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”

Mondaq Advice Centre (MACs)
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
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). 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 & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd 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 or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.