Legal Alerts/27 Mar 2020

The Coronavirus and M&A Transactions: MAC/MAE Clauses

Over the last couple of weeks, the effects of the coronavirus (COVID-19) outbreak have been widespread, disrupting numerous lives, global supply chains, financial and labor markets. With the rapidly evolving situation, it is important to closely monitor the pandemic and how it may affect performance of contractual obligations under potential or current M&A transactions.

Because of the COVID-19, buyers may anticipate drastic changes to the financial performance of their targets and look for a way to back out of the deal. Sellers, on the other hand, may be concerned that implications of COVID-19 might delay completion of the deal or terminate the agreement. Given the severe consequences on commercial dealings, contractual provisions, including force majeure and material adverse change (“MAC”) under the applicable governing laws determine whether a party is permitted to postpone or escape their obligations.

What is a “Material Adverse Change” clause?

In merger and acquisition agreements, a material adverse change provision, also known as a “material adverse effect” (“MAE”) provision, allocates financial and other risks relating to the business and the acquisition transaction between the buyer and the seller. As a general rule, a MAC provision captures unforeseen events or consequences that have a long-term, dramatic and adverse effect on the value of the target. As such, MAC/MAE clauses may allow a party to postpone or terminate the transaction if there is a change in the circumstances that significantly lessens the value of the target company or business.

Although, the parties heavily negotiate MAC provisions, their limitations and exclusions, there is typically no specific language defining what exactly constitutes a material adverse change. As a result, the courts use a fact-based analysis to declare whether a material adverse change has been triggered. The party arguing for the application of the material adverse change provision must show that the adverse change substantially threatens the overall earning potential of the target company in a durationally-significant manner or in other words, over an extended period of time, usually years. However, most, if not all, MAC and MAE provisions commonly exclude, specifically, the effects of global market conditions, Acts of God, pandemics, and health emergencies from the definition of MAC, unless there has been a disproportionate effect on the company.

Will COVID-19 qualify as MAC?

Assessing whether the impact of the coronavirus outbreak will be considered a material adverse change will depend on the analysis of the contractual terms, the surrounding circumstances, and the impact of COVID-19 on the target’s particular business compared to other participants of the same industry.

Since most MACs include the exclusion for pandemics, health emergencies and changes in general economy, there is a high probability that COVID-19 does not qualify as MAC. When negotiating MAC clauses the parties usually allocate market and systematic risks to the buyer, unless it affects the target disproportionately compared to other industry participants. Therefore, the MAC provision usually does not protect the buyer in case where it would face the same issues also when purchasing some other company operating in same industry. In addition, even if the parties did not explicitly exclude pandemics or changes in general economy from the definition of material adverse change, invoking a MAC clause due to COVID-19 issues may be problematic in most circumstances because the long-term effects of COVID-19 on financial and operational aspects are still unknown. It would be difficult to persuade a court that the coronavirus substantially and disproportionately threatens the target’s overall earning capacity viewed in the long term and that the impact of COVID-19 will persist in a durationally significant way.

As more information about the effects of COVID-19 are discovered, parties to the transaction, especially the buyer, will have to continually evaluate whether the impact will have a significant, long-term effect on the target company.

Borenius’ lawyers are available to assist in addressing any questions you may have regarding your business’ situation.

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Additional information

Johannes Piha



Juha Koponen


Helsinki, London, New York