Company Law | Govt. Policy | Judiciary | Mergers & Acquisition
December 28, 2020

Shivani Verma

Shivani is a 4th year Law student at Hidayatullah National Law University.


Yash is a 3rd year Law Student at Faculty of Law , Banaras Hindu University.
  • Background:

The World Health Organization on January 30’2020 declared novel coronavirus as a public health emergency of International concern.[1]In a merger and acquisition deal particularly, the presence or inclusion of a materially adverse change (herein referred to as “MAC”)clause (also known as ‘hardship clause”)works in allowing a party to get the contract terminated and walk out of the deal on the happening of an event that materially and adversely affects the contract.In other words, the MAC clausewhen present in a transaction or financing deal enables parties to withdraw in case the event triggering the clause has a detrimental effect on the target’s business.[2]It can be argued that MACs “occupy center stage in the negotiation of merger agreements,”[3]the impact (if any) of MACs on acquisition dynamics is unclear.

It is well known that in a typical M&A deal, the parties are afforded a time gap in between signing the deal and its subsequent closing during which the parties seek necessary approval from authorities.Acquisitions have a huge effect on the resources of both target and acquisition shareholders and accordingly, mergers also require contractual mechanisms that assign the risks between the objective and the acquirer over the period between the first notice and the completion of the transaction.  Due to the relatively long time between the announcement and the completion of the acquisition, the risk of adverse events that will change the acquisition’s anticipated wealth gains is non-trivial.This is when the MAC clause could be invoked if during such a transitional period, the target (in most cases), suffers unexpectedly an adverse impact upon his business making the deal a futile venture for him.[4]

In allocating the risks of the acquisition between the target and acquiring companies, the structure of MACs plays a significant role.For the applicability of a MAC clause it becomes pertinent to carve out the scope of events that would constitute a “material adverse change”.This is because MAC clauses are to a great extent, shadowed by ambiguity.The parties take advantage of this lacuna and leavewide scopein circumscribing the ambit of events that could lead to termination of deals,so that they can freely negotiate later.

  • Covid-19 And The Crash In Economy 

After the outbreak of the virus, countries across the world imposed lockdown and mandated citizens to undergo a strict quarantine thereby placing restrictions on movement of people. This has made the business deals run into rough weather leading to the eventual economic downturn.The disruptions in business activity has had such a massive impact that even after more than half a year and subsequent lifting of the lockdown; economies are still trying to recover from the blow.The question in particular arises as to whether the pandemic could be included as one of the conditions for invoking the MAC clause?The pandemic’s long term impact on the businessescould form one of the notable concerns for buyers not wanting to enter into the deal in anticipation of the potential value of the target being permanently wretched.The notion that MACs influence the possibility of completion and renegotiation of the transaction by allowing the acquirer to exit the acquisition agreement under some circumstances is implied in the framework.Hence a substantial impact and the lasting effect of the pandemic on the target’s business are significant determinants for considering the pandemic as a triggering event.

For instance, the GDP decline that U.S. has suffered post the pandemic has been the worst till date with 32.9%.[5]History is the best guide and if we take the estimates of 2008 financial crisis, we would know that the havoc caused by the economic downfall was so grave, that it took several years for the economies around the world to mend their financial health. The economic crash in India is also drastic with a 23.9%[6]decline in GDP in the April-June quarter, worst since 1996.Considering that the pandemic has had twice the impact that the 2008 financial crisis had; it is not wrong to estimate that the pandemic would have a long term effect on businesses globally.

The Various Exit Options: Force Majeure, Doctrine Of Frustration& Mac :

A force majeure clause (herein referred to as “FM clause”) is yet another inveterately found clause entered between parties which can specifically be invoked for events that are “extraordinary” in nature and beyond human control.

Predominantly, the force majeure event could fundamentally include epidemic, war, natural disaster, et cetera. In furtherance, the act done should have been beyond human foresight and the parties should have done the maximum in their capacity to pacify the happening of the mishap.

The death-dealing Novel Coronavirus was encompassed within the ambit of the definition of an event that may be termed as force majeure. After such an inclusion, it is patent that the parties would try to direct the force majeure clause to avoid the contract and the obligations associated thereof. The difference between an FM clause and MAC clause is that while in case of FM clause the triggering events are articulately and specifically manifested, MAC clause entails ambiguity. Where on one hand, MAC clauses are only effective for an adverse event taking place in between signing and closing of the contract, on the contrary constant, there is no such durational limb in case of FM clause. It may also be activated post executing the deal.Under any predicament, the determination of the most viable option involves the drafting of the clauses in a carefully adroit and enunciated way. In the most definite terms, there is no other alternative. Triggering any clause largely depends upon the case taken into consideration and in turn the specific wording of the clause and the juncture reached in the deal between the parties thereto.

