Managing Risk In M&A: Material Adverse Change And Material Adverse Effect Clauses

There are several clauses in M&A contracts where the parties attempt to manage the risks associated with unanticipated future change. Who bears the risk in the event an unforeseen change impacts the performance of the seller's business? Material adverse change ("MAC") and material adverse effect ("MAE") clauses are one mechanism used to avoid or manage the risk of litigation if an unplanned external event changes the nature of the deal.

Background

Whenever there is a period of delay between signing and closing a deal, parties can address the potential risk of material changes that may occur by negotiating and agreeing to a MAC or MAE. In a standard scenario, the clause permits the purchaser to refuse closing where the seller's business has been impacted by a material change.