As discussed above, whether a public health crisis such as COVID-19 is sufficient to trigger a MAC clause depends first of all on whether the party invoking the MAC clause can bear its “heavy burden” to demonstrate that the crisis has caused a negative change that is essential for the agreement as a whole. In most cases, to meet his costs, the appellant would have to show that the crisis has had a significant adverse effect on the financial situation or operations of the seller or borrower and that these effects will continue for a significant period of time. With respect to COVID-19, the main question may be whether COVID-19 and the damage it causes will persist for an extended period of time, provided that the Appellant can demonstrate that COVID-19 is having or will have a material adverse effect on the financial position of the counterparty. The answer to this question remains open – as the damage caused by COVID-19 continues and economic upheaval increases in severity and duration, the argument that a MAC clause has been triggered may well become stronger. How gravity and duration are defined is again an open question that needs to be carefully considered in relation to the wording of the MAC clause, including, where appropriate, the specific exceptions contained in the agreement. The buyer`s ability to exit the transaction is limited by MAC clause exceptions that are as diverse as the transactions they contain. Overall, buyers will argue for a full MAC clause that would allow them to terminate the deal if adverse events make the acquisition unattractive. Sellers, on the other hand, will attempt to negotiate a strict MAC clause to shift the closing risks of the target transaction. Certain terms and conditions that modify the clause include shifting the burden of proof of the absence of an ADAD to the seller, forward-looking standards (the pre-closing event has or is reasonably likely to have a post-closing effect) and adverse events that are not permanently material. The policies underlying MAC clauses can also guide courts in determining whether a MAC clause has been violated. In the context of the merger, for example, “the typical MA[C] clause assigns general market or industry risk to the buyer and business-specific risks to the seller.” Akorn, 2018 WL 4719347, at *49. Business-specific or commercial risks are those “associated with the normal operations of the party – the types of adverse events that can be expected from time to time in the ordinary course of business, including those that, although known, are remote.” The seller assumes these risks because he is “better able to prevent these risks.

and has a superior knowledge of the likelihood of such risks occurring that cannot be avoided. Id., p. *52. The buyer, on the other hand, assumes systematic risks, i.e. those that are “beyond the control of all parties (even if one or both parties are able to take measures to mitigate the effects of these risks) and . will usually assign companies outside the companies involved in the transaction. Id., p. 49. In general, systematic risks would include risks associated with “acts of war, violence, pandemics, disasters and other force majeure.” See id., p.

*52. [7] See Alison Frankel, Sycamore Partners invokes MAE clause to escape Victoria`s Secret deal, Reuters (22 April 2020, 17:21), www.reuters.com/article/us-otc-mae-idUKKCN2243CK. To what extent does the imposition of MAC allow for economic change? It depends on the clause itself, but it`s usually more than a minor change. As a general rule, a decrease in sales or gross profit of more than X before closing invokes the clause at the buyer`s choice. In a leased environment, this may be an adjacent change of use that eliminates value, such as opening a factory next to a retail store. It all depends on the wording of the MAC. This legal update discusses the law governing material adverse change (“MAC”1 clauses – including the rules that courts apply when interpreting MAC clauses and the evidence required to successfully invoke a MAC clause – and discusses the applicability of MAC clauses in the context of public health crises such as COVID-19. In the past, Delaware courts have been extremely reluctant to allow buyers to invoke MAC clauses to opt out of M&A transactions. [7] Such claims generally face significant obstacles, with the acquirer bearing a “heavy burden” to prove the existence of an MAC. [8] In Delaware Chancery Court, the burden is so heavy that there was only one case where the court found that the MAC clause had been triggered. [9] The decision concerned a target company, Akorn Inc.