A recent English court decision has shed light on how the courts will approach the interpretation of so-called “material adverse change” clauses (or “MAC clauses”).

MAC clauses are sometimes used in sale agreements where there is going to be a gap between exchange of contracts and completion. The clause enables the buyer to get out of the deal if something occurs in the period between exchange and completion which is materially detrimental to the business they’re buying. In effect, a MAC clause will transfer from the buyer to the seller some of the pre-completion risk of an adverse change occurring.

This case concerned a share purchase agreement. The buyer claimed that two events fell within the MAC clause:

  • actual deterioration in the target’s financial performance in the month prior to completion; and
  • the target making substantial downward revisions to its financial forecasts during the period between exchange and completion of the transaction.

The court held that the buyer had an arguable case as regards the first event but not the second.

The MAC clause in this share purchase agreement defined a Material Adverse Event as: “…an act or omission, or the occurrence of a fact, matter, event or circumstance, affecting [the target] giving rise to, or which is likely to give rise to, a material adverse effect on the business, operations, assets, liabilities, financial condition or results of operations of [the target] taken as a whole…”

The parties were required to notify one another if any facts likely to permit the buyer to rely on a completion condition occurred. However, importantly, the seller’s liability was limited by an acknowledgement by the buyer that the seller gave no warranty as to the accuracy of any forecasts, estimates, projections and statements of honestly expressed opinion provided to the buyer before the SPA was signed.

After signing, the target’s financial performance was significantly worse than the seller had forecast – indeed, profits for the relevant period were down 84.6% against the forecast. The target’s management also made substantial downward changes to its forecasts during the gap between signing and completion.


The court held that it was arguable that actual deterioration in the target’s financial performance before completion constituted a Material Adverse Event.

However, the court decided that the seller revising its forecasts downwards could not trigger the clause. First, the revision did not fall naturally within the words “act or omission, or the occurrence of a fact, matter, event or circumstance”. Second, the causal effect of the revisions to the forecasts was tenuous. While things might follow from these revisions, this was to do with what underlay the revision, rather than the fact of the revision itself.

Finally, the buyer’s argument that revisions to forecasts constituted a Material Adverse Event did not make commercial sense. It was inconsistent with the term in the SPA that said the seller gave no warranty in respect of the accuracy of financial forecasts. To include forecasts within the Material Adverse Event definition, said the court, would result (in effect) in the forecasts given after exchange of contracts being treated as warranted. Including forecasts within the definition of Material Adverse Effect bring uncertainty, something which is undesirable in M&A markets.

The judgment is a useful reminder that, as with any other contractual term, the courts will not interpret a MAC clause in isolation from the other terms of a contract e.g. the limitation of the seller’s liability. It is also clear that the courts will look to adopt a construction which is commercially sensible.

Case: Ipsos SA v Dentsu Aegis Network Limited (previously Aegis Group plc) [2015] EWHC 1726.

Corporate and Commercial