Buyers negotiate hard for a MAC condition. Courts almost never let them use it.

Every acquisition agreement allocates one uncomfortable question: Who bears the risk that the target's business deteriorates between signing and closing? The material adverse change (MAC) clause is the primary tool for answering it. It sits quietly in the closing conditions section until a deal goes sideways, and then it becomes the most litigated few words in the agreement.

The MAC clause is frequently the last provision to receive serious drafting attention and the first provision everyone wishes they had drafted more carefully once a dispute arises. Understanding how it actually functions, and how it has been interpreted by the courts that matter most, changes how both sides should approach the negotiation from the outset.

What a MAC Clause Actually Does

A MAC condition lets a buyer walk away, or refuse to close, if the target suffers a change that is material and adverse to its business, financial condition, or results of operations. In practice it functions less as a walk-away trigger and more as a backstop. It is a way to allocate general, market-wide, and industry-wide risk to the buyer, while leaving company-specific collapse risk available as a basis for the buyer to refuse to close.

This risk allocation function matters because acquisition agreements are often signed well before they close. Financing needs to be arranged, regulatory approvals obtained, and third-party consents secured. During that gap, ordinary business risk does not disappear. And the MAC clause decides, in advance, who absorbs that risk. Parties who treat the MAC clause as boilerplate are, without realizing it, making a significant decision about that risk allocation by default.

Carve-Outs Do the Real Work

The definition itself is rarely where deals turn. The fight is in the carve-outs. General economic conditions, industry-wide changes, changes in law, war, natural disasters, and pandemics are customarily excluded from what counts as a MAC. Sellers then negotiate further to exclude the impact of the transaction's own announcement or a buyer's breach.

Often, buyers push back with a disproportionate effect carve-back. Under this formulation, the exclusion only applies if the change does not hit the target harder than its industry peers. This single phrase often becomes the most heavily negotiated sentence in the entire definition, because it determines whether an industry-wide downturn that happens to hit the target especially hard still counts as excluded risk or reverts to being the buyer's problem.

Bar Is High

Delaware courts have made clear, across cases including In re IBP Shareholders Litigation, Frontier Oil v. Holly, Genesco v. Finish Line, and Hexion v. Huntsman, that a buyer invoking a MAC condition faces a steep burden. The change generally must be durationally significant. That is to say something like a single bad quarter is not enough. Courts measure the alleged change against the target's earnings power over a commercially reasonable period, not just the most recent results.

Akorn v. Fresenius Kabi remains the outlier worth knowing. It is the first Delaware decision to find that a MAC had actually occurred, but only after a collapse so severe and sustained that the court itself characterized the facts as extreme. The lesson for practitioners is not that Akorn opened the door to easier MAC claims. It is that Akorn illustrates just how far a target's business has to fall before a MAC claim will actually succeed.

Drafting Points Worth Fighting For

Because litigation outcomes involving MACs tend to favor sellers, buyers who actually want walk-away leverage often supplement the MAC definition rather than rely on it alone. Useful tools include tighter interim operating covenants, specific financial-metric conditions, key-person conditions, and allocating the burden of proof to the seller directly in the agreement.

Sellers, for their part, should scrutinize whether “forward-looking prospects” language has crept into the definition. Including forward-looking prospects within the scope of a MAC meaningfully lowers the buyer's bar, because it allows the buyer to point not just to current conditions but to a reasonable expectation of future deterioration. The standard MAC definition asks whether there has been a material adverse change in the target's business, financial condition, or results of operations. That formulation is backward and present looking. It measures whether something has already happened to the company's actual, historical or current financial performance.

By adding “prospects language” the definition reads something like "a material adverse change in the business, financial condition, results of operations, or prospects of the Company." Once "prospects" is in there, the buyer no longer has to show that the business has already deteriorated. It only has to show that the company's future outlook has worsened. With prospects language in play, if expected future performance looks materially worse than it did at signing, buyer’s may have an out through the MAC clause even if current results are still fine.

