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The developing English jurisprudence regarding material adverse change clauses

Simon J Little, Davis Polk & Wardwell, United Kingdom

Acquisitions of private companies in the United States are almost universally conditional upon the absence of a material adverse change (a "MAC"). This is achieved either by virtue of an explicit MAC condition or a condition requiring that a warranty confirming the absence of a MAC be true at completion.

Such conditionality is much less prevalent in private company acquisitions governed by English law which is largely attributable to different paradigms regarding the allocation of risk. In the US market, a purchaser is not considered to assume risk with respect to the target company until the time of completion and so customarily protects its ability to walk away from a transaction that ceases to match the commercial deal that has been made with the seller. By comparison, in English law transactions, a purchaser is customarily regarded as assuming risk from the time of contracting, subject only to legally required conditions, and therefore is rarely permitted the opportunity not to complete the acquisition if it is legally able to do so.

However, in an increasingly international market place influenced by US purchasers and parties drawing on experience in the US market, there has been an evolution in favour of increased negotiation of MAC conditions in English law transactions, even if their inclusion in agreements is not as prevalent as in US transactions, and there has been a recent emergence of English case law to assist in the drafting of MAC conditions. The following themes and guidance can be drawn from the case law.

Terms will be construed narrowly

In the interests of promoting certainty, a court can be expected to read the terms of MAC conditions narrowly. In Grupo Hotelero1, in the context of a loan agreement, the High Court considered that in testing the "financial condition" of a company, the assessment will begin with the relevant financial information. During the course of a financial year reference can be made to interim, or else management, accounts. Consequently, reference to a company's financial condition can be expected to be interpreted narrowly so as not to be forward looking.

In Ipsos2, in the context of a company acquisition, the High Court determined that a downward revision of a forecast did not naturally amount to an "act, omission or the occurrence of a fact, matter, event or circumstance". In the court's view, the facts causing the revision in forecasting were more likely to be changes that may be the basis for invoking a MAC condition. Therefore, in so far as the buyer wants the widest range of circumstances to amount to a MAC it should seek to ensure that the specific changes it cares about are captured in the terms of the condition including reference to the projected future condition of the target company if relevant.

A MAC condition will be construed in the context of the whole agreement

As would be expected when construing a contractual provision, the court will not consider a MAC condition in isolation. In Ipsos, the High Court considered that allowing revisions to forecasts to amount to a MAC would be inconsistent with other terms of the agreement. The parties had agreed to limit the seller's liability by excluding any warranties relating to the accuracy of forecasts provided by the seller to the buyer. The court considered that if a MAC could arise from revisions to forecasts the buyer would, in substance, have received comfort as to the accuracy of those forecasts despite the agreed upon limitation of liability.

The impact of a change must be significant

In Grupo Hotelero, the High Court held that for an adverse change to be material it must significantly affect the ability of the borrower to perform its obligations. There is not, however, a clear parallel to be drawn with an acquisition agreement: in satisfying a test that a circumstance has had a significant impact on the ability of the target company to operate its business is no clearer than evaluating whether the change in circumstance is material.

A buyer would clearly be assisted if the MAC condition included a subjective standard. Subjectivity would cause the buyer to be judge in its own cause on the issue of whether a particular circumstance amounts to a MAC, provided that, as was the case in Cukurova3 in the context of a loan agreement, the buyer can produce evidence to the court of holding an honest and rational opinion that a MAC exists. In the context of an acquisition, however, it is unlikely that a sophisticated seller would accept such a risk of optionality by agreeing to a comparatively low threshold for invoking a MAC condition. Therefore, a buyer should expect to have the burden of proving that the impact of a change is sufficiently significant to alter the basis upon which the contract was entered into.

Events must be unknown

The High Court in Grupo Hotelero ruled that a party could not trigger a MAC condition on the basis of circumstances of which it was aware at the time of contracting as the parties should be assumed to have intended to enter into the agreement despite those circumstances. The court did acknowledge that it may be possible to invoke a MAC condition where circumstances worsen in a way that makes them materially different in nature, albeit this only emphasises that the court must be satisfied that the matter being relied upon as amounting to or comprising a MAC is in fact sufficiently significant.


The recent English jurisprudence regarding MAC conditions suggests that parties to English law private acquisition agreements should expect provisions to be construed narrowly in view of a MAC condition being regarded as a backstop against significant unforeseen events.

A buyer's prospects of being protected from adverse changes should be increased if specific and objectively quantifiable criteria are included in a MAC definition (such as a change in EBIDTA or revenues by a specified amount to capture a deterioration in financial condition or the loss of specific contracts to capture a deterioration in a company's operations) and the parties acknowledge that short-term fluctuations, and not only durationally significant changes, in the financial or operational criteria will qualify as being materially adverse changes.

However, the greater the precision in drafting a MAC definition, the less scope a buyer may have to claim a MAC in the face of what may subsequently be regarded as an agreement on unfavourable terms. Ultimately, in so far as the purpose of a MAC condition is to protect a buyer against the unknown, ambiguity may prove to be the greatest ally.

  1. Grupo Hotelero Urvasco S.A. v Carey Value Added S.L. and another [2013] EWHC 1039 (Comm)
  2. Ipsos S.A. v Dentsu Aegis Network Ltd [2015] EWHC 1726 (Comm)
  3. Cukurova Finance International Limited and Cukurova Holding A.S. v. Alfa Telecom Turkey Ltd [2013] UKPC 2