Return of the MAC: Material Adverse Change Can Break a Deal

By Tanya Roth, Esq. on May 15, 2012 | Last updated on March 21, 2019

In-house counsel, beware of the MAC. No, we're not talking about the computer. We're talking about the deal-breaker clause in a merger.

It's not always easy for an investor or a potential buyer to walk away from a deal. But with material adverse change, or MAC, there is a loophole for the buyer in a deal to walk away.

Take the case of Pep Boys. Pep Boys recently disclosed that Gores Group, a private equity firm, was considering whether or not there had been a material adverse change to the operations of Pep Boys, so as to allow the private equity firm to walk away.

Gores Group was locked in a $1 billion deal to acquire Pep Boys.

The concept of MAC popped up often during the recent financial crisis. Many prospective buyers walked away from the deal and terminated acquisitions when there were adverse changes to the target companies.

During the financial crisis, it was much easier to walk away by paying a reverse termination fee, roughly 3 percent of the deal value.

Currently, the reverse termination fee has become higher, typically at 4 to 8 percent of the deal.

For the Pep Boys deal, that 4 to 8 percent can still be a hefty amount. So a MAC claim may be the answer to absolve Gores Group from consummating the deal.

Does the recent poor performance by Pep Boys amount to a MAC? That's what Gores Group is saying.

But invoking the MAC clause isn't always for the sole purpose of breaking the deal. It can serve as a good negotiation tactic as well. In the event that a MAC clause is triggered, the target company is put in a position where they might feel backed into a corner. Now, the target company might agree to a lower price or to more favorable terms for the buyer.

Beware of the MAC. It could kill the deal. Or severely alter the playing field.

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