Key points

  • Underwriting agreements have long lists of MAC clauses which have in a few cases been applied in an acquisition context
  • Underwriters and longer term investors may have different interests which result in different MAC positions  


Material adverse change clauses (MAC) allow a bidder to walk away from its bid if there is a material adverse change affecting the target or its business.

The common wisdom is that for a bidder to rely on a MAC, the MAC must be carefully drafted and specific because courts and panels have construed ‘material adverse effect’ in general MACs narrowly.

Narrow interpretation

In the 2001 United States decision of IBP, Inc. v Tyson Foods, Inc., the court found that a general economic or industry downturn (in particular, the effects of a harsh winter on livestock markets) did not meet ‘the required materiality of effect’ in the context of a general MAC, and adopted ‘a strategic buyer’ reasoning so that the change had to be ‘durationally significant’ and ‘consequential to the company’s earnings power over a commercially reasonable period…measured in years rather than months’.

In the more recent 2008 United States decision in Hexion Specialty Chemicals and others v Huntsman Corp., the narrow interpretation prevailed and the court affirmed that a mere ‘short-term hiccup in earnings’ would not constitute a MAC.

Other examples come from the public takeover context such as the United Kingdom Takeovers Panel decision in WPP v Tempus where the events of ‘September 11’ did not trigger a general MAC since it was not ‘an adverse change of very considerable difference striking at the heart of the purpose of the transaction’.

The Australian Takeovers Panel in the 2003 decision of In the matter of Goodman Fielder Ltd also expressed concern that a general MAC may be ‘excessively uncertain’ and therefore run a ‘material risk’ of contravening section 629 of the Corporations Act 2001 (Cth).

There is limited Australian case law on MACs in the acquisition context and legal advice tends to counsel against relying on general MACs in light of overseas experience.

Underwriting agreement MACs

Despite the uncertainty around general MACs, it is uncommon to find MACs drafted in an M&A context with the specificity found in a capital raising context. One or two exceptions have occurred in the area of ‘cornerstone investments’—where an investor acquires a significant stake as part of a broader capital raising by a listed company.

Perhaps because the acquisition agreement (with the cornerstone) and the underwriting agreement (with the underwriter) are negotiated together, it may be difficult for listed companies to resist a cornerstone investor who points to the list of specific MAC type clauses in the underwriting agreement with a ‘make that two, please…’

Many underwriting agreements have long lists of events in addition to a more general MAC clause.

Examples of these include:

  • a ‘market fall clause’ – triggered where an index (such as the S&P/ASX 200 Index) falls by more than an agreed percentage below a starting level
  • a ‘hostilities clause’ – triggered where hostilities commence or escalate involving a list of agreed countries, or where a national emergency is declared by, or where a major terrorist act is perpetrated in, those countries
  • a ‘financial disruption clause’ – triggered where there is disruption to financial, political or economic conditions, currency exchange rates or controls or financial markets in a list of agreed countries, or where there is a general moratorium on commercial banking activities in those countries
  • a ‘trading disruption clause’ – triggered where securities quoted on a list of major stock exchanges is suspended, or there is a material limitation in trading on these exchanges
  • a ‘change in law clause’ – triggered where there is a change in law or policy or an announcement of a change, and
  • a change in senior management or the board, or prosecution or conviction of a director or senior manager.

Are these more certain?

It is easier to prove that these underwriting agreement MACs are called into play more than a general MAC, although in relation to the ‘market fall’ and ‘change in management’ clauses, underwriters may not usually rely on these unless the occurrence of these events has had a ‘material adverse effect’.

A court may find it difficult to ignore a specific event where this is clearly in the contemplation of the parties and documented in the clause.

Secondly, underwriting agreement MACs are sometimes expressed to be triggered where ‘in the reasonable opinion of the underwriter’ that event has had a ‘material adverse effect’, and there is Australian case law enforcing clauses which rely on subjective elements such as a party forming a particular opinion.

Finally, underwriting agreement MACs are not usually limited to where there is a ‘material adverse effect’ on the business of the listed company, but extend to ‘material adverse effects’ on the capital raising or the secondary trading price of the shares being offered. The latter is more readily ascertained than material effects on the business, which risks re-importation of tests such as ‘durational significance’.

Of course, a court may still impute different concerns to a cornerstone investor than that of an underwriter and interpret the same clause differently, but the underwriting MACs are certainly closer to what the legal doctors have been ordering for the uncertainty with general MACs.

Should underwriting MACs be more widely applied?

A listed company may argue that a cornerstone investor is a long term or a strategic investor and has interests different to an underwriter who is more closely concerned with ensuring a resilient share price and a successful offer so that their underwriting obligations are not called on.

A cornerstone investor may counter that it is a long term investor, but only at a point in time after the conditions are fulfilled and the MACs are no longer relevant. Prior to such time, it may want the freedom to respond to more economic alternatives should events so unfold.

Furthermore, a cornerstone investor may also argue that if a termination event were to occur under the underwriting agreement, the response to that should be a ‘three-way’ conversation between the underwriters, the cornerstone investor and the company.

It is also not clear that cornerstone investors are always ‘long term investors’ in the same way as a bidder for the whole company. Cornerstone investors may be private equity houses some of which have a ‘medium term’ horizon of three-to-five years. Cornerstone investors may also have balanced the challenges of investing in a publicly listed company alongside other investors against the advantages of liquidity afforded by the listing.

From the company’s point of view, the capital raising and cornerstone investment are usually inter-dependent, and the transactions with the underwriter and the cornerstone investor are a ‘all or nothing’ proposition, although it may be important to bed down at least one part of the proposition. Furthermore, unlike a takeover, the period during which these MACs are relevant are relatively short—especially in the context of an accelerated rights offer.


Ultimately, MACs, like other clauses in an acquisition agreement, are settled on the basis of the parties’ relative bargaining positions and concerns.

It may be that an acceptance of more specific MAC clauses in a PIPE is a reflection of the ‘cash is king’ flavour of the current environment. Or perhaps it is just a case of being less shy when one is simply saying ‘make that two, please…’