MAC clauses in corporate acquisitions: allocating risk appropriately between signing and closing

What is a MAC clause and what is its purpose?

Signing and closing often take place at different times, particularly if merger control, FDI approvals, financing, board approvals or other conditions must be met before completion. This period can last for weeks or months.

In the absence of specific provisions, the buyer remains, in principle, bound by the concluded contract. The ongoing performance of the business then forms part of the risk that the buyer has assumed by agreeing to the purchase price. A MAC clause shifts a narrowly defined portion of this risk back onto the seller.

The clause should clearly distinguish between four levels:

Trigger. Which events or effects can constitute a MAC?

Materiality and duration. How severe and how long-lasting must the adverse effect be?

Carve-outs. Which general or known risks are excluded?

Legal consequences. Is the buyer entitled to refuse to proceed with the closing, to withdraw from the contract, to set a deadline, or merely to claim damages?

In practice, a MAC is often a condition precedent to the purchaser’s obligation to complete the transaction. This is distinct from a condition that automatically terminates the entire contract. The wording must therefore determine whether the contract continues to have effect, whether a right of termination or withdrawal arises, and what notification and time-limit requirements apply.

Business MAC, Market MAC and Materiality

A Business MAC relates to adverse developments in the target company or its group. Examples include the sustained loss of key customers, suppliers or licences; serious compliance or regulatory breaches; and the significant destruction or loss of key assets. This category also includes a permanent slump in turnover, EBITDA or cash flow; the loss of key personnel whose absence would affect the company’s value; and significant legal disputes or regulatory actions.

A Market MAC additionally encompasses general developments, such as a recession, an industry crisis, a rise in interest rates, war, a pandemic or a change in the law. Sellers regularly seek to exclude such risks through carve-outs, as they have no control over them and the buyer generally assumes responsibility for the market environment in which the investment is made.

Materiality can be defined in qualitative, quantitative or combined terms. Qualitative definitions are flexible but leave room for interpretation. Terms such as ‘materially adverse effect on the net assets, financial position or results of operations’ should be supplemented by details regarding duration, the level of analysis and excluded effects. Quantitative thresholds may be based on turnover, EBITDA, equity, net financial debt or enterprise value. They provide clarity but carry risks of manipulation and misclassification, and may overlook an incident that is economically significant but does not affect key financial ratios.

Duration is often a decisive factor. A temporary decline or a single weak month should generally not be sufficient. Options include a defined period, a ‘durationally significant’ requirement, or an assessment of long-term profitability.

What are the usual carve-outs and exceptions?

Carve-outs assign general risks, or risks deliberately assumed by the purchaser, to the purchaser.

Typical exclusions relate to general economic or financial developments, changes in the industry or sales markets, and changes in legislation, accounting standards or taxation. Exclusions usually also include war, terrorism, sanctions, pandemics and natural disasters, as well as developments in interest rates, exchange rates and commodity prices, and the consequences of the announcement or completion of the transaction itself. The same applies to measures demanded or approved by the buyer, to the mere failure to meet forecasts, and to circumstances that had already been disclosed or were known to the buyer.

In the case of forecasts, a distinction should be made between the failure to meet them and the underlying cause. The failure to meet the forecast may be excluded, whilst a customer loss that is not excluded may still constitute a MAC.

Many carve-outs contain a reverse exception for disproportionate effects. A general event remains excluded to the extent that it affects the target company significantly more severely than comparable companies. The peer group, measurement method, time period and treatment of the disproportionate share should be specified.

The transaction-specific carve-out must be worded with particular care. A buyer should not be liable for losses caused by the seller itself through inadequate communication or a breach of interim covenants. Conversely, the buyer must not base a MAC on effects that inevitably result from the transaction it has sought to enter into.

Is there any case law on MAC clauses?

Published German judgements on MAC clauses in company purchase agreements remain rare. Many M&A agreements contain arbitration clauses. Furthermore, disputes are often settled out of court. There is therefore no established German threshold above which an adverse change would always be deemed ‘material’.

US case law, particularly that of Delaware, is frequently used as a guide for negotiation and interpretation. Whilst it is not directly applicable to German law, it does reveal recurring guiding principles. The threshold for a MAC is generally high; short-term fluctuations are typically insufficient. The decisive factor is a sustained impairment of long-term profitability. Carve-outs and ordinary-course covenants are assessed on their own merits. A purchaser must therefore not prematurely refuse to fulfil its obligation to complete the transaction by citing unclear developments.

The well-known Akorn/Fresenius ruling of 2018 remains an exceptional case, in which a significant and sustained slump in earnings coincided with serious regulatory problems. At the same time, pandemic-related rulings such as AB Stable demonstrate that, whilst an event may be excluded by a MAC carve-out, measures taken by the seller may nevertheless breach a separate ordinary-course covenant.

