Directors called upon to review the terms of an M&A definitive agreement may note the important new Delaware decision sustaining a buyer’s use of a material adverse change (MAC) clause to terminate a merger agreement. 

A MAC clause in a transaction agreement is typically included to allow a party to terminate the agreement in the event that one or more (previously agreed-upon) events occur after the execution of the agreement that threaten the contractual bargain of that party. MACs are often heavily negotiated clauses, often suffer from imprecise definitions, and until the current case, have never been upheld in a termination situation by the Delaware courts. 

In the instant case, the Chancery Court concluded that the purchaser validly terminated the definitive transaction agreement in part because the seller’s representations regarding its compliance with applicable regulatory requirements “were not true and correct, and the magnitude of the inaccuracies would reasonably be expected to result in a Material Adverse Event.”

In a detailed summary of the facts, the court noted that the buyer had received communications from anonymous whistleblowers accusing the seller of regulatory violations. During the course of follow-up investigations, the buyer identified what the court described as “serious and pervasive data integrity problems.” In this context, the court concluded that the buyer’s decision to terminate was based on legitimate concerns with a company-specific collapse in the seller’s business.

This prominent new decision should be of interest to directors when considering MAC-type clauses as a protective measure in a definitive transaction agreement.