South Africa: Material Adverse Change Clauses: Do They Hold Any Water?

Last Updated: 30 July 2011
Article by Jared Nickig

Originally published June 2011

The MAC clause

A Material Adverse Change (MAC) clause enables a buyer to withdraw from a signed deal if certain criteria defined in the clause are met. MAC clauses are intended to protect buyers against any changes, circumstances, developments, events or occurrences (defined as "Triggers") that have had, or are reasonably likely to have, a material adverse effect on the business (i.e. assets and liabilities), financial condition or operating results of a target and, if appropriate, its subsidiaries, taken as a whole, in the period between the signing of a definitive transactional agreement and the closing of that transaction.

The definition of a MAC is often heavily negotiated because it has the potential to grant a buyer a convenient walk-away right if, after signing a deal, it is struck by "buyer's remorse". It is for this reason that targets will argue that buyers should not be able to walk away from a deal if a Trigger arises out of, is caused by, or relates to:

changes in general economic or political conditions;

  • changes or downturns in the industry in which the target operates;
  • changes or amendments in accounting principles, laws or regulatory policies;
  • the announcement or consummation of the transaction;
  • the identity of the buyer;
  • compliance with the definitive transactional agreement(s); or
  • any act of terrorism or war, unless the target and, if appropriate, its subsidiaries, taken as a whole, is disproportionately affected by the Trigger when compared with its peers in the same industry or geographic area.

Despite all of the potential carve-outs for which a target will negotiate, many buyers still view some form of MAC clause as a necessity in the light of the very real dangers that have been highlighted by the global recession.

In fact, statistics released by the American Bar Association reveal that the agreements in nearly all (i.e. about 97%) public company deals that were signed in 2008 included a MAC clause with a walk-away right.

Of those deals:

  • 98% included a carve-out for changes in economic conditions;
  • 93% included a carve-out for changes in industry conditions;
  • 93% included a carve-out for changes occurring as a result of the announcement of the deal;
  • 86% included a carve-out for changes in law;
  • 83% included a carve-out for changes in accounting principles; and
  • 88% included a carve-out for acts of terrorism or war.

In addition, 92% of the agreements that contained carve-outs included "disproportionate" language as a qualification to those carve-outs, with 53% of those agreements requiring that the disproportionate impact be material or substantial.

Clearly, MAC clauses have become an important part of the machinery driving agreement in most public company deals in the USA. The trend is similar in the UK, Europe and, indeed, in South Africa. But, while these clauses consume a large amount of the negotiation time, it is not yet clear how much protection they grant buyers in practise. The real question is: when, or under what circumstances, will a court find that a MAC has occurred?

Relevant case law

There does not appear to be reported case law on the subject in South Africa. So it is useful to review the way in which the specialist commercial courts of Delaware in the US have interpreted these types of clauses.

In In re: IBP, Inc. Shareholders Litigation, 789 A.2d 14 (Del. Ch. 2001), the Delaware Court of Chancery had to determine whether or not the acquirer, Tyson, was permitted to terminate its merger contract with the target, IBP, as a result of an alleged breach by IBP of its representation and warranty that it had not suffered a "Material Adverse Effect" since the "Balance Sheet Date", except as set out in the "Warranted Financials" or the disclosure schedule to the contract.

The contract defined a "Material Adverse Effect" as, "any event, occurrence or development of a state of circumstances or facts which has had or reasonably could be expected to have a Material Adverse Effect... on the condition (financial or otherwise), business, assets, liabilities or results of operations of [IBP] and [its] Subsidiaries taken as a whole".

Tyson, in essence, argued that a decline in IBP's performance in two consecutive quarters since the Balance Sheet Date was evidence of the existence of a Material Adverse Effect. In addition, it argued that an unexpectedly-high impairment charge against one of IBP's subsidiaries constituted a Material Adverse Effect.

In interpreting the definition of a Material Adverse Effect in the merger contract, the Court stated that, "[o]n its face, [it] is a capacious clause that puts IBP at risk for a variety of uncontrollable factors that might materially affect its overall business or results of operations as a whole". In addition, the definition of Material Adverse Effect did not contain any carve-outs.

The Court held that it could not give meaning to such a broadly-drafted clause unless it read the contractual language in, "the larger context in which the parties were transacting". According to the Court, this requires a court to understand the motivations of a buyer in acquiring a specific target. In this regard, the Court held that a short-term speculator may regard the failure of a target to meet analysts' projected earnings for a quarter as material. However, that failure may be less significant to a strategic buyer with long-term prospects for the business combination between it and the target:

"[t]o such an acquirer, the important thing is whether the company has suffered a Material Adverse Effect in its business or results of operations that is consequential to the company's earnings power over a commercially reasonable period, which one would think would be measured in years rather than months" (footnote omitted).

This led the Court to hold that a MAC clause:

"is best read as a backstop protecting the acquirer from the occurrence of unknown events that substantially threaten the overall earnings potential of the target in a durationally-significant manner. A short-term hiccup in earnings should not suffice; rather the Material Adverse Effect should be material when viewed from the longer-term perspective of a reasonable acquirer" (footnote omitted).

On the question of onus, the Court held that, since merger contracts are heavily negotiated and cover a large number of specific risks explicitly, "a buyer ought to have to make a strong showing to invoke a Material Adverse Effect exception to its obligation to close".

