August 14, 2017

MAC Clauses: Use Judgment, Not Market Practice

In this recent blog, Weil Gotshal’s Glenn West vents his frustration about the way practitioners continue to approach MAC clauses despite the lessons of several decades of Delaware case law.  Instead of thinking through the implications of these cases when drafting MAC clauses, lawyers routinely defer to market practice – which often means these clauses don’t accomplish what the parties intend.  Here’s an excerpt:

Many of the standard terms of M&A agreements began their existence with a brain—the brain of a smart lawyer who perceived an issue that needed to be addressed and drafted a clause to address it.  And then other smart lawyers recognized the value of that newly drafted clause, and adapted and improved it until it became a standard part of most M&A agreements.  But once that clause became attached to the “market” it became divorced from the brain or brains that created it, and soon everyone was using it regardless of whether they truly understood all the reasons that prompted its drafting.

Even worse, market attachment is so strong that even after a standard clause has been repeatedly interpreted by courts to have a meaning that differs from the meaning ascribed to that clause by those who purport to know but do not actual know its meaning (mindlessly using the now brainless clause), it continues to be used without modification.  Such is the case for many with the ubiquitous Material Adverse Change (“MAC”) or Material Adverse Effect (“MAE”) clause.

Glenn offers up some specific suggestions for buyers negotiating MAC clauses, and closes with advice that all deal lawyers should take to heart:

Don’t let “it’s market” ever be an acceptable explanation for the inclusion or lack of inclusion of any provision of an agreement.  Know what every provision of your agreement means on its face, as well as how any standardized provisions have been interpreted by the courts that could ultimately be involved in any dispute over your agreement.

John Jenkins