In the complex world of M&A transactions, buyers and sellers often grapple with the concept of a “Material Adverse Change” (MAC). Under Delaware law, the interpretation of a MAC clause has historically been seller-friendly, with a high bar that makes it difficult for buyers to walk away from a deal or renegotiate terms based on adverse developments in the target company’s business. However, this legal standard does not mean that buyers are left without strategies to protect themselves in staggered sign-and-close deals.

This article explores the definition and modification of MAC clauses under Delaware law, strategies that buyers use to protect themselves when pursuing a staggered sign-and-close deal structure, and how modifications to the traditional MAC definition can be both practical and market-acceptable in private M&A transactions.

Understanding the Seller-Friendly Nature of MAC Clauses under Delaware Law

The term “Material Adverse Change” may seem straightforward, but Delaware courts have construed it to set a high threshold. In Delaware, a MAC is typically defined as a severe, long-term event that fundamentally threatens the target’s long-term earnings potential. Temporary fluctuations or declines in business performance generally do not constitute a MAC, even if they are significant.

Why Buyers May Favor Simultaneous Sign-and-Close Deals

Given the seller-friendly nature of MAC clauses in Delaware, buyers may prefer a simultaneous sign-and-close structure. This approach locks in the transaction without an interim period between signing and closing, eliminating the risks associated with changes in the target’s business performance that occur during that gap.

Here’s why simultaneous sign-and-close deals are appealing to buyers:

1. Reduced Risk of Adverse Changes: By closing the deal immediately after signing, buyers eliminate exposure to the business risks that can arise during the interim period. This reduces the likelihood that adverse events—whether they reach the MAC threshold or not —will affect the buyer’s obligation to close.
2. Avoidance of Litigation over MAC Clauses: A simultaneous sign and close minimizes the risk of legal disputes over whether a MAC has occurred. Delaware’s high MAC threshold makes it challenging for buyers to successfully argue that one has occurred, so avoiding an interim period helps buyers sidestep this issue altogether.
3. Streamlined Negotiation and Execution: A simultaneous sign and close eliminates the need for extensive interim-period covenants and closing conditions, making the deal process simpler and less risky for buyers.

Strategic Reasons for Staggered Sign-and-Close Transactions

While simultaneous sign-and-close deals have their advantages, there are several strategic reasons why a buyer might prefer a staggered sign-and-close structure:

1. Financing Arrangements: Buyers may require additional time post-signing to finalize their financing arrangements, particularly in leveraged buyouts or large-scale acquisitions. The interim period allows buyers to lock in favorable terms while ensuring that the target is committed to the deal.
2. Due Diligence Continuation: In some cases, buyers may wish to conduct further due diligence post-signing to confirm certain assumptions or investigate newly discovered aspects of the target’s business. This is particularly relevant in industries with complex regulatory environments or high operational risks.
3. Integration Planning: For strategic buyers, the interim period between signing and closing provides time to plan for the integration of the target’s operations. This could involve preparing for systems integration, aligning organizational structures, or addressing cultural differences.
4. Transition of Key Relationships: Buyers may want time to transition key relationships with customers, suppliers, or employees, especially in deals where the success of the transaction depends heavily on these stakeholders. A staggered sign-and-close allows the buyer to begin building these relationships before taking full ownership.
5. Negotiation of Third-Party Consents / Regulatory: Many transactions require regulatory approval or the consent of third parties, such as lenders, landlords, or key customers, to proceed. The interim period provides the necessary time to secure these approvals and/or consents without delaying the signing of the agreement.
6. Risk Allocation: A staggered sign-and-close structure can be used to allocate certain risks to the seller during the interim period. For instance, the buyer might negotiate covenants that require the seller to maintain the business in a particular state or achieve specific milestones before closing.
7. Protecting Sensitive Information: In some transactions, the target company may have highly sensitive information, such as proprietary technology, trade secrets, or confidential customer data. The seller may be unwilling to disclose this information until the buyer is fully committed by signing the purchase agreement. A staggered sign-and-close allows the seller to delay the disclosure of such sensitive information until after signing, reducing the risk of misuse or exposure should the deal fall through. This approach provides the seller with greater control over the timing and scope of sensitive disclosures, while still allowing the buyer to conduct the necessary due diligence post-signing.

Buyer Strategies for Staggered Sign-and-Close Transactions

In a staggered sign-and-close deal, buyers must protect themselves during the interim period. Here are some creative strategies to mitigate risks:

1. Financial Performance Covenants: Buyers can seek to negotiate specific financial performance metrics that the target must maintain during the interim period.
2. Purchase Price Adjustments Based on Interim Events: Buyers can seek to negotiate purchase price adjustments tied to specific events that occur between signing and closing, such as the loss of key customers or supply chain disruptions.
3. Representations and Warranties Insurance (RWI): RWI offers buyers a way to recover damages for breaches of representations and warranties (to the extent that any representation and warranty has a MAC threshold for a breach), even if those breaches don’t meet the MAC threshold.
4. Modifying the MAC Clause to Include a Lower Threshold: In some deals, buyers may look to negotiate modifications to the MAC clause to establish a lower threshold for what constitutes a MAC. These modifications could include quantifiable financial or operational metrics to make it easier for buyers to walk away if adverse events occur between signing and closing.

Conclusion

While the traditional MAC clause under Delaware law is seller-friendly, buyers in M&A transactions can deploy various creative strategies to protect themselves in staggered sign and-close deals and create what they perceive to be a more balanced agreement. The balance of an agreement, however, is not typically measured by the impact of one provision, but upon the totality of the documentation and the dynamics of the deal.

THIS POST IS FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE LEGAL ADVICE.

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