Latest / The Acquisition Talk with Fexingo: Mergers, Buyouts, and Business Sales for Operators / How the Material Adverse Change Trap Killed a Billion Dollar Deal
Transcript
- Lucas: So April 2026 — a $1.2 billion acquisition falls apart. Buyer walks, seller sues, and the whole thing hinges on seven words buried in the purchase agreement. Luna: Seven words. That is terrifying. Which words? Lucas: The Material Adverse Change clause — or MAC clause — specifically the phrase 'disproportionately affects the target.' That phrase let the buyer argue that a market downturn hit the seller harder than its peers, triggering the MAC, and the Delaware Chancery Court agreed. Luna: So the clause actually worked the way it was written — for the buyer. The seller probably thought it was boilerplate. Lucas: Exactly right. And that's the trap for today. Most middle-market sellers sign an SPA with a MAC clause, assume it's standard language that never gets triggered, and never read the 'disproportionate effects' carveout carefully. In this deal — a healthcare IT services company called MedSync — the buyer, a large pe backed rollup, walked because MedSync's revenue dropped 8 percent in Q1 2026 while the industry average was 3 percent. Luna: Eight versus three. That's a five percentage point gap. Does the MAC clause usually have a specific percentage threshold? Lucas: It rarely does. That's what makes it so dangerous. Most MAC clauses say something like 'a material adverse effect on the business, financial condition, or results of operations.' Then there's a list of exceptions — changes in the economy, the industry, geopolitical events, et cetera. But the catch is: those exceptions don't apply if the target is disproportionately affected. Luna: So the buyer's argument is: 'The industry downturn is excepted, but your downturn is worse than the industry, so we can walk.' And the court bought that? Lucas: The Delaware Chancery Court has a long history of enforcing MAC clauses strictly. The classic case is IBP v. Tyson in 2001 — Tyson tried to walk away from a chicken processor deal during a market downturn, and the court said no, because the downturn hit the whole industry equally. But the Akorn decision in 2018 changed the game. Akorn was a generic drug company; Fresenius walked because Akorn's business declined while its peers recovered. The court said that counts as a MAC. MedSync's case is basically Akorn 2.0. Luna: So the precedent is clear: if you're the seller and your numbers slip more than your competitors between signing and closing, you're exposed. What can a seller actually do about it? Lucas: Three things. First, negotiate a 'reverse MAC' clause that gives the seller the right to walk under certain conditions — rare but possible. Second, tighten the disproportionate-effects carveout. Instead of 'disproportionately affects the target,' push for language like 'disproportionately affects the target relative to the industry as a whole, measured by revenue and EBITDA percentage change.' That forces a specific metric. Luna: Measurable, not subjective. That helps. What's the third? Lucas: Third — and this is the one most sellers miss — negotiate a 'MAC deductible' or a 'basket.' A minimum threshold, say a 10 percent decline in EBITDA or revenue, before the MAC can be invoked. That gives you a buffer. In MedSync, an 8 percent revenue drop wouldn't have hit a 10 percent basket. Luna: So the deal would have closed. But the seller didn't ask for that, and the buyer had the leverage. Let me guess — the seller was under time pressure? Lucas: Always. The MedSync founders wanted to close before year-end for tax reasons. They signed a tight SPA in January 2026, expecting to close in April. The MAC clause had no basket, no specific metrics, and a broad disproportionate-effects carveout. In Q1, they lost two big contracts — combined about 5 percent of revenue — and their legacy business declined another 3 percent. Their EBITDA dropped 12 percent year over year. The industry: down 2 percent. Luna: Twelve versus two. That's a textbook disproportionate effect. The buyer's lawyers must have been thrilled. Lucas: They sent a termination notice on April 15. The seller sued on April 17. The court ruled for the buyer on May 11 — less than a month. Expedited because the buyer had another deal waiting. The seller got nothing. No reverse termination fee, no expense reimbursement. The SPA didn't have either. Luna: A $1.2 billion deal, gone over a clause the seller probably never read carefully. And no breakup fee? That seems like a basic negotiating point. Lucas: It is. But in competitive processes, buyers often refuse to include a reverse breakup fee for a MAC walk. They say 'we're only walking if something genuinely bad happens.' And sellers, eager to get the deal done, concede. That's the trap. Luna: So the lesson: if you're selling, assume the buyer will try to walk using the MAC clause. Negotiate a basket, specific metrics, and at least a modest reverse breakup fee. And read the disproportionate-effects carveout