The Snapshot
- The previous six months have been marked by significant economic instability. For an example, in April 2025, the Trump Administration introduced a 10% baseline tariff on most goods and services imported from Australia to the United States, as well as various other reciprocal tariffs.
- Current market uncertainty presents new challenges for domestic and cross-border M&A deals, where parties will need to consider whether economic instability and geopolitical matters will trigger the material adverse change clauses that are often found in contracts, and allow buyers to effectively ‘back out’ of the deal.
- The extent to which a buyer can rely on material adverse change as a ground for termination depends entirely on the construction of the clause. Parties should ensure the material adverse change clause is carefully considered depending on whether they are on the buy-side or sell-side of a transaction.
The Material Adverse Change Clause
A ‘material adverse change’ (MAC) clause allows a party to terminate a contract in circumstances where a MAC has occurred in respect of the target company. In the context of an M&A deal, the MAC clause is drafted for the benefit of the buyer and provides it with an avenue to ‘back out’ of the transaction (or renegotiate its terms) in situations where an event has significantly diminished the attractiveness of the target.
The impact of this clause and the circumstances in which it can be triggered is entirely dependent on the construction of the clause and the definition of ‘material adverse change’. These clauses are also generally drafted to run through to completion, allowing the buyer to terminate at any point before completion if a MAC occurs. In this way, the negotiation and drafting of the MAC clause is essentially a risk-allocation exercise, with the buyer attempting to put the risk of a MAC occurring onto the seller (by allowing the buyer to terminate with a broadly drafted MAC).
A MAC clause may be drafted broadly or narrowly. An example of a buyer-friendly MAC clause would include a low quantitative threshold for the MAC event, or a general qualitative threshold that is at the discretion of the buyer (i.e. any event that the buyer believes will diminish the value of the target).
In contrast, a seller-friendly MAC clause will be tied to specific events and/or higher financial thresholds that would be unlikely to be met unless something extraordinary was to occur.
The negotiation of the MAC clause is a direct function of the deal terms, the length of the time between signing and completion, and the number of conditions precedent. If there is a short period between signing and completion, a narrow and seller-friendly MAC clause is of less utility, as the risk of any ‘major event’ triggering the MAC clause is unlikely. Conversely, if there is a long period of time between signing and completion, then a more narrow MAC clause could be reasonable. Of course, a long period of time between signing and completion may result in the buyer requiring a broader MAC clause, given any geopolitical events that fundamentally impact the target will be at their risk without such a clause.
The MAC clause may also be qualified by a series of ‘carve-outs’, which are those events that the parties agree will not constitute a MAC. These are typically negotiated and may include, for example, actions that are contemplated by the transactions documents or events that impact the whole of the target’s industry, changes in law etc. The effect of the carve-out is that it limits the circumstances in which the buyer can rely on the MAC clause to avoid the contract.
Relying on the Material Adverse Change clause
If a party invokes the MAC clause to terminate a contract, and the relevant event cannot be properly regarded as a material adverse change (as defined under the contract), the buyer will be liable for wrongful repudiation. From here, the seller can terminate and seek damages for breach of contract (or alternatively seek specific performance). So, when is an event properly regarded as a material adverse change?
Unfortunately, in Australia, there is minimal judicial authority concerning the interpretation of MAC clauses. There remains considerable uncertainty as to their operation and enforceability in commercial contexts. However, in taking insights from English cases, courts have been reluctant to allow parties to rely on the MAC clause as a means of escaping their contractual obligations.
In The Football Association Premier League Ltd v PPLive Sports International Ltd [2022] EWHC 38 (Comm), the English High Court held that the COVID-19 Pandemic did not create a fundamental change to the format of the premier league competition, notwithstanding that the timing of the matches had changed and fans could not attend those matches. A similar conclusion was reached in BM Brazil I Fundo De Investimento Em Participações Multistrategia & Ors v Sibanye BM Brazil (Pty) Ltd & Anor [2024] EWHC 2566 (Comm) where the English High Court determined that a geotechnical event that occurred in respect of a Brazilian mine that was to be acquired by the buyer did not constitute a material adverse change because the event was insignificant and could be rectified with costs equivalent to 5% of the purchase price.
These cases demonstrate and reiterate the underlying key principles in relation to a MAC, namely that:
- the event must significantly or substantially threaten the target and impair the party’s ability to perform the contract; it must not be a temporary hiccup in earnings or operations; and
- the event must have been unknown at the date of execution in the sense that it was not part of the risk profile and thus, could not have been uncovered or otherwise dealt with in due diligence.
So where does this leave us?
The current geopolitical landscape, heightens the risk that the MAC clause could be triggered and therefore, places buyers and sellers alike in a difficult situation given the uncertainty surrounding the judicial interpretation of a MAC. It has not yet been tested by Australian courts whether a tariff can be relied on in a MAC clause.
In response to geopolitical concerns, buyers are well advised to opt for MAC clauses that are clearly drafted in terms of the financial threshold (and how this threshold is calculated, which is also often a point of contention) and prescribe all events (including, for an example, knock-on effects of tariff variations) that constitute a material adverse change. From a sell-side view, sellers should ensure there is a comprehensive set of carve-outs which exclude certain geopolitical matters (for example, changes in law and more specifically, tariffs).
Regardless, parties should take a nuanced approach by considering and outlining:
- a specific quantitative threshold (for instance, a 20% decline in EBITDA with a clear reference to the baseline and how the decline is to be calculated);
- the specific events which will constitute a MAC; and
- the specific carve-outs which do not constitute a MAC.
Such an approach is beneficial from both a buy and sell side perspective, as it ensures both parties understand their respective rights, and mitigates the risk of a court striking down the relevant MAC clause.
As we continue to navigate the new trade landscape, these provisions will be tested and parties should carefully consider whether the MAC clause adequately addresses potential deal risks.
For more information, please contact Benny Sham, Peter Williams or Irfaan Rashid.