In case the contract does not include an FM clause, parties can aptly put into effect Section 56 of the Indian Contract Act’1872 that briefs about frustration of contracts and its subsequent impossibility. Along similar lines, the parties can invoke MAC clause if there is an explicit stipulation of the aforesaid in the contract.The doctrine of frustration was first recognized in the case of Krell v. Henry[7]. The frustration defence can be relied upon when the counter-performance becomes worthless and  may be seen as consisting of four elements: the party seeking to be excused must show that “(1) its principal purpose in making the contract was (2) totally frustrated (or nearly so) by an (3) extraordinary and (4) exogenous event.”[8]

Hence, if there is a frustration of the principal purpose bereft of which the contract would not make much sense or if the value of the counter performance has perished in totality, frustration could be invoked by the parties. In addition to this, if there is an extraordinary event inclusive of the clause iterating “foreseeability” frustration could be proved.

It is only good that parties are afforded as many opportunities as may be possible in order to prevent themselves from incurring any undue loss that they might suffer due to the pandemic and giving them multiple exit options in the form of these clauses are the requisite ladders to the climb. Albeit, MAC clauses by encircling broad interpretation could be used by parties to turn the situation in their favor and interpret the wordings in a way that would allow them to walk out of the deal or make themselves able to renegotiate/review the term, it is also necessary to keep in mind that MAC relief are very difficult in nature to be invoked as their lies a high threshold to meet and an in depth factual inquiry that falls squarely in the domain of Section 56 and Section 32 of Contract Act.

  • Judicial Approach Towards Mac Clause:

There is a dearth of judicial pronouncements on MAC clause because of the obvious reason that the presence of a MAC clause can be gruelling for both the acquirer and target entity with the high stakes involved which compels them to often do an out of the court settlement. The courts in India offer a very narrow interpretation of what in essence can be considered to be a material adverse change for terminating the deal and rely on higher thresholds for affecting the MAC clause. This is primarily because of the fundamental principle of “pactasuntservanda”which mean that the contracts must be observed. However with time, when the environment around the contracts became extremely volatile, exceptions to the principle was formulated to excuse a party for whom the anticipated value of a contract is destroyed by an unexpected event during the execution period i.e; the time span from signing to the completion of performance.Merger or other business acquisitions and other arrangements in India are largely governed by tribunals and any combination scheme has to attain the mandatory approval of the National Company Law tribunal to be enforced. In this scenario, it becomes herculean to look for the scope of adjusting MAC clause in the merger scheme. However, MAC Clauses do offer solace to the contracting parties by allowing withdrawal of open offers in SEBI’s Takeover code. Regulation 27 of the 1997 Takeover Regulation and Regulation 23(1)(c) of the amended Takeover Regulation of 2011 lay down certain conditions on the basis of which parties can walk out of a deal.

Internationally, the MAC clauses have had a better recognition and in both US and UK the judiciary by its various judicial pronouncements has been very fixated towards eliminating the ambiguity associated with the definition of MAC. 

In U.S.A, the transition from traditional MAC clause to modern MAC clause could be marked as a profound event making the understanding around MAC clause more complex and detailed. The traditional interpretation of the MAC clause laid stress on the “non-foreseeability” factor for any adverse event which does not remain the same as per the modern interpretation. The U.S. laws allow the presence of a MAC clause in a transaction document highly negotiable affording opportunity to both the parties to significantly influence and interpret it. In the last fifteen years’ time span, the U.S. corporate attorneys have noted a dramatic upheaval in the usage of MAC clause. It focuses on the symmetrical risk allocation in the event there is any alteration in the seller’s value. Additionally, the transaction documents contained various exceptions to the MAC clause which meant that it listed the events on the happening of which the MAC clause would not be invoked.

On the contrary constant, in UK, the invocation of the MAC clause largely depended upon the type of merger that was sough i.e.; public or private. The private merger meant the securities of the company that intend to merge are not traded on a regulated market and it was uncannily similar to U.S. regime. However, in the case of public merger, the Takeover Panel was greatly responsible for regulating the merger and the MAC clause came along with lesser exceptions and making the MAC clause more standardized. Therefore, the regulation under Takeover Panel offers limitations on the ability of the purchaser to exit the deal.

Generally, the courts outside have taken into bearing fraudulent practices and hiding of material information as conditions for discharging parties from their obligations under the contract as was evident in the case of Osram Sylvania v. Townsend Ventures[9].Further, the US CourtIn re IBP, Inc. Shareholders Litigation[10]stated that only a long term detrimental impact would be qualified as material. In a rare judgement of Akorn v. Fresenius Kabi[11], the Delaware Chancery court considered the durational impact of the Covid-19 as a significant reason for foregoing the performance of the obligation of the buyer by taking note of the long term damage that the target would entail.