as if your entire payout depends on it — because it does. Lucas: That's exactly it. And it's not just big deals. Middle-market SPAs often have the same language. A $20 million deal with a $2 million earnout can be killed by a 5 percent revenue dip if the industry dips 2 percent. The numbers scale down, but the risk is identical. Luna: Right. And if you're listening and you're in the middle of a sale process right now, go look at your SPA. Find the MAC clause. See if it has a basket. See what the exceptions say. That five minutes could save your deal. Lucas: And if today was actually useful to you — if you're an operator thinking about an exit, or an advisor helping clients through one — the way these conversations stay ad-free is listener support. Buy me a coffee dot com slash fexingo. That link goes directly to keeping this show independent. Luna: Yeah, it's a small thing that makes a big difference. We don't run ads, we don't take sponsor money. It's just you and us figuring out how deals actually work. Every coffee helps. Lucas: So back to the MAC clause. The other thing sellers often miss is the 'ordinary course' covenant. Most SPAs require the seller to operate in the ordinary course between signing and closing. If you make a big strategic change — even a good one — the buyer can argue you breached the covenant, and that can also trigger a MAC. Luna: So you're stuck: you can't fix problems because that might be a breach, but if you don't fix them, your numbers slip and the MAC clause bites you. Classic catch-22. Lucas: Exactly. In MedSync, the lost contracts were partly due to the CEO spending time on the sale instead of managing client relationships. The buyer argued that was a breach of ordinary course — the CEO should have been focused on business, not the deal. The court didn't even need to reach that argument because the disproportionate-effects carveout already gave the buyer the win, but it shows how many angles a buyer has. Luna: What about the pandemic carveout? Most SPAs since 2020 have a specific exception for pandemics, epidemics, and public health emergencies. But what about something like a trade war or tariff shock? Is that covered? Lucas: It depends on the drafting. Standard MAC exceptions include 'changes in economic, political, or market conditions generally' and 'changes in law or regulation.' But if the tariff specifically targets your industry — say, medical devices — and you're a medical device company, the 'generally' language might not protect you. Courts look at whether the event is industry-specific or company-specific. Luna: So the exception has to match the cause. And the seller's best defense is to make the exceptions as broad as possible, covering any event that affects the industry generally, regardless of the cause. Lucas: Right. And then add a 'basket' on top of that. But here's the thing: even with a basket, if the basket is set at 10 percent and the industry drops 8 percent, but your business drops 15 percent, you're still disproportionately affected. The basket only helps if the absolute decline is below the threshold. Luna: So you need both: a basket for absolute decline, and a relative performance test that uses a percentage gap rather than a subjective 'disproportionate' standard. Something like 'the target's EBITDA decline exceeds the industry average decline by more than 5 percentage points.' Lucas: That is exactly the kind of language a good M&A lawyer would push for. And it's worth the legal fees. In a $20 million deal, if you spend an extra $20,000 on negotiating the MAC clause, that's 0.1 percent of the deal value. It's the cheapest insurance you'll ever buy. Luna: And if the buyer refuses? What's your move? Lucas: Then you decide how badly you want the deal. If you're in a competitive process, you may have to accept. But if you're the only buyer, you have leverage. And even if you accept, at least you know the risk. You can prepare: manage your business to minimize volatility during the interim period, avoid big client dependencies, and maybe get a backup financing line in case the deal falls through. Luna: So the trap isn't just the clause — it's the illusion of certainty. Sellers think 'signing is closing,' but the MAC clause means nothing is certain until the wire hits. Lucas: Exactly. And the MedSync case is a reminder that even a $1.2 billion deal can fall apart on seven words. The sellers walked away with nothing but legal bills. And the buyer? They announced a deal with a different target three weeks later — presumably with a better MAC clause. Luna: So the buyer learned from the same clause they used to walk. That's the asymmetry: buyers see MACs every day; sellers see one maybe once in a lifetime. Lucas: That's the whole point of this show. You don't get to practice selling. So you'd better study the playbook before you're at the table. Next episode, we'll talk about the 'hell or high water' clause — the buyer's commitment that can actually protect a seller. Luna: Looking forward to it. Until then, read your SPA.