Material Adverse Change: Key Considerations Amid Geopolitical and Market Volatility

In periods of heightened geopolitical and market uncertainty, buyers negotiating or signing sale and purchase agreements (SPAs) with a split exchange and completion structure often revisit one question: does the material adverse change (MAC) clause provide a meaningful route to withdraw from the transaction if circumstances deteriorate before closing? The short answer is that it depends. MAC is not a general doctrine under common law; its operation turns on the wording of the clause, the seriousness of the event, and the contractual process for invoking it.

Risk allocation

External uncertainty often prompts parties to assume that a MAC clause will operate as a broad safety valve. In practice, MAC clauses are usually construed narrowly and are intended to allocate specific categories of interim risk between signing and closing, rather than to protect against every adverse development.

Under both DIFC and ADGM law, the starting point is the contract. Neither jurisdiction recognises a standalone statutory doctrine of MAC. The key question is therefore not whether circumstances have become adverse in a general commercial sense, but whether the relevant event falls within the agreed definition of MAC and outside any negotiated exclusions and qualifiers.

The drafting of a MAC clause is of paramount importance. A clause drafted broadly by reference to adverse effects on the target’s business, operations, assets or liabilities may offer a different level of protection from a clause drafted narrowly by reference to a party’s ability to perform its obligations. The legal analysis will turn on the wording agreed between the parties, and not on any broad notion of fairness.

Moreover, a MAC clause does not operate in isolation. Its effect will depend on how it is used in the SPA, including as a condition precedent, a termination right, or a warranty that no MAC has occurred since a specified date.

Carve-outs

In practice, sellers often negotiate specific carve-outs to prevent a buyer from invoking a MAC for events outside of the seller’s control. Common carve-outs include:

› Changes in general economic, political or market conditions

› War, terrorism or civil unrest

› Pandemics or other widespread disruptions

› Changes in law or regulation

› Matters already disclosed to the buyer

These carve-outs reflect an allocation of risk: the buyer is typically protected against deterioration specific to the target business, but not against broader external or market-wide developments unless the SPA provides otherwise. In turn, the buyer often seeks to qualify such carve-outs by including language whereby the MAC clause can still be invoked if either the target is affected to a significantly greater extent than other companies in its industry, or the target’s industry is disproportionately affected when compared to other industries.

A high burden

Recent decisions from DIFC and ADGM case law confirm that a party seeking to rely on a MAC clause faces a high threshold and will need to show a serious deterioration falling within the agreed wording, rather than ordinary transactional friction or temporary trading difficulties.

For buyers, the practical takeaway is clear: not every adverse development arising between signing and closing will provide a right to walk away from the deal.

Practical considerations

In the current geopolitical climate, parties negotiating or reviewing SPAs should consider the following:

› Does the MAC clause address the right commercial risk? A generic definition may not reflect the commercial concerns relevant to the transaction. The parties may wish to include quantitative thresholds, such as a reduction in EBITDA, to provide a level of objectivity for triggering MAC

› Are the exclusions too broad or too narrow? Systemic and market-wide risks are often excluded, but the precise list and any disproportionality qualifiers can materially affect the balance of risk. The seller may wish to specify the relevant industry and comparable companies to narrow the disproportionality qualifiers

› How does the MAC clause operate within the wider SPA framework? A MAC clause should not be reviewed in isolation. Its practical effect will depend on how it is used in the SPA. Specific risks may be better addressed through tailored covenants, warranties, indemnities, conditions precedent or other termination rights. The buyer may wish to include milestone completion conditions, such as the achievement of a minimum EBITDA or other KPI, the absence of the loss of key or a specified number of customers or clients, or the solvency of the target

› What procedural steps are required? Notice mechanics, cure periods and evidentiary requirements should be reviewed early and followed strictly. A meritorious MAC claim may fail if the contractual procedure for invoking it is not followed

In periods of geopolitical and market uncertainty, MAC clauses naturally attract more attention as parties seek to allocate the risk between signing and closing. When negotiating SPAs governed by DIFC or ADGM law, parties should focus on the language, exclusions, objective and subjective tests, usage and procedural mechanics for determining whether the MAC clause will be helpful if and when invoked.

If you would like to discuss how to structure or negotiate MAC protection in your transaction, please contact Ali Sikander, Senior Associate, or Jennifer Abou Fadel, Associate.

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