Latest / The Acquisition Talk with Fexingo: Mergers, Buyouts, and Business Sales for Operators / The MAC Clause That Cost a Buyer 45 Million
Transcript
- Lucas: So we've talked about a lot of deal-breakers on this show — termination fees, data rooms, earnouts. But today I want to dig into the clause that's supposed to catch everything else: the material adverse change clause. And specifically, the case of a buyer who thought he had a perfect MAC out, invoked it, and ended up paying forty-five million dollars for the privilege. Luna: Forty-five million? That's a brutal outcome for a guy who probably thought he was being clever. Lucas: Exactly. The deal was a three-hundred-million-dollar acquisition of a specialty chemicals manufacturer. Signed in early 2024, closing scheduled for the summer. Between signing and closing, the company's biggest customer — about thirty percent of revenue — announced it was moving production in-house. That's a massive hit. The buyer looked at the MAC clause, saw 'material adverse change,' and thought, this is it. We're out. Luna: And I'm guessing the seller didn't just say 'okay, no hard feelings.' Lucas: Right. The seller sued for specific performance. And the court had to answer one question: does losing a major customer count as a material adverse change? The answer, after months of litigation and a twenty-million-dollar legal bill, was no. The buyer had to close the deal — or pay the reverse termination fee. They chose to pay, forty-five million, and walk away. Luna: So the clause that was supposed to let them out actually cost them more than if they'd just closed the deal. What went wrong? Lucas: Before I get into that — if today's breakdown helps you look at your own deal documents a little more carefully, that's exactly the kind of practical takeaway we're here for. And the way these stay ad-free is listener support. If you've gotten something useful out of the show, buy me a coffee dot com slash fexingo. It genuinely keeps us going. Luna: Yeah, and it's a small way to say thanks — we appreciate every single one. Lucas: Alright, so back to the MAC clause. The first problem: the buyer's clause defined material adverse change as 'any event that has a material adverse effect on the business, financial condition, or results of operations.' That's the classic broad definition. But courts have read those words extremely narrowly. They're not looking for any old setback — they want something that fundamentally changes the long-term earnings power of the company. Luna: So losing a third of your revenue doesn't qualify? What does? Lucas: Think of it this way: courts have said a MAC has to be 'durationally significant' — not a blip, not a temporary hiccup, but a change that's likely to persist for years. In this case, the customer loss was real, but the buyer couldn't prove it would be permanent. The customer said it was transitioning production over eighteen months, and the company had already replaced some of that revenue with two new contracts. So the judge saw it as a manageable setback, not an existential blow. Luna: But that seems harsh on the buyer. I mean, they signed a deal based on a certain business, and then the business changed. Lucas: And that's the tension. The seller's argument, which the court accepted, is that the buyer took on the risk of ordinary business fluctuations. In M&A, the seller is selling a business, not a guarantee of future performance. Unless the contract specifically carves out 'loss of a major customer' as a MAC event, the buyer is stuck with that risk. Luna: So what should the buyer have done differently? Could they have drafted a clause that actually protected them? Lucas: Absolutely. The most effective MAC clauses are specific. Instead of a broad, vague definition, you list out the events that would give you an out: loss of a named customer, a material breach of a key contract, a regulatory action, a change in law. The buyer could have named that customer as a 'key customer' and said if they terminate or reduce purchases by more than twenty percent, that's a MAC. That's the kind of clarity courts respect. Luna: So you're saying the general clause is almost useless in practice. Lucas: In practice, yes — it's a trap for the unwary. The famous Delaware cases, like Akorn and IBP, have set a high bar. Courts presume the buyer is taking the business as is, with all its risks. The MAC clause is a backstop, not a primary exit. You have to negotiate for specific protections if you want to be able to walk away. Luna: And what about the seller's side? What can a seller do to protect themselves from a buyer trying to use a MAC to renegotiate or back out? Lucas: Great question. For sellers, the key is to include carve-outs — exceptions to the MAC clause for events that the buyer has to bear. Things like general economic downturns, industry-wide changes, even changes in commodity prices. In this case, the seller's lawyers did exactly that: they carved out 'changes in general economic or political conditions' and 'changes in the industry.' The buyer's loss of a customer fell into the general business risk bucket, not a carve-out. Luna: So the seller's diligence on the contract was what saved them. Lucas: Exactly. And it's also worth noting the buyer made another mistake: they announced they were terminating the deal and publicly blamed the seller's business for the deterioration. That gave the seller ammunition. They argued the buyer was acting in bad faith — trying to escape a deal that had become less attractive for financing reasons, not because of a real MAC. The court picked up on that narrative. Luna: So how does a buyer know if they actually have a legitimate MAC claim? Is there a checklist? Lucas: There are a few factors courts look at. First, is the change substantial enough to affect the company's long-term value? Second, is it permanent or expected to last more than a year? Third, is it a risk the buyer explicitly assumed in the contract? And fourth, did the buyer act in good faith — meaning they didn't cause the change and didn't try to use it as an excuse? If you can't tick all four boxes, you probably don't have a claim. Luna: That's a high bar. So in practice, when does a MAC clause actually get successfully invoked? Lucas: Rarely. In the Akorn case, the court did allow a MAC for regulatory issues that destroyed the company's core business. But those are extreme situations. The lesson is: don't count on a MAC clause as your escape hatch. If there's a specific risk that would make you walk, name it in the contract. Luna: And what about the reverse termination fee? Is that a common way to handle this? Lucas: It's becoming more common. In a private deal like this, if the buyer gets cold feet, the contract might specify a reverse termination fee — say three percent of the deal value — as the buyer's sole remedy. That's what happened here. The buyer paid forty-five million, which was fifteen percent of the deal, but that's because the fee was tied to the buyer's actions, not the standard three percent. Actually, let me correct myself: the fee was negotiated as fifteen percent because the buyer had a financing condition. But that's a whole other episode. Luna: So the buyer's mistake was twofold: they relied on a vague MAC clause, and they had a high reverse termination fee they couldn't avoid. Lucas: Right. And the broader point is that in M&A, every risk you don't explicitly allocate ends up being allocated by default — often against you. The buyer thought the MAC clause was a safety net. The seller knew it wasn't. That asymmetry is where deals go wrong. Luna: So what's the one takeaway for someone listening who might be on either side of a deal? Lucas: If you're a buyer, spend your negotiation capital on specific MAC carve-ins — name the events that would make you walk. If you're a seller, push for broad MAC language and carve-outs that put general business risk on the buyer. And both sides should assume the MAC clause will never be successfully invoked in court, because that's the reality. Luna: That's a sobering thought. But it's the kind of thing you want to know before you sign, not after. Lucas: Exactly. And on that note, maybe the next time you see a MAC clause, you'll read it a little differently. Thanks for being here.