MAC clauses in business purchase and sale contracts

The objective of this article is to offer a first orientation on the content and usefulness of the MAC clauses, which allows defining their meaning and understanding their relevance in the framework of a negotiation in the sale of a company.

The MAC clause (Material Adverse Change) is a guarantee measure for the buyer in a business sale transaction. It is inserted in the purchase contract or SPA as one more provision, and its translation into English means “adverse material change”. Its purpose is to serve as a guarantee measure for the buyer, against possible unforeseen changes in the target company being acquired. It is an atypical figure, without a specific regulation, whose size is left to the will of the parties.

They work as a guarantee measure because they allow the buyer to terminate the sale-purchase agreement, or modify the agreed conditions of purchase, if there is a material adverse change in the financial or business situation of the company subject to the transaction before the end of the transaction. the operation. In other words, this clause is used to protect the buyer in case the company undergoes significant changes that could negatively affect the operation.

In Spanish law there are already legal formulas that allow one of the parties to disassociate themselves from their contractual commitments when the reality of the circumstances varies in such a way, with respect to what was initially foreseen at the time of contracting, that it justifies a review or modification of the obligations of one of the parts. It is the so-called doctrine of the “rebus sic stantibus”. Question that has already occupied us in previous articles referring to contracts of another nature.

However, the application of the “rebus sic stantibus” is certainly restrictive on the part of our courts, where, in addition, the concurrence of the following conditions is required:

• The concurrence of an extraordinary alteration of the circumstances that were taken into account at the time of formalizing the contract whose modification is intended must be verified.
• Such alteration must be of such a caliber that it causes an exorbitant disproportion between the obligations and benefits of both contracting parties, to the point that the so-called “balance of benefits” is broken.
• It will be essential that such extraordinary and disproportionate alteration be considered unexpected and unforeseeable.

Difficulties in their application of the rebus, which furthermore can only be granted by the courts, have encouraged buyers to require the inclusion of the MAC clause in SPAs or sales contracts. Especially in those where a signing (moment of signing the contract) and a closing (closing date of the operation) are contemplated, with an interim period between both milestones where the parties commit to complying with certain obligations. The MAC clause works as a guarantee applicable in that interim period where there are pending issues, with the idea of fully transferring the business risk to the buyer from the closing.

By establishing a regulation between the parties in an agreed manner to determine the effects in the event of an unforeseen event, we voluntarily close the judicial alternative of modifying the counterparties under the rebus sic stantibus. And this is so because the doctrine applicable by the rebus only allows the courts to modify the obligation scope when there is no agreement between the parties that regulates these unforeseen circumstances.

It should be borne in mind that the MAC clauses are not an absolute guarantee for the buyer, since their application depends to a large extent on different issues depending on what has been agreed and the interpretation that its content allows to make. Which is obviously subject to the conditions freely accepted by both parties, which will require an effort on the part of the buyer for the seller to accept its inclusion.

For a MAC clause to be effective, first of all, a clear and precise wording is required, which perfectly identifies the situations that must be considered, under the protection of said contract, as material adverse changes. In addition, it is recommended that a detailed list of events that must acquire said identification be included. The most common is that they refer to the loss of an important contract, the entry into bankruptcy or the imposition of significant fines or sanctions by the competent authority.

On the other hand, the application of the MAC clause must be proportionate and reasonable. In other words, this clause cannot be used to terminate the sale-purchase agreement for any negative change that affects the company, but rather it must be a substantial change that justifies altering the viability of the operation. For example, the loss of a major contract or a significant lawsuit could be considered material adverse changes.

When we advise the buyer in operations of this nature, and knowing that the MAC clauses can be subject to abusive use by the buyer, we try to introduce not only a balanced wording but also include conflict resolution mechanisms in this regard, which prevents frustrate the operation or that the will of the buyer takes effect without mediating a specific control.

José Luis Casajuana Ortiz
Socio de J. L. Casajuana y responsable del área internacional

16/05/2023