M&A: Three types of material adverse change (MAC) clause

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When drafting MAC clause in a sale and purchase agreement, consider which of the following may be more appropriate:

1. Measurable MAC

This type of MAC clause provides that MAC is deemed to have happened when measurable financial metrics such as profit, EBITDA or turnover of a target company declines by an agreed number of percentage points.

This type of MAC clause has the advantage of providing certainty to the seller and purchaser as the financial metrics are measurable.

2. Independently assessed MAC

This type of MAC clause provides for the materiality to be assessed by an independent third party. The advantage is that the third party is supposed to be an independent party who makes a fair assessment. The disadvantage is that there may be cost involved in engaging such independent third party.

3. Subjective MAC

This type of MAC clause is subjective. Whether any change is considered to be material depends on the opinion of the party relying on the MAC clause. It is beneficial for the party who wishes to rely on the MAC clause but such clause may be subject to interpretation and more likely to be challenged by the other party.

This post was first posted on Linkedin on 9 February 2023.

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