For German contracts, the main implication is that the parties should expressly regulate triggers, carve-outs, behavioural obligations and legal consequences. One cannot rely on supposed market standards in this regard.

How does the MAC clause relate to Section 313 of the German Civil Code (BGB)?

Section 313 of the German Civil Code (BGB) permits, under strict conditions, an adjustment to the contract in the event of a material change in the basis of the transaction, with withdrawal or termination being permitted only as a secondary option. The provision does not apply where the risk in question is allocated to one party by contract or by law.

A MAC clause is therefore, above all, a contractual allocation of risk. It determines which changes the buyer and seller have assumed and what the consequences will be. The more comprehensively the SPA governs risks, closing conditions and interim covenants, the less scope there is, as a rule, for a supplementary adjustment under Section 313 of the German Civil Code (BGB). However, a blanket statement that the MAC clause ‘supersedes’ Section 313 of the German Civil Code (BGB) in every case would be too broad. The decisive factors are the wording of the contract, the level of detail in the provisions and the specific facts of the case. Outside the scope of the regulated risks, Section 313 of the German Civil Code (BGB) may theoretically remain relevant. However, the legal requirements are stringent.

The contract should expressly stipulate whether the MAC provisions and other closing rules are intended to definitively determine the allocation of risk. The legal consequences and the relationship to other claims should also be clear.

Who bears the burden of proof?

In principle, the party deriving rights from a MAC clause must set out and prove that the conditions of the agreed trigger have been met. This is usually the buyer.

In the case of carve-outs, the exact allocation of the burden depends on the wording and general rules of interpretation and evidence. It is therefore too broad a generalisation to always require the buyer to provide full proof that not a single exception applies. The contract may expressly allocate the burden of proof and presentation, or effectively ease it through precise definitions. In practice, the buyer requires up-to-date information about the target company.

The SPA should therefore include ongoing reporting obligations until closing, immediate notification of potential MAC events, and access to management and documents. In addition, it should set out limits to protect confidentiality and comply with competition law, procedures for review, comment and, where necessary, remedy, as well as the deadline and form of a MAC notification. Quantitative thresholds make it easier to provide evidence, but do not resolve all issues of causality and demarcation. In the case of qualitative triggers, internal reports, customer correspondence, forecasts, regulatory correspondence and comparative data are often decisive.

How is a MAC clause structured?

A robust clause typically consists of:

• A definition of the MAC or MAE, specifying the scope – the target company, the group or material subsidiaries.
  
• A list of possible impacts. On business, assets, finances, earnings, licences or enforceability.
  
• Materiality and duration requirements. Including quantitative thresholds, where appropriate.
  
• Carve-outs. For general or known risks.
  
• Exceptions. For disproportionately significant impacts.
  
• Rules on knowledge and attribution. For buyers, sellers and governing bodies.
  
• Information and notification procedures. Including due diligence and, where applicable, a cure period.
  
• Legal consequences. As a closing condition, right to refuse performance, withdrawal or termination.
  
• Exercise period and long-stop date.
  
• Relationship to warranties, interim covenants and other legal remedies.
  

The clause should be tailored to the business model. For a software company, recurring revenue, cyber incidents and key contracts are relevant. For a manufacturing company, focus may be on assets, supply chains, energy and environmental permits. Interim covenants warrant separate provisions. They oblige the seller to manage the business in the ordinary course of business until closing and to undertake certain measures only with consent. A breach may occur even if no MAC has occurred – and vice versa.

How does the MAC clause relate to W&I, warranties and earn-outs?

Warranties relate to the condition of the target company on specific reference dates. If they are reiterated at closing, it must be clarified whether any breach of warranty prevents completion or merely triggers a claim for damages. A MAC clause should not inadvertently extend this allocation of risk.

W&I insurance covers – subject to the terms of the policy – certain warranty and indemnity claims. It is not a substitute for a MAC clause and typically does not cover the general risk of deterioration between signing and closing. Insurers also take into account prior knowledge and new information prior to closing.

An earn-out shifts part of the valuation risk to the period after closing. This may reduce the need for a broad MAC clause, but does not replace it if the buyer does not wish to proceed with the transaction at all in the event of a fundamental deterioration.

Purchase price adjustments often cover net financial debt or working capital, but do not necessarily cover a sustained downturn in the business. Double counting and gaps must be avoided.

Interim covenants govern the seller’s conduct. The MAC clause governs consequences or events. Both should have their own legal consequences.

A consistent SPA assigns an instrument to each risk: closing condition, MAC, warranty, indemnity, purchase price adjustment, earn-out or insurance. The clearer this allocation, the lower the risk that the MAC clause will be used as a general means of exerting pressure to renegotiate the purchase price.