The English courts for the longest time did not invoke MAC provisions in the private acquisition agreement and after recent developments, adoptedmateriality test for its determination. That is in essence, looking at firstly, whether the change hasa substantial effect and secondly that theeffect should be long term. The Australian judgement of Canberra Advance Bank Ltd. v. Benny[12]laid down that, financial condition and assets of the target could be attributed to invoking MAC clause.

In India, there are not enough pronouncements on MAC clauses andon the question of what could constitute a material change, the court by its judgement in Nirma Industries[13]and Akshay Infrastructure[14]has ruled out the possibility of financial condition or economic downfall as a “material adverse change”, stating that the same does not qualify the conditions of “legal and natural impossibility”laid down under Regulation 27(1) of SEBI SAST Regulation 1997. This gives an impression that the judiciary has been severely critical towards allowing the discharge of contractual obligations which brings the validity of MAC enforcement under Takeover Regulations 2011 into hot water. Regulation 23(1)(c) offered some leeway to parties by allowing withdrawal if condition in contract is not able to be satisfied for reasons beyond control. This hinted towards the judiciary widening its ambit and willing to adopt a more liberal attitude towards MAC clauses. However, the same was rendered untrue when the courts still pressed upon the requirement of impossibility of performance to trigger the MAC clause[15]inviting further ambiguity. Therefore, it is an imminent need that the uncertainty in the interpretation is done away with.

  • Way Forward:

The pandemic has wreaked havoc on the economical standing of not only individuals but the entire nation as a wholeand has aggravated the already volatile financial environment. In such an event, the inclusion of MAC clauses for mitigating/preventing the loss arising from unexpected circumstances could prove to be doomsayers for anyone wanting to enter into an M&A deal but fearing the consequences thereto.Hence it becomes very significant for the nation to acknowledge and appreciate the inclusion of MAC clause in M&A deals. The transaction can turn into a complete failure post signing the deal for no fault of the partiesor for reasons beyond their control.

The MAC clause in purpose has yet not accomplished clarity and there is no exclusive definition laid down for it. Nationally and internationally, the judicial approach towards MAC clause has been critical as it is often taken to be a reinstatement of the frustration doctrine[16]. In Genesco v. The Finish Line[17]it was observed that “MAC clause should not be understood to be a replication of frustration doctrine”. This essentially meant that the high standard requirement to prove in essence that a contract has become frustrated due to the distortion of the principal purpose, or on the happening of an extraordinary or exogenous event should be discouraged.In U.K. too, when the Takeover Panel in the Tempus Case[18]adopted the frustration standard for invoking the MAC clause, it was heavily criticized basis that the demonstration of frustration is not necessary for effectuating MAC. Hence, the materiality aspect in MAC need not be catastrophic; a standard that is applied for proving the frustration and a significant adverse change is enough.

Under this shadow, it is paramount for the judiciary to espouse a bonhomer and collegial attitude towards recognition of MAC clauses in transaction deals so as to exhort more parties to enter into such deals which in turn would uplift the financial conundrum of the country. 

In absence of this, parties would be far more dubious and uncertain to venture into merger deals by fearing the impediment in carrying out their respective obligations. It is high time that the conventional response towards terminating a deal without its consummation is discouraged and parties are not coerced into performing their contractual obligations when a significant adverse and nocuous impact is caused on either party to the deal.

With this recognition, India will also elevate its position in the global footing by encouraging more number of M&A activities within its national boundaries and in cross border deals. In these tough times, businesses are seeking to enter into combinations in order to prevent flat lining whilst the financial pressure and also liquidate themselves. Adding to this, it is also pivotal as termination on account of a material adverse change is better received in countries outside and Indian companies are given slack to do away with their contractual obligations. Therefore, the same freedom and allowance should also be accorded to foreign investors so as to encourage them to make more investments in a country that does not possess a rigid attitude towards terminating deals.

Hence, whilst the unprecedented ripple effects of the pandemic on the world economy, a rejuvenated focus on MAC clause is much needed now than ever. Contracts need to encapsulate specific wording and express stipulations of any such event for rescinding the contract by either party. It is however always a tall order to correctly attain a balance in determining whether a particular event holds enough substance to be able to be qualified as a materially adverse event. This is because the intent is always to attain the closure of transactions than to nullify it and the latter path is only chosen in conditions of extreme hardships making the deal closing immensely unsatisfactory and difficult. Additionally, the seller would try to assign a narrow interpretation of the MAC clause in hope of completion of the deal and the buyer on the other hand would attempt a broad interpretation of the same in order to walk out of the deal. Hence it becomes important to achieve an equilibrium that is favourable to both the parties at hand and any situation of conflict may be pacified to a greater extent.

In any case, when the nation’s policies are being modified and re-invented to lend financial support to those in trouble, it becomes highly convenient to explore the already existing options in order to provide relief. Hence the plethora of multifarious possibilities of the MAC clause need to be explored and better utilized while ensuring a just application and preventing any bias towards forgoing obligations.

