MAC Clauses and Termination Rights: When Can a Buyer Walk Away?

Once an SPA has been signed, the basic expectation is straightforward: the parties are supposed to close the transaction.

That expectation matters. Signing would have little value if either party could simply reconsider the economics, change strategy or walk away because market conditions had become less attractive.

But M&A transactions do not take place in a static environment. Where signing and closing are separated by weeks or months, the target’s business may deteriorate, regulatory approval may fail, a condition precedent may remain unsatisfied or one of the parties may breach an important obligation.

The SPA therefore needs to define the circumstances in which a signed transaction can legitimately be terminated.

Among the most closely negotiated mechanisms is the Material Adverse Change, or MAC, clause, often expressed through the related concept of a Material Adverse Effect (MAE). Its purpose is to address an exceptional question: what happens if the target changes so significantly between signing and closing that the buyer can reasonably argue it should no longer be required to acquire the business it originally agreed to buy?

The concept sounds simple. Drafting it is not.

A signed SPA is not an option to buy

The starting point is important.

A buyer should not be able to sign an acquisition agreement, reserve the target for several months and then decide at closing whether the transaction still looks attractive.

If market valuations fall, financing becomes more expensive or the buyer develops doubts about the strategic rationale, those developments do not automatically justify termination.

When the SPA is signed, the buyer assumes a substantial degree of transaction risk.

This is why termination rights are generally linked to defined events, rather than to a general change of mind.

Depending on the transaction, these may include failure of conditions precedent, material contractual breach, failure to obtain regulatory approvals, breach of interim covenants, failure to close by the long-stop date or occurrence of a qualifying MAC.

The commercial purpose is to create certainty while recognising that some developments genuinely make completion impossible or fundamentally different from what was agreed.

What is a Material Adverse Change?

At its core, a MAC clause attempts to identify a sufficiently serious deterioration in the target’s business, financial condition or operations that may allow the buyer not to complete the acquisition.

The emphasis is on material.

A disappointing quarter is not necessarily a MAC. Losing a relatively small customer is unlikely to be enough in a large diversified business. Temporary disruption or ordinary volatility may also fall short.

The concept is generally intended to capture something substantially more significant and durable.

This makes sense commercially. The buyer is purchasing a business whose performance will inevitably fluctuate. It cannot normally expect the seller to guarantee that nothing negative will happen between signing and closing.

The more difficult question is determining where ordinary business risk ends and a genuinely transaction-changing event begins.

That boundary depends heavily on the wording of the SPA, the governing law and the circumstances of the target.

The definition matters enormously

A MAC provision commonly begins with a broad definition referring to events, circumstances, changes or effects that have — or could reasonably be expected to have — a material adverse effect on specified aspects of the target.

But the real negotiation often occurs in the exceptions.

The seller will typically seek to exclude events that affect the economy or market generally rather than the target specifically. Depending on the deal, carve-outs may address general economic conditions, changes in financial markets, changes in law, geopolitical events, industry-wide developments, natural disasters, pandemics or the consequences of announcing the transaction itself.

Why?

Because the seller will argue that the buyer should bear systemic market risk once the SPA is signed.

If interest rates rise across the economy or an entire industry experiences temporary contraction, the target may perform worse without anything having gone uniquely wrong with the company.

The buyer may respond that even a general event should matter where the target is affected disproportionately compared with comparable businesses.

That leads to one of the characteristic structures of MAC drafting: a broad definition, a series of carve-outs and then exceptions to those carve-outs.

The clause can therefore become one of the most technically intricate provisions in the agreement, despite being designed for an event that everyone hopes will never occur.

Company-specific risk versus market risk

A useful way to understand the negotiation is to ask who should bear different categories of risk during the gap period.

Suppose the target loses its largest customer because of a serious failure in its product. That may represent a company-specific risk that the buyer will argue should remain with the seller until closing.

Now suppose an economic recession reduces demand across the entire sector by 10%. The seller may argue that this is market risk that the buyer accepted when it signed the transaction.

The distinction is commercially important.

The buyer should not normally be able to use a MAC clause as protection against every deterioration in the economic environment. At the same time, the seller should not necessarily be able to insist on closing where the target itself has suffered an extraordinary and lasting deterioration.

The MAC definition is therefore another form of risk allocation between signing and closing.

How material is "material"?

One of the difficulties with MAC clauses is that the concept cannot always be reduced to a fixed percentage.

A 10% decline in EBITDA may be significant in one transaction and relatively ordinary in another. A regulatory event affecting a critical licence may be far more serious than a larger short-term decline in earnings.

Duration matters as well.

A temporary interruption lasting several weeks may have little effect on the long-term value of the target. A structural event that permanently damages a key part of the business may have much greater significance even if its immediate financial impact is initially difficult to quantify.

This is why MAC disputes tend to be intensely fact-specific.

The buyer generally needs to distinguish between ordinary business volatility and a fundamental deterioration in the company it agreed to acquire.

From an advisory perspective, that also means parties should not rely on a MAC clause as a substitute for identifying foreseeable risks before signing.

If a particular customer contract is already known to be uncertain, or a regulatory decision is expected shortly, that issue may be better addressed specifically in the SPA rather than left to the general MAC definition.

MAC clauses are not a substitute for due diligence

A buyer should not sign first and investigate later on the assumption that a MAC clause will protect it from anything it subsequently discovers.

If due diligence identifies a potentially serious issue, the parties have several more precise tools available.

They can adjust the purchase price. They can require a specific indemnity. They can make resolution of the issue a condition precedent. They can require a particular representation or covenant.

A MAC clause should generally remain a backstop for exceptional developments, rather than a general remedy for risks that could have been identified and allocated more precisely before signing.

