In the fields of

mergers and acquisitions Mergers and acquisitions (M&A) are business transactions in which the ownership of a company, business organization, or one of their operating units is transferred to or consolidated with another entity. They may happen through direct absorpt ...

and

corporate finance Corporate finance is an area of finance that deals with the sources of funding, and the capital structure of businesses, the actions that managers take to increase the Value investing, value of the firm to the shareholders, and the tools and analy ...

, a material adverse change (abbreviated MAC), material adverse event (MAE), or material adverse effect (also MAE) is a change in circumstances that significantly reduces the value of a

company A company, abbreviated as co., is a Legal personality, legal entity representing an association of legal people, whether Natural person, natural, Juridical person, juridical or a mixture of both, with a specific objective. Company members ...

. A

contract A contract is an agreement that specifies certain legally enforceable rights and obligations pertaining to two or more parties. A contract typically involves consent to transfer of goods, services, money, or promise to transfer any of thos ...

to acquire, invest in, or lend money to a company often contains a term that allows the acquirer, investor, or lender to cancel the transaction if a material adverse change occurs. Where an acquiring company uses its own shares as part of the consideration paid to acquire another company, or in a

merger Mergers and acquisitions (M&A) are business transactions in which the ownership of a company, business organization, or one of their operating units is transferred to or consolidated with another entity. They may happen through direct absorpt ...

of two companies, the contract may provide that either

party A party is a gathering of people who have been invited by a Hospitality, host for the purposes of socializing, conversation, recreation, or as part of a festival or other commemoration or celebration of a special occasion. A party will oft ...

to the transaction can cancel it if a material adverse change significantly reduces the value of the other party. Large transactions often require a long period of time between the signing of a contract and completion of the transaction. For example, time may be required to obtain approval of the transaction by government agencies,

shareholder A shareholder (in the United States often referred to as stockholder) of corporate stock refers to an individual or legal entity (such as another corporation, a body politic, a trust or partnership) that is registered by the corporation as the ...

labor union A trade union (British English) or labor union (American English), often simply referred to as a union, is an organization of workers whose purpose is to maintain or improve the conditions of their employment, such as attaining better wages ...

s, lenders, or others. Until the transaction is completed, the companies involved go on about their business and are subject to risks. Contract terms that deal with material adverse changes are carefully negotiated by the parties and take into account the relevant circumstances of each party. Thus, the definition of material adverse changes is unique to each contract. When a party to a contract claims that a material adverse change had occurred and refuses to complete the transaction on that ground, the other party may disagree and

litigation A lawsuit is a proceeding by one or more parties (the plaintiff or claimant) against one or more parties (the defendant) in a civil court of law. The archaic term "suit in law" is found in only a small number of laws still in effect today. ...

may ensue. One notable example of this was the planned acquisition of SLM Corporation (formerly known as Sallie Mae) by a group including

Bank of America The Bank of America Corporation (Bank of America) (often abbreviated BofA or BoA) is an American multinational investment banking, investment bank and financial services holding company headquartered at the Bank of America Corporate Center in ...

and

JPMorgan Chase JPMorgan Chase & Co. (stylized as JPMorganChase) is an American multinational financial services, finance corporation headquartered in New York City and incorporated in Delaware. It is List of largest banks in the United States, the largest ba ...

. In the United States, much of this litigation occurs in the

Delaware Court of Chancery The Delaware Court of Chancery is a court of equity in the U.S. state of Delaware. It is one of Delaware's three constitutional courts, along with the Supreme Court and Superior Court. Since 2018, the court consists of seven judges. The cour ...

because many large American companies are organized under Delaware law. According to a

precedent Precedent is a judicial decision that serves as an authority for courts when deciding subsequent identical or similar cases. Fundamental to common law legal systems, precedent operates under the principle of ''stare decisis'' ("to stand by thin ...

of that court, the party that seeks to avoid completion of a transaction must prove that a material adverse change as defined by the parties' contract has occurred. Delaware Court of Chancery opinion in Frontier Oil Corp. v. Holly, 2005

References

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External links

2015 Annual MAC Survey from Nixon Peabody2014 Annual MAC Survey from Nixon Peabody2013 Annual MAC Survey from Nixon Peabody2012 Annual MAC Survey from Nixon PeabodyAmerican Bar Association: Revisiting the MAC Clause in Transaction Agreements2011 Annual MAC Survey from Nixon PeabodyAccredited Home Lenders v. Lone Star Funds: A MAC Case StudyDrafting Material Adverse Change Clauses
from McDermott Will & Emery Legal terminology Mergers and acquisitions Financial law