Use Of Material Adverse Change Clauses In The United Kingdom

Material adverse change (MAC) clauses are frequently used in the context of mergers and acquisitions (M&A) in UK transactions, but their structure and content differ depending on whether the transaction is of private or public nature. In both contexts, the purpose of a MAC clause is to give the buyer or bidder the right to walk away from an acquisition following material and adverse business or economic developments in or affecting the target, in the time period between agreeing to a deal (whether by signing an acquisition agreement or by making an announcement for a bid) and the deal's completion.Private TransactionsIn private company M&A, a MAC clause may take the form of either a condition to completion or, more likely, a warranty that no MAC has occurred since a specific date (the buyer will try to negotiate that the warranty is repeated at completion in order to give itself a termination right capable of being exercised if the warranty, when repeated at completion, is not true). A typical MAC clause will contain similar exceptions as would apply in a U.S. transaction (e.g., change in economic conditions or financial or securities markets, natural disasters).

MAC clauses in an acquisition agreement will be interpreted in accordance with the principles of English contract law, but there is very little case law on the subject (although rulings by The Panel on Takeovers & Mergers offer some indication as to the approach the UK courts might take towards MAC clauses). Generally, UK courts determine the intention of the parties by looking at the contract as a whole, but they will only enforce a general clause if it is clear that it unequivocally expresses the intention of the parties and is free of ambiguity. To ensure, therefore, that a MAC clause can be more safely relied upon, it is advisable for a buyer in a UK transaction to express MAC in terms of an event resulting in a quantified reduction in value of target assets or an increase in liabilities, which can be objectively measured, or by reference to specific circumstances occurring that would have an effect on the target in particular.Public TransactionsIn public company M&A, it is standard practice for a UK offer document to contain a MAC clause (expressed as a condition to the offer), the wording of which is largely standardised, as follows: "[save as publicly disclosed] no adverse change or deterioration having occurred in the business, assets, financial or trading position or...