MAC in an uncertain world: The impact of ‘Material Adverse Change’ Clauses

Generally, there are two types of MAC clauses:

• Quantitative MAC clause: Typically defining a material adverse change with regard to tangible financial metrics of a business (e.g. diminution in the target’s EBITDA or revenue beyond a specified percentage or figure)
• Qualitative thresholds: Generally broadly worded, often referring to the occurrence of an event or class of events or a (potentially circular) ‘material adverse change (or effect)’ in the target’s business, without providing any explicitly stated numerical criteria or threshold.

While a qualitative approach may offer greater flexibility than an objective financial metric, this approach can also give rise to interpretive uncertainty. Even a quantitative MAC clause can give rise to ambiguity.  The tension between managing flexibility for the seller, whilst ‘locking in’ protective measures for the benefit of the buyer, is a live issue which the Courts have dealt with recently.

Given the post-pandemic economic changes and uncertainty, it is not surprising that we are now seeing an uptick in litigation that considers the meaning of ‘material adverse change’, as buyers look to safeguard their interests.  The judgments are helpful because MAC clauses have rarely gone before Courts.  Rather, parties tend to avoid litigation and instead opt to renegotiate deal terms or an agreed termination.

Recently, the Supreme Court of NSW In the matter of Mayne Pharma Group Limited [2025] NSWSC 1204 confirmed that the bar is high for a buyer to demonstrate a material adverse change has occurred. In this case, the MAC clause was quantitative in nature and the buyer (Cosette Pharmaceuticals Inc) attempted to establish a material adverse change due to suggestions that the target’s performance was declining. This argument was rejected by the Courts, who determined that a risk that something may go wrong is not sufficient to trigger the ‘actual’ entitlement to walk away from the deal.

In the foreign decision of BM Brazil I Fundo De Investimento Em Participações Multistrategia & Ors v Sibanye BM Brazil (Pty) Ltd & Anor [2024] EWHC 2566 (Comm), the English High Court determined that a geotechnical event that occurred in respect of one of the mines that was to be acquired by the buyer did not constitute a material adverse change because the event’s significance was quantifiable to costs equivalent to 5% of the purchase price.  While there were a number of factors affecting what is considered ‘material’ (such as transaction size, length of sale process, etc), the Court indicated that a reduction of 15-20% of equity value might be material, and a reduction of 20% of equity value would be material (though these were not ‘absolute’ figures).

SME deals have changed in the period following the pandemic.  Clearly there are economic, funding (interest rate) and market (risk) drivers that have contributed to this change.   Transactions slowed prior to the commencement of RBA interest rate cuts.  Deal activity has increased but with a different focus – it is not unusual for even a straightforward SME transaction to have 6 or 8 conditions precedent that give a buyer the ability to terminate and walk away in the event a condition is not satisfied.  In this context, is has become routine to see a MAC clause added as a termination trigger.

For a seller, a MAC clause represents a material completion risk.  We have had sellers walk away from a prospective transaction because of the expansive termination right a MAC clause can give a buyer.  For a buyer or investor, a transaction may not make sense if the performance of the underlying business does not track to projected or expected earnings.

Typically, quantitative MAC clauses provide some certainty by linking the adverse effect to a tangible financial metric.  On the other hand, qualitative clauses, whilst offering flexibility, invite argument and interpretive ambiguity.  The Australian Securities & Investments Commission (ASIC) recommends a quantitative approach, given the objective and clearer standard for assessment.  We have also seen an increase in carve outs to MAC clauses, so as to mitigate the effects of macro-economic events and trends which are beyond the seller’s control.

The Mayne Pharma decision supports the general view that a MAC clauses should be strictly construed and a buyer’s “change of mind” (even if linked to a performance downturn) may not permit termination.  MAC clauses should really only be treated as a safeguard in the negotiation ‘toolkit’, rather than a concrete fallback plan for deal uncertainty.

If sale documents include a MAC clause, an appropriate balance is required (in the context of each deal) to allow each party sufficient certainty that the transaction will complete.  Relevant factors include the potential legal costs, uncertainty, and possible delay to completion if a ‘MAC clause’ dispute arises.

We have had experience in drafting, negotiating, and resolving MAC clauses but also navigating termination of a sale agreement for MAC.  Our litigation team has been involved in mediating and resolving negotiation outcomes based on change in recent times and we expect that this trend will continue.  Any investor or vendor in today’s uncertain economic environment is likely to consider change and delay when negotiating a transaction document.  These two elements and whether the incorporation of a MAC termination right is appropriate must be thought through very carefully.

This article is not legal advice.  It is intended to provide commentary and general information only.  Access to this article does not entitle you to rely on it as legal advice.  You should obtain formal legal advice specific to your own situation.  Please contact us if you require advice on matters covered by this article.