The Delaware Court of Chancery's decision in Akorn v. Fresenius established that invoking a material adverse change clause requires showing a change that is both substantial and durationally significant — not just a temporary setback or a trend that may reverse. The court also confirmed that a MAC must have a meaningful impact on the company's long-term earnings power, not just its short-term results, making MAC clauses extremely difficult for buyers to invoke successfully.
The Delaware Court of Chancery's 2018 decision in Akorn v. Fresenius Kabi established the only instance in which a Delaware court sustained a buyer's invocation of a MAC clause to terminate an acquisition. The court held that a material adverse effect must be measured against the long-term earnings power of the target company, must be durationally significant rather than temporary, and must substantially threaten the overall earnings potential of the target in a way that would be material to a reasonable acquiror. Akorn involved a combination of regulatory fraud, data integrity failures, and a 50%+ decline in operating performance. Gurpreet Bal advises clients that while Akorn confirmed that MAC clauses can be enforceable, the threshold for establishing a material adverse change remains extremely high, and buyers should not rely on MAC clauses as a general exit mechanism from deals they no longer want to complete.
Standard MAC carve-outs exclude changes affecting the industry as a whole (but not the company disproportionately), general economic and financial market conditions, changes in applicable law, acts of terrorism or war, and changes resulting from the announcement of the transaction itself. The disproportionate effect exception is critical — if a general industry downturn affects the target company much worse than its peers, the MAC clause may still be triggered.
MAC definitions in purchase agreements typically include a list of carve-outs specifying events or conditions that do not constitute a material adverse change even if they negatively affect the target. Standard carve-outs include changes in general economic or market conditions, changes affecting the target's industry generally, changes in applicable law or accounting standards, acts of war or terrorism, natural disasters, pandemics, and changes resulting from the announcement or pendency of the transaction itself. The critical negotiation point for each carve-out is the disproportionate impact exception, which reinstates the carve-out event as a potential MAC if it disproportionately affects the target relative to comparable companies in the target's industry. Gurpreet S. Bal advises sellers to negotiate for the broadest possible carve-outs with narrow disproportionate impact exceptions, and advises buyers to ensure that disproportionate impact is measured against an appropriate peer set.
When a buyer seeks to invoke a MAC, Delaware courts analyze whether the change is substantial in magnitude, durationally significant (not a temporary blip), and attributable to the target company rather than general market conditions. Courts look at financial metrics, forward projections, the specific carve-out language, and any disproportionate effect compared to industry peers. Buyers rarely succeed in invoking MAC clauses, but the threat of litigation over the issue creates significant deal uncertainty.
In practice, MAC analysis involves comparing the target's performance between signing and closing against both its own historical performance and the performance of comparable companies. The analysis requires examining revenue trends, margin deterioration, customer losses, regulatory developments, and operational disruptions. In Gurpreet Bal's experience with technology M&A, the most common events that trigger MAC discussions are loss of a key customer representing a significant percentage of revenue, regulatory actions affecting the target's core product, discovery of material undisclosed liabilities during the interim period, and departure of key technical employees. Few of these events individually meet the Akorn threshold, but their cumulative effect can form the basis for MAC-related negotiations.
Between signing and closing, sellers must operate in the ordinary course of business under interim operating covenants, which require maintaining existing business operations without material changes. A seller that violates these covenants — by losing a major customer, terminating key employees, or taking on unusual liabilities — may give the buyer grounds to refuse closing based on the covenant breach rather than a true MAC. The covenants and MAC clause work together to protect buyers from pre-closing deterioration.
MAC clauses interact with interim operating covenants, which require the target to operate the business in the ordinary course between signing and closing. A target that complies with its ordinary course covenants may still experience a material adverse change due to external factors beyond its control. Conversely, a target that violates its interim covenants may provide the buyer with a separate termination right independent of the MAC analysis. Gurpreet S. Bal advises both buyers and sellers to carefully coordinate the MAC clause and interim covenant provisions to ensure that the closing condition framework operates as intended and does not create unintended gaps or overlaps in the parties' respective protections.
Gurpreet S. Bal is a Partner at Foley and Lardner LLP in Silicon Valley, where he advises startups, founders, and investors on mergers and acquisitions, venture financings, IPOs, and cross-border transactions. He has advised on more than 50 M&A transactions with aggregate deal value exceeding $60 billion across AI, semiconductors, fintech, and emerging technology.