This distinction is important because a buyer attempting to invoke a MAC faces a much more significant proposition than simply bringing a post-closing warranty claim.

It is arguing that the deterioration is serious enough that the acquisition itself should not have to complete.

Termination rights go beyond MAC

A MAC is only one potential basis for termination.

A well-drafted SPA will normally contain a broader termination framework addressing the principal reasons why the transaction may fail before closing.

One of the most common is failure to satisfy a condition precedent by the agreed long-stop date.

Suppose a transaction requires regulatory approval but clearance has still not been obtained nine months after signing. The parties may not be expected to remain committed indefinitely.

The agreement may therefore allow termination once the long-stop date passes, provided that the party seeking to terminate is not itself responsible for the failure to satisfy the condition.

Termination may also arise from a material breach of the SPA. If one party fails to perform an important pre-closing obligation and the breach cannot be remedied within the agreed period, the other party may have a right to terminate.

The contract may further address circumstances in which a governmental authority permanently prohibits the transaction or another legal impediment makes closing impossible.

Each termination right reflects a different type of execution risk.

Regulatory failure: who owns the risk?

Regulatory approval can become one of the most important termination issues in larger or cross-border transactions.

Consider a buyer agreeing to acquire a competitor subject to merger-control approval.

If the regulator objects, what must the buyer do?

Is it required merely to submit the application and cooperate with the authority? Must it offer behavioural remedies? Must it dispose of assets? How economically painful must the remedy become before the buyer is entitled to refuse?

These questions are usually addressed through the SPA’s efforts covenants and regulatory-risk provisions.

The commercial allocation can vary significantly.

A seller seeking maximum closing certainty may insist that the buyer accept substantial remedies necessary to obtain clearance. The buyer will want to limit its obligation where the required remedy would materially damage the rationale of the transaction or another part of its business.

Termination rights therefore cannot be understood in isolation from the obligations that precede them.

Before asking whether the buyer can terminate for regulatory failure, the agreement needs to answer what the buyer was required to do to prevent that failure.

Break fees and reverse break fees

In some transactions, termination has an economic consequence beyond simply ending the agreement.

A break fee may become payable where the transaction fails in specified circumstances, often depending on the structure and jurisdiction.

A reverse break fee operates in the opposite direction: the buyer pays the seller if the transaction fails because of certain risks allocated to the buyer, such as financing failure or, in some structures, regulatory failure.

The purpose is not necessarily to compensate the seller for the entire lost value of the transaction.

Instead, the fee can serve as an agreed allocation of specific execution risks and provide some compensation for the disruption caused by a failed deal.

From the seller’s perspective, this can be particularly important where it has spent months under exclusivity, incurred substantial advisory costs and potentially lost alternative transaction opportunities.

The amount and triggers therefore need to be considered together.

A large reverse break fee has little value if its triggering conditions are so narrow that it is unlikely ever to become payable.

Financing failure deserves particular attention

A buyer may intend to fund an acquisition partly through external debt.

The seller will naturally want to understand what happens if that financing does not materialise.

In many private M&A transactions, the seller will resist a broad financing condition allowing the buyer to terminate simply because its lender has withdrawn.

From the seller’s perspective, the buyer selected the financing structure and should generally bear that execution risk.

This is why acquisition financing arrangements, equity commitment letters, limited guarantees and reverse break fee structures can become central to transaction certainty.

Again, the highest headline price is not necessarily the strongest offer.

A slightly lower fully funded bid may be more valuable to a seller than a higher bid carrying substantial financing conditionality.

Termination risk is therefore part of deal economics.

Can a party terminate because the other side breached?

Not every breach should allow the entire transaction to be abandoned.

The SPA will often distinguish between ordinary breaches, which may result in damages or other remedies, and sufficiently serious breaches that justify termination.

Materiality thresholds, cure periods and closing conditions can all influence the analysis.

Suppose the seller fails to provide one minor document by the agreed date. That should not ordinarily allow the buyer to escape a EUR 200 million acquisition.

If the seller instead disposes of a core division in violation of an interim covenant, the position is fundamentally different.

The termination framework should preserve proportionality.

Its purpose is to protect against failures that materially undermine the transaction, not to provide either party with technical opportunities to exit a deal it no longer likes.

The advisory perspective: termination rights have economic value

When comparing two offers, sellers often focus primarily on valuation.

But an offer is also a package of closing certainty.

Consider two bidders offering the same EUR 100 million.

Buyer A requires broad MAC protection, extensive closing conditions, a financing condition and flexible termination rights.

Buyer B has committed financing, accepts narrowly defined conditions and offers a reverse break fee if a specified buyer-side risk prevents closing.

The headline value is identical. The probability-weighted value of the offers may be very different.

This is why advisers should analyse not only what the buyer is offering to pay, but how easy it is for the buyer not to pay it.

The same applies from the buyer’s side. Excessive closing certainty can force an acquirer to complete a transaction despite a genuinely catastrophic change in the target.

Good structuring therefore seeks the appropriate balance between commitment and protection.

The walk-away right should remain exceptional

An SPA is intended to create transaction certainty.

If termination rights are drafted too broadly, that certainty becomes illusory. If they are drafted too narrowly, a party may remain forced into a transaction that has fundamentally changed or become impossible to complete.

MAC clauses, long-stop dates, regulatory provisions, breach termination rights and break fees collectively define that boundary.

They answer a question that sits at the centre of every signed-but-not-yet-closed transaction:

how much can change before the deal is no longer the deal the parties agreed to?

The answer should not depend on whether the buyer still likes the economics at closing.

It should depend on the risk allocation negotiated at signing.

That is ultimately the purpose of termination provisions: not to create an easy exit, but to define the exceptional circumstances in which contractual commitment must give way to a transaction that can no longer reasonably be completed.