Material Adverse Change
A material adverse change clause lets a buyer withdraw from a signed acquisition if, between signing and completion, something happens that seriously and durably damages the target's business — with the definition of "material", and the list of things that do not count, negotiated line by line. In practice the clause is invoked far more often than it is upheld.
- Also known as
- MAC, Material adverse effect, MAE, MAC clause
- Used at
- the conditions to completion in a sale or merger agreement
- Binding
- yes, but courts read it narrowly; a buyer relying on it carries the burden of proof
- Carve-outs
- market-wide events, changes in law, the deal's own announcement, and often the pandemic since 2020
- Fintech-specific
- a regulatory action against the target is usually a MAC; a change in interchange rules usually is not
- Parties
- buyer and target or sellers
How a material adverse change clause works in practice
Between signing and completion a company keeps trading, and the buyer has agreed a price for a business that may not be the one it receives. The material adverse change clause is the buyer's protection against the extreme case: the target loses its largest customer, its licence is suspended, its platform is breached. It is not protection against the ordinary case — a bad quarter, a market fall, a competitor's launch — and the carve-outs are drafted to say so.
Whether an event qualifies turns on two words. "Material" has been read by courts, in the Delaware cases that most drafting follows, to mean an effect on earnings that is significant over years, not quarters — a 40% fall in expected EBITDA has qualified, a 15% fall has not. "Durational" means the effect must persist. A buyer invoking the clause must show both, and while it argues, the target is in limbo; the alternative — renegotiating the price with the clause as leverage — is what usually happens.
For a licensed fintech the clause is often more specific than in other industries. A regulator's enforcement action, a loss of scheme membership, a safeguarding failure: each is named as a MAC, because each can end the business in a way a general definition might not catch, and because a buyer of a licensed company is buying the licence.
Example
A buyer signs to acquire a card-issuing platform for £45m. Three weeks later the target's sponsor bank gives six months' notice on the BIN sponsorship that every card depends on. The buyer serves notice of a material adverse change; the sellers argue the loss is replaceable and not durational. Rather than litigate, the parties reprice: £38m at completion and a £5m earn-out payable if a replacement sponsor is live within nine months. The replacement goes live in month seven and the sellers receive £43m.
Common mistakes
- Buyers treating the clause as a free option to walk away from a deal they have gone off. - A definition with no carve-outs, which no seller will sign, or with so many that nothing qualifies. - Forgetting the regulatory events that matter most to a fintech and relying on a general definition. - Invoking the clause in public, which damages the target whether or not the claim succeeds. - Sellers who accept a low threshold because "it never gets used" — it gets used to renegotiate.