The “Material Adverse Change” (MAC) clause offers additional protection to the buyer in a mergers and acquisitions (M&A) transaction, allowing them to terminate the contract without penalty or renegotiate its terms if, between the date of signing and the closing date of the transaction, events occur that significantly affect the target company.
The MAC clause, therefore, defines the events and/or circumstances considered so detrimental that, if they occur, they will allow the buyer to withdraw from the deal or renegotiate the terms previously agreed upon. These events generally include substantial changes in the financial, operational, or market conditions of the target company.
In a volatile economic environment like Brazil, the MAC clause is particularly relevant, offering greater security and risk mitigation, with the purpose of protecting the buyer from significant changes that could compromise the return on investment or even the viability of the business.
However, the definition of a Material Adverse Change depends on the context of the M&A transaction, the buyer’s objectives, and the specificities of the target company, which is why detailed discussions and negotiations are necessary. It is essential that the MAC clause be clearly drafted, with the parties and their advisors working together to establish objective criteria and concrete examples, minimizing the room for interpretation.
Some examples of events that may be considered under the MAC clause include, but are not limited to:
a) Significant economic changes: recessions that affect the sector in which the target company operates;
b) Financial decline: characterized, among other factors, by a sudden drop in the target company’s revenue or profits;
c) Loss of key customers or partners: loss of one or more customers that represent a significant portion of the target company’s revenue, or loss of strategic partners;
d) Relevant litigation: initiation of lawsuits that could significantly impact the target company;
e) Regulatory changes: changes in laws or regulations applicable to the target company that affect its operations;
f) Other events: natural disasters, earthquakes, floods, or pandemics that negatively impact the target company’s operations.
During the negotiation of the MAC clause, the buyer should strive to identify and include all events and/or circumstances that could compromise their investment or make the entire transaction unfeasible, while the seller, on the other hand, should seek to include the most objective parameters possible (for example, the percentage of revenue decline that would characterize financial decline, or which customers and partners are considered crucial to the business and cannot be lost).
The seller should also focus on establishing carve-outs, specific exceptions that outline events or circumstances that will not be considered Material Adverse Changes. In other words, these are situations that, even if they occur, will not allow the buyer to terminate or renegotiate the contract based on the MAC clause.
In M&A transactions, both parties invest significant time and resources to consummate the deal. Both the buyer and the seller have an interest in closing the transaction, as it represents a strategic and financial opportunity for both. However, if material adverse effects occur, substantially compromising the economic viability or value of the target company, it is reasonable for the buyer to have the option to terminate or renegotiate the contract terms. This flexibility is essential to ensure that the economic-financial balance is maintained, reflecting the prudence and diligence necessary in volatile economic contexts, which is why the MAC clause closely aligns with the possibility of contractual revision under the theory of unpredictability, as provided for in Article 478 of the Brazilian Civil Code, which allows for the renegotiation of contractual terms in the face of unforeseeable and extraordinary situations.
Therefore, the MAC clause should not be seen merely as a safeguard, but as a strategic tool whose use is generally indispensable in structuring M&A transactions. It reflects the necessary diligence and prudence in M&A operations, ensuring that the buyer is protected against significant unforeseen events that may arise during the negotiations.
By Felipe Hauagge
