MAC Clauses Post August 2007 - What Do They Mean In The Current Financial Markets?

The "credit crunch" has resulted in numerous

disputes being brought, both by and against lenders, in relation to

commercial transactions which are now less attractive or less

workable than they were prior to Summer 2007. Paul Friedman and

Nicola Clavarino examine the operation of MAC clauses in the

current market and what the recent financial markets turmoil could

mean for borrowers and lenders interpreting such clauses. Paul

Friedman is a partner; and Nicola Clavarino an associate in Clyde

& Co's banking litigation team.

Most corporate finance agreements contain material adverse

change or MAC clauses, as they are commonly known. Some finance

agreements currently governing relationships between commercial

parties were agreed prior to the market turmoil of August 2007.

What do these clauses now mean for borrowers and lenders in the

current market climate?


Since August 2007, the prevailing commercial climate has

changed: there is greater uncertainty, many financial institutions

are in financial difficulty, the market is less borrower-friendly

and banks are wary of advancing funds as well as being keen to

reduce their existing commitments. Following the collapse of Bear

Sterns, the nationalisations of Northern Rock and Bradford &

Bingley, the insolvencies of Lehman Brothers and Washington Mutual,

the sale of Merrill Lynch to Bank of America and the take-over of

HBOS by Lloyds TSB, lenders are reviewing their positions and

rethinking their commitments to borrowers. In many cases in which

banks have advanced funds, the market has since moved and so

certain existing loan agreements are on terms at which lenders

would not now be prepared to lend and secured by assets worth

significantly less than when the loans were agreed.

MAC clauses – general importance

In the context of a loan agreement, MAC clauses typically

provide that any material adverse change in the underlying business

in respect of which a loan is made amounts to an event of default.

MAC clauses are inserted to protect lenders and empower them to

take action when there has been a material negative change in the

condition of the business against which they have advanced funds.

The MAC clause is a general sweep-up protection clause for the

lender. Depending on the provisions of the particular finance

documentation in question, the occurrence of a MAC could mean any

of the following:

the lender is relieved from the obligation to provide funding

in response to borrower draw-down requests;

the lender can demand cure of the default by means of an

injection of equity from the borrower; or, most seriously,

the lender is entitled to accelerate the loan.

Given the serious consequences of a MAC for most borrowers and

the potential relief they offer for lenders in a difficult market,

it is worth analysing the two central issues in this area in the

light of current market developments:

1) what amounts to a material adverse change in the current


2) what effect does a decline in market conditions generally

have in respect of the operation of MAC clauses?

1) What amounts to a material adverse change?

What precisely will amount to a MAC in any given circumstance

will depend both on the wording of the specific MAC clause and the

particular facts of the case. For example, some MAC clauses may

have no qualification (i.e. "no material adverse change to the

company"), some may have an inclusive or exhaustive list of

changes which are deemed to amount to a MAC. Further a MAC clause

may require a change "to the overall net assets", or to

the "business" of an asset company, the "business

assets or financial condition" of the company, or to the

"trading or financial position" of the company, or to

"the financial condition, results of operations and

assets". Yet MAC clauses may require a change "to be

judged by reference to the company's financial

statements". The precise wording of the specific clause and

the meaning of any defined terms used are key. Nonetheless, some

general guidance as to how the courts interpret these clauses

generally can be gained from both English1 and US


Generally, the threshold for materiality is set quite low. It

excludes matters which are trivial or insignificant. It includes

matters which would be decisive or regarded as important by a

lender banker. It may also include matters which could be viewed as

influential considerations by some but not by others.

Butterworth's Encyclopaedia of Banking Law states that

"It is considered that normally an adverse change in

financial condition would be material if the change would have

caused the bank not to lend at all or to lend on significantly more

onerous terms, e.g. as to margin, maturity or security.

Consideration could be given also to the criteria used by

recognised rating agencies in implementing significant credit

downgrades. Any additional test, such as probable impact on ability

to pay, would be an additional hurdle."3

Elsewhere, the definition of MAC has been discussed in the context

of a sale and purchase agreement.

In Re TR Technology Investment Trust plc ((1988) 4 BCC

244), for example, a share purchase was financed by a loan. The

borrower's assets were frozen. The material adverse change

clause in the loan agreement required that "the adverse

change... be judged by reference to the company's financial

statements." The company was newly formed and had no financial

statements. The Court held that it was not possible to say whether

there had been an adverse change, which could only occur in this

case if there were financial statements. The Court construed the

clause according to its literal meaning. In National

Westminster Bank plc v Halesowen Pressworks Assembles Ltd

([1972] AC 785 HL), the Court held that a resolution to wind up the

company was a material change of circumstances.

There is also a statutory definition of "material" in

the Marine Insurance Act 1906, section 18(2). In insurance law,

this definition is relevant where there...

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