Clause primer
Material adverse change (MAC) and material adverse effect (MAE) clause
Defines a serious adverse change in a business and uses that definition to let a party refuse to close, stop funding or call a default.
Legal information, not legal advice. What a clause does depends on its exact words, the rest of the agreement and the governing law.
Also called: MAC clause, MAE clause, material adverse effect definition, no-MAC condition. Where you find it: Merger and acquisition agreements, credit agreements and loan facilities, investment and subscription agreements, and some large supply or financing contracts.
SAMPLE CLAUSE (INVENTED FOR THIS PRIMER)
"Material Adverse Effect" means any event or change that, alone or together with others, has had or would reasonably be expected to have a material adverse effect on the business, financial condition or results of operations of the Company, taken as a whole; provided that none of the following counts: (a) changes in general economic or market conditions; (b) changes in law or accounting rules after the date of this Agreement; (c) changes affecting the Company's industry generally; or (d) the announcement of this Agreement. Items (a) through (c) do count to the extent they affect the Company disproportionately compared with others in its industry. Buyer need not close if a Material Adverse Effect has occurred since the date of this Agreement.
How it works
Core definition
The opening words set the threshold: the effect must be material to the business taken as a whole, so harm to a single unit or contract may not be enough. Check which items are listed (business, financial condition, results of operations and sometimes "prospects"), because each addition widens the clause.
Carve-outs
The numbered exclusions move general risks such as the economy, markets, changes in law and industry conditions back onto the protected party. Real agreements often carry a longer list, and each item allocates a specific risk.
Disproportionate-effect exception
This sentence puts some carved-out events back in if the Company is hit harder than its peers. In most drafting only the disproportionate share counts, and the comparison group ("others in its industry") can be defined narrowly or broadly.
Closing condition
The last sentence gives the definition its practical effect by letting Buyer refuse to close. The same term is often reused to qualify representations or, in a loan, to define an event of default.
Why it is there
The clause allocates the risk of a serious deterioration in the business between signing and closing, or during the life of a facility. Sellers and borrowers accept it because the threshold is high and the carve-outs shift general and systemic risks back to the buyer or lender. In practice the clause is rarely litigated to a final result and is more often a basis for renegotiation.
How it works with other clauses
- Representations are often qualified by "except as would not have a Material Adverse Effect," which can combine with a bring-down condition to set a second, related closing test.
- A bring-down condition and a standalone no-MAC condition can overlap, so read them together to see which test actually controls closing.
- In credit agreements a MAC may appear as a condition to each borrowing, as a representation repeated on each draw or as an event of default, with very different consequences.
Negotiating it
Who it protects: The buyer, lender or investor.
If it protects you
- Keep the forward-looking "would reasonably be expected to" language so that a clear future effect counts.
- Resist an open-ended list of carve-outs and keep the disproportionate-effect exception attached to the general ones.
- Consider whether the definition should also cover the counterparty's ability to perform the agreement and close.
If it runs against you
- Standard ask: a full set of carve-outs covering general economic, market, industry, legal, political and catastrophic events, plus the announcement of the deal.
- Fallback: accept the disproportionate-effect exception but limit it to the incremental impact measured against a defined peer group.
- Ask to delete "prospects" and to add that failure to meet forecasts is not itself a MAE, while allowing the underlying causes to be considered.
Escalate before accepting: A MAC defined without carve-outs, tied to "prospects" or judged in the counterparty's sole discretion works as a practical option to exit and should be escalated.
What AI explanations get wrong
- Treating any significant drop in revenue or earnings as a MAE. Check: courts have generally set a high threshold, often looking for a lasting effect on the business as a whole, so read the actual definition and confirm the approach under the governing law.
- Summarizing the carve-outs without the disproportionate-effect exception. Check: read the sentence after the list and confirm which carve-outs it applies to.
- Assuming a MAC clause in a credit agreement works like one in an acquisition agreement. Check: identify whether it is a draw condition, a repeated representation or an event of default, and what remedy follows.
Where the law varies
Courts apply MAC clauses as a matter of contract interpretation, and the threshold, burden of proof and treatment of carve-outs depend on the governing law and the precise wording. Many reported U.S. decisions involve agreements governed by Delaware law, and other jurisdictions may approach these questions differently.
TOOLS
Need a primer like this for a clause in front of you? The Clause Primer Kit, included in All-access, produces one in this format inside the AI tool you already use, with checks built in. For reviewing whole agreements, see the Practice-Area Pack: Corporate and Governance.