The Court was ultimately unable to conclude that a Material Adverse Effect had occurred. Instead, it found that the decline in IBP's business since the Balance Sheet Date was due to short-term swings in the cattle industry, which is cyclical in nature, and that Tyson had not considered the subsidiary that had suffered the impairment charge to have been important at the time the parties were negotiating and could not therefore claim that that subsidiary was now important to it. It consequently ordered Tyson to close the transaction and acquire IBP pursuant to the terms of their merger contract.

In Hexion Speciality Chemicals, Inc. et al., v. Huntsman Corp., the Court was faced with a MAC clause containing a standard industry carve-out. It had to determine whether or not the relevant standard for judging if a MAC had occurred was to compare the target's performance from the date of signing the merger agreement and its expected future performance with the performance of its peers in the industry over the same period. The Court held that, "[t]he plain meaning of the carve-outs found in the proviso is to prevent certain occurrences which would otherwise be MAE's being found to be so". It went on to state that:

"[i]f a catastrophe were to befall the chemical industry and cause a material adverse effect in Huntsman's business, the carve-outs would prevent this from qualifying as an MAE under the Agreement. But the converse is not true – Huntsman's performance being disproportionately worse than the chemical industry in general does not, in itself, constitute an MAE. Thus, unless the court concludes that the company has suffered an MAE as defined in the language coming before the proviso, the court need not consider the application of the chemical industry carve-outs".

Following these statements, the Court in Hexion went on to reaffirm the holdings in IBP. But it also made a number of other important points.

First, it stated that it is no coincidence that Delaware courts have never found a MAC to have occurred in the context of a merger agreement. In so doing, it reiterated the heavy burden that a buyer must bear if it seeks to terminate its deal with the target.

Second, the Court noted that, although it should affect a target's, "long-term earning power over a commercially reasonable period, which one would expect to be measured in years rather than months", a MAC can occur in the period between signing and closing, provided that any substantial decline in earnings during that period is, "expected to persist significantly into the future".

Third, the Court held that the form that a MAC clause takes (e.g.: a warranty, a representation or a condition to closing) should not determine the allocation of the burden of proof in the absence of any evidence regarding the intention of the parties on this point.

Finally, it held that, in the context of a cash acquisition where a buyer is acquiring both the debt and equity of a target, the use of earnings per share (EPS) as a benchmark for examining changes in the results of a company's operations is problematic because EPS is, "very much a function of the capital structure of a company, reflecting the effects of leverage".

Since an acquirer for cash may replace the capital structure of the target with one of its own choosing, the capital structure of the target prior to closing is largely irrelevant. In these circumstances, a court should look to the results of operations of the target's business, which is best measured using earnings before interest, taxes, depreciation and amortisation (EBITDA) data because this is independent of the capital structure of the target.

Lessons learned from the US

South African lawyers can learn the following lessons from the US cases referred to above:

  • A MAC clause is a "backstop" provision that is analysed and interpreted against the backdrop of negotiations between the parties. As a result, the parties should not be able to rely on the MAC for issues that were specifically contemplated during negotiations; these issues should be covered by specific warranties and indemnities. Although South Africa has strict rules regarding the admission of parol evidence for the purposes of interpreting a contract, the typically broad and ambiguous drafting of these clauses should provide any party seeking to admit the parol evidence with a sufficiently strong foothold for its admission.
  • If a buyer wishes a MAC clause to include any short-term declines in the business, financial condition or results of operations of a target, then it should contract for this specifically, either by:
  • acknowledging, in the preamble or otherwise, that the buyer is, say, acquiring the target as part of its short-term investment strategy; or
  • providing that a MAC shall occur if, say, the target fails to meet stated business goals, financial targets or projections in the period between signing and closing.
  • It is not clear whether the South African courts would follow the example of the US courts in placing the onus of proving a MAC on the buyer. This is the most likely outcome since it will usually be the buyer who is asserting a MAC as a defence to an allegation by the target of repudiation of the definitive transactional agreement(s). But the parties should avoid any risk in this regard by allocating the onus explicitly in their agreement.
  • The parties should explicitly provide for the valuation method to be used in determining whether or not a MAC has occurred (e.g.: EPS or EBITDA), especially where the MAC contains an economic or industry carve-out. As the Hexion case indicates, a court will be inclined to use EBITDA since this will provide it with the most objective measure of the earnings performance of a target relative to its peers. The valuation method used by the buyer or its financial advisers in valuing the target will probably be the standard against which the parties seek to pin the determination of a MAC.
  • The parties and their financial and legal advisers should consider all possible Triggers that are likely to impact on the performance or value of a target when drafting the definition of a MAC and its carve-outs. This is especially important where the target's business is cyclical or subject to short-term swings in fortune.
  • If a buyer wishes to assert a MAC, it should tread very carefully, especially in its dealings with the target's management. As the Delaware cases suggest, courts are reluctant to find that a MAC has occurred. Consequently, a court may force the buyer to specifically perform its obligations under the definitive transactional agreement(s). Although specific performance may seem like a drastic remedy on its face, the IBP decision indicates that it is likely to be less drastic than allowing the buyer to walk away from the deal (which would make the target appear like "damaged goods" in the eyes of the marketplace) with only an award of damages against its name (which would be almost impossible to calculate and, in any event, staggeringly high in the case of a public company).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions