Material Adverse Change

CHAPTER 7Is It Too Late to Back Out?

What is wrong with changing your mind because the facts changed? But you have to be able to say why you changed your mind and how the facts changed.

—Lee Iacocca

So here we are—the chapter this book is all about, the material adverse change (MAC). As discussed in the Introduction, MAC clause is a legal provision normally found in mergers and acquisitions contracts. It allows a buyer to cancel an acquisition if the target company suffers a significant negative change in their financial position prior to closing the deal.

The clause is intended to protect the acquirer from major events that may make the target less attractive to buy. Large transactions often require a long period of time between actual agreement to buy (signing) and the completion of the transaction (closing). This time is used to obtain governmental or regulatory approvals, get shareholder consent to the transaction, arrange financing for the deal, or anything else that needs to be done prior to the new owners taking over running of the business.

During this period, the target company continues to function as it always has pending the completion of the merger, and is subject to the normal risks of its business, the economy, or acts beyond its control. The company continues to be run by the existing management team under their policies and procedures. This is a very risky period for a buyer. They have committed to buy the company at a firm price, but they can't manage the ...