6.1.2: Note on Material Adverse Change

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Abstract

The term Material Adverse Change (or "MAC"; also sometimes called Material Adverse Effect or "MAE") describes an occurrence, event or condition that could or would likely cause a long-term and significant diminution in the earnings power or value of a business. The phrase is commonly used in venture investment or M&A transactions in connection with a closing condition whereby the investor/acquiror has the benefit of a 'walk' right if the target company experiences a serious adverse change between the date the contract is signed and the transaction closing date. The concept is also used in connection with standard representations and warranties.1 Two decisions out of the Delaware Chancery Court, IBP, Inc. v. Tyson Foods, Inc.2 and Frontier Oil Corporation v. Holly Corporation3, have examined MAC clauses and are instructive to lawyers and other venture or M&A professionals who, before these cases, often believed that adding the seemingly magic "MAC" words to a definitive agreement would provide an escape hatch from a deal that turned bad because of changes or events affecting the target business. While these cases shed light on court construction of MAC clauses in M&A contexts, for reasons stated below, it remains to be seen whether a court would apply the same standards in connection with investment transactions.

Sub-Topics

• 6.1.2.a: Is It a Material Adverse Effect? Discussion of Frontier Oil v. Holly Corporation