecom Turkey Ltd ([2013] UKPC 2) where, in the context of a loan agreement, the Privy Council concluded that the claimant had concluded that there had been a material adverse effect.

Although a party would have to prove to the satisfaction of the court that it honestly and rationally held such an opinion, in the context of an acquisition it is unlikely that a sophisticated seller would grant a buyer such a degree of optionality by agreeing to a comparatively low threshold for invoking a MAC condition, so the buyer would have the burden of proving that the effect of a change was sufficiently significant.

Events must be unknown

In Grupo Hotelero, the court ruled that a party could not trigger a MAC condition on the basis of circumstances of which it was aware at the time of contracting, as the parties should be assumed to have intended to enter into the agreement despite those circumstances. The court acknowledged that it may be possible to invoke a MAC condition where conditions worsen in a way that makes them materially different in nature; however, this only re-emphasises that the court must be satisfied that the matter being relied on as amounting to or comprising a MAC is in fact sufficiently significant.


Recent English case law regarding MAC conditions suggests that parties to acquisition agreements governed by English law should expect provisions to be construed narrowly and as a backstop against significant unforeseen events.

A buyer's prospects of protection from adverse changes should be increased if specific and objectively quantifiable criteria are included in the MAC definition (eg, a change in earnings before interest, taxes, depreciation and amortisation or revenues by a specified amount to capture a deterioration in financial condition or the loss of specific contracts to capture a deterioration in a company's operations) and the parties' acknowledgement that short-term fluctuations, and not durationally significant changes only, in the financial or operational criteria will qualify as being materially adverse.

The greater the precision in the MAC definition, the less scope a buyer may have to renegotiate what may be regarded as an unfavourable agreement. Insofar as the purpose of a MAC condition is truly to protect a buyer against the unknown, ambiguity may prove to be the greatest ally.

For further information on this topic please contact Simon Little or Will Pearce at Davis Polk & Wardwell London LLP by telephone (+44 20 7418 1300) or email ( or The Davis Polk & Wardwell website can be accessed at

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