Material adverse change (MAC) clauses have become increasingly prevalent in acquisition agreements since the global economic downturn. In the context of mergers and acquisitions, MAC clauses typically allow a buyer to terminate an agreement prior to its completion. It can also be used as leverage for renegotiations. While MAC clauses appear to be similar to force majeure clauses, they are in fact distinct. MAC clauses apply where there has been a fundamental change to the target company’s affairs, although the acquisition can still take effect. Conversely, force majeure clauses encompass acts of God beyond the parties’ control, which cause the subject matter of the agreement to be incapable of performance.
While MAC clauses are common in mergers and acquisition deals across the US and the UK, closer to home the use of these clauses is still generally rare, especially in Singapore and Malaysia. The rarity of MAC clauses in Malaysia can be attributed to the fact that our economy has not been as adversely affected by the global economic crisis. However, a study conducted by Stamford Law in Singapore illustrated that there has been a surge in the inclusion of MAC clauses in Hong Kong – where in 2007 it was used in about 60% of public merger and acquisition deals.
If successfully invoked, a MAC clause would result in the buyer walking out without fearing the repercussions of a wrongful repudiation and make the seller bear the risk of a material event which transpired before completion of a deal. The onus of proving a MAC is on the buyer, seeking to rely on the MAC clause as an exit option.
This onus is often difficult to discharge and the courts in other jurisdictions have indicated that a short term hiccup in earnings does not suffice to constitute a MAC. An event may only amount to a MAC when it is viewed as a long term threat to the prospects of the target company.
In conclusion, given the continuing uncertainty in the global and local commercial climate, it is likely MAC clauses will become more ubiquitous in local public mergers and acquisitions. This is especially in the context of private equity, where interests are not proprietorial and the investor intends to exit within a shorter investment period.
Brian Chia
Partner
Tel: +603 2298 7999
E: brian.chia@wongpartners.com