  • Conclusion:

In the attempt of invoking the MAC clause midst the virus, the challenge abounds is that the risk associated with the pandemic has rather become more predictable and has taken a form of general risk. In the backdrop, it will be more complex for buyers to invoke the clause as they would have to meet a higher threshold than the pre-existent. One defence to this could be that the unpredictability of the pandemic makes it extremely difficult for parties to ascertain the risk as the damage and impact caused thereto could be very evolutionary in nature. It is most favourable if the judiciary adopts a change in its approach and embraces the MAC provisions by mandating a lesser threshold for it and to the best interest of the party that has suffered disproportionately and would need some relief in the form of exiting from the deal or renegotiating its terms. It is also suitable for the country to encourage maximum number of M&A activities in response to its economic downturn. However, one also needs to be mindful of the fact that the MAC provision could be misused by the parties to claim undue relief which not only hinders with the intended purpose of the clause but could also prove to be detrimental to the parties to rely on broader interpretations as it may lead to ambiguity tainting its authenticity. Hence the more objective and articulate the wordings of the clause are, the better it is. Drafting a precise framework for MAC clauses in the Indian context can prove helpful in alleviating the catastrophic repercussions of the pandemic and businesses might see the light of day.

[1]Statement on the second meeting of the International Health Regulations (2005) Emergency Committee regarding the outbreak of novel coronavirus (2019-nCoV)

30 January 2020, World Health Organization, available at, last seen on 08/12/2020.

[2]A guide to MAC clauses in M&A transactions,Lexology, available at, last seen on 08.12.2020.

[3]Ronald J. Gilson & Alan Schwartz, Understanding Macs: Moral Hazard in Acquisitions, Journal of Law, Economics & Organization, Vol. 21, p. 330, Columbia Law School (2005), Available at:, last seen on 08/12/2020.

[4]Miller Robert T., “The Economics of Deal Risk: Allocating Risk Through Mac Clauses in Business Combination Agreements”, Vol 50,William and Mary Law Review, 6 (2007), available at, last seen on 08/12/2020.

[5]3 Months Of Hell: U.S. Economy Drops 32.9% In Worst GDP Report Ever

 NPR (30/07/2020) available at, last seen on 08/12/2020.

[6]Anirban Nag,India’s economy heads for double-digit decline as virus spike, Economic Times(18/09/2020), available at, last seen on 08/12/2020.

[7]Krell v. Henry[1903] 2 KB 740.

[8]Andrew C. Elken, Rethinking the Material Adverse Change Clause in Merger and Acquisition Agreements: Should the United States Consider the British Model, 82 S. CAL. L. REV. 291 (2009).

[9]Osram Sylvania v. Townsend Ventures C.A. No. 8123-VCP, LLC 46 (2013, Delaware Chancery Court).

[10]In reIBP, Inc. Shareholders Litigation 789 A.2d 14 (2001, Delaware Chancery Court).

[11]Eric Fidel Akorn: Establishing a Material Adverse Effect, American Bar Association(16/01/2019) available at, last seen on 08/12/2020.

[12] Canberra Advance Bank v. Benny, [1991] 9 ACLC 1,53(Federal Court of Australia).

[13]Nirma Industries Ltd. &Anr v. Securities & Exchange Board Of India Civil Appeal No.6082 of 2013 (Securities Appelate Tribunal, 09/05/2013); Nirma Industries Ltd. &Ors. v. SEBI, (2013) 8 SCC 20.

[14]Sebi v.Akshya Infrastructure Pvt.Ltd Civil Appeal  No 6041  of 2014( 25/04/2013).

[15]In The Matter Of Open Offer Of M/S Jyoti Limited, WTM/SR/CFD/39/08/2016 ( Securities and Exchange Board of India, 01.08.2016).

[16]Andrew C. Elken, Rethinking the Material Adverse Change Clause in Merger and Acquisition Agreements: Should the United States Consider the British Model, 82 S. CAL. L. REV. 291 (2009).

[17]Genesco v. The Finish Line, No. 07-2137-11WL 4698244,111 (2007, Tennessee Chancery Court).

[18]See Panel on Takeovers and Mergers, Offer by WPP Group PLC (“WPP”) for Tempus Group PLC (“Tempus”), Statement 2001/15, available at http://www.thetakeoverpanel., last seen on 08.12.2020.

Preferred Citation: Verma, S; Yash, “THE CURIOUS CASE OF THE NEBULOUS CLAUSE IN MERGER & ACQUISITION DEALS” The law Culture (2020)


Shivani Verma

Shivani is a 4th year Law student at Hidayatullah National Law University.


Yash is a 3rd year Law Student at Faculty of Law , Banaras Hindu University.

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