In the fields of

mergers and acquisitions Mergers and acquisitions (M&A) are business transactions in which the ownership of companies, other business organizations, or their operating units are transferred to or consolidated with another company or business organization. As an aspect ...

and

corporate finance Corporate finance is the area of finance that deals with the sources of funding, the capital structure of corporations, the actions that managers take to increase the Value investing, value of the firm to the shareholders, and the tools and anal ...

, a material adverse change (abbreviated MAC), material adverse event (MAE), or material adverse effect (also MAE) is a change in circumstances that significantly reduces the value of a

company A company, abbreviated as co., is a Legal personality, legal entity representing an association of people, whether Natural person, natural, Legal person, legal or a mixture of both, with a specific objective. Company members share a common p ...

. A

contract A contract is a legally enforceable agreement between two or more parties that creates, defines, and governs mutual rights and obligations between them. A contract typically involves the transfer of goods, services, money, or a promise to tran ...

to acquire, invest in, or lend money to a company often contains a term that allows the acquirer, investor, or lender to cancel the transaction if a material adverse change occurs. Where an acquiring company uses its own

stock In finance, stock (also capital stock) consists of all the shares by which ownership of a corporation or company is divided.Longman Business English Dictionary: "stock - ''especially AmE'' one of the shares into which ownership of a company ...

as part of the consideration paid to acquire another company, or in a

merger Mergers and acquisitions (M&A) are business transactions in which the ownership of companies, other business organizations, or their operating units are transferred to or consolidated with another company or business organization. As an aspect ...

of two companies, the contract may provide that either

party A party is a gathering of people who have been invited by a host for the purposes of socializing, conversation, recreation, or as part of a festival or other commemoration or celebration of a special occasion. A party will often feature f ...

to the transaction can cancel it if a material adverse change significantly reduces the value of the other party. Large transactions often require a long period of time between the signing of a contract and completion of the transaction. For example, time may be required to obtain approval of the transaction by government agencies,

shareholder A shareholder (in the United States often referred to as stockholder) of a corporation is an individual or legal entity (such as another corporation, a body politic, a trust or partnership) that is registered by the corporation as the legal own ...

labor union A trade union (labor union in American English), often simply referred to as a union, is an organization of workers intent on "maintaining or improving the conditions of their employment", ch. I such as attaining better wages and benefits ( ...

s, lenders, or others. Until the transaction is completed, the companies involved go on about their business and are subject to risks. Contract terms that deal with material adverse changes are carefully negotiated by the parties and take into account the relevant circumstances of each party. Thus, the definition of material adverse changes is unique to each contract. When a party to a contract claims that a material adverse change had occurred and refuses to complete the transaction on that ground, the other party may disagree and

litigation - A lawsuit is a proceeding by a party or parties against another in the civil court of law. The archaic term "suit in law" is found in only a small number of laws still in effect today. The term "lawsuit" is used in reference to a civil actio ...

may ensue. One notable example of this was the planned acquisition of SLM Corporation (formerly known as Sallie Mae) by a group including

Bank of America The Bank of America Corporation (often abbreviated BofA or BoA) is an American multinational investment bank and financial services holding company headquartered at the Bank of America Corporate Center in Charlotte, North Carolina. The bank w ...

and

JPMorgan Chase JPMorgan Chase & Co. is an American multinational investment bank and financial services holding company headquartered in New York City and incorporated in Delaware. As of 2022, JPMorgan Chase is the largest bank in the United States, the ...

. In the United States, much of this litigation occurs in the

Delaware Court of Chancery The Delaware Court of Chancery is a court of equity in the American state of Delaware. It is one of Delaware's three constitutional courts, along with the Supreme Court and Superior Court. Since 2018, the court consists of seven judges. The chi ...

because many large American companies are organized under Delaware law. According to a

precedent A precedent is a principle or rule established in a previous legal case that is either binding on or persuasive for a court or other tribunal when deciding subsequent cases with similar issues or facts. Common-law legal systems place great valu ...

of that court, the party that seeks to avoid completion of a transaction must prove that a material adverse change as defined by the parties' contract has occurred. Delaware Court of Chancery opinion in Frontier Oil Corp. v. Holly, 2005

References

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External links

2015 Annual MAC Survey from Nixon Peabody2014 Annual MAC Survey from Nixon Peabody2013 Annual MAC Survey from Nixon Peabody2012 Annual MAC Survey from Nixon PeabodyAmerican Bar Association: Revisiting the MAC Clause in Transaction Agreements2011 Annual MAC Survey from Nixon PeabodyAccredited Home Lenders v. Lone Star Funds: A MAC Case StudyDrafting Material Adverse Change Clauses
from

McDermott Will & Emery McDermott Will & Emery is an international law firm with a diversified business practice. The firm is one of the largest grossing law firms in the US and globally, and its lawyers represent a wide range of commercial, industrial and financial e ...

Legal terminology Mergers and acquisitions Financial law