Proving actual, realized financial decline requires hard numbers (e.g., trailing revenue, EBITDA, margins, etc.). However, proving a change in prospects can rest on softer, more predictive evidence including a lost customer that hasn't yet shown up in the financials, a delayed product launch, a regulatory development, or a soft sales pipeline. A buyer arguing prospects has more raw material to work with, and a court evaluating that claim is being asked to make a predictive judgment rather than simply compare historical financial statements.

That is why sellers' counsel routinely push to strike "prospects" from the definition, or at minimum to restrict its scope by limiting it to specific, objectively verifiable metrics rather than open-ended future outlook. Delaware's MAC case law was largely built around the traditional formulation and its durationally significant, backward looking standard. Adding prospects language is a drafting move aimed at getting the buyer out from under that demanding standard, not a change that current case law directly addresses in the same way. It's a small, easy-to-overlook word with real leverage attached to it.

Beware the Carve-Backs

As mentioned above, the MAC definition typically excludes broad, systemic risks that shouldn't be the target company's problem alone. Changes in general economic conditions, industry-wide changes, changes in law, acts of war, pandemics, etc. should be a risk that buyer’s bear as well.  So a change caused by an industry-wide downturn would not count as a MAC, because it's typically carved out of the definition.

Buyers then negotiate an exception to that exception. The clause typically reads something like: "...provided that such change may be taken into account in determining whether a Material Adverse Change has occurred to the extent it disproportionately affects the Company relative to other participants in the industries in which the Company operates." That's the disproportionate effect carve-back. It takes back a slice of what the carve-out just gave away. If the industry-wide event hit this particular target harder than it hit comparable companies, the buyer can still point to it as part of a MAC claim.

The net effect of the two layers together is general industry risk is the buyer's problem, unless the target was disproportionately hurt, in which case it reverts to being fair game for the buyer's MAC argument.

Why the drafting of the carve-back matters so much. The carve-back is usually written as a single blanket sentence that applies to every carve-out at once (i.e., "...provided that any of the foregoing may be taken into account to the extent they disproportionately affect the Company."). That single sentence, tacked onto the end of a list of eight or nine carve-outs, quietly re-exposes the seller on every one of them at once. A seller who negotiated hard to get pandemics, changes in law, and industry-wide conditions excluded can find that a broadly drafted carve-back has clawed back meaningful protection on all three simultaneously, even though the seller thought each carve-out stood on its own.

That's why sellers' counsel should look closely at scope and degree of carve-backs.  Does the carve-back apply to every carve-out, or can it be limited to only the ones where a disproportionate effect argument is genuinely likely to arise (e.g., broad economic conditions) while leaving others (e.g., pandemics or acts of war) fully protected without a carve-back at all?  The comparator group (e.g., "disproportionate relative to other participants in the industry") is doing a lot of work. A narrow, poorly defined industry comparator (or none at all) gives a buyer more room to argue disproportionality than a comparator tied to specific, identifiable peer companies or a defined index.  Some carve-backs require the effect to be "materially disproportionate," which is a meaningfully higher bar for the buyer than just "disproportionate."

Sellers generally want the carve-back drafted narrowly, not broadly, so it claws back as little of their negotiated protection as possible. The point is simply that sellers need to read the carve-back against every carve-out it touches, rather than treating it as a single throwaway proviso at the end of the list.  Sellers should also confirm that the disproportionate effect carve-back is drafted broadly enough to cover the carve-outs the seller actually cares about, since a narrowly drafted carve-back can quietly undo much of the protection the carve-outs were meant to provide.

Practical Guidance

Sellers should push to keep the MAC definition tightly tied to a durationally significant decline in the target's earnings power, consistent with the Delaware case law, and resist any effort to import prospects language or a lower disclosure standard. Look for ways to supplement the MAC with more concrete, objectively measurable closing conditions rather than relying on the MAC definition alone to protect against a genuine downturn between signing and closing.

Whether you are on the buy side or the sell side, the MAC clause deserves more attention at signing than it typically receives. By the time anyone reads it closely again, the deal is usually already in trouble, and the negotiating leverage to fix it has already been spent.

This post is intended for general informational purposes and does not constitute legal advice. Please contact Jeffrey R. Glassman, Esq. in our Corporate, IP and Technology group to discuss how these issues apply to your business.