The COVID-19 pandemic has had tremendous effects in every sector of the worldwide economy. Private equity (and private M&A deals, specifically) are no exception. Besides the more apparent impact on returns and profitability, the pandemic has affected in the long term also the way deals are conducted.
In particular, a new problem arises in these uncertain times, since the seller may fail to deliver the business to the buyer in the agreed-upon state, as sudden changes in the economic landscape caused by the pandemic continue to be a threat. Consequently, there has been a rise in MAC (material adverse change) clause negotiations in deals, although to different extents depending on the region. Simply put, a MAC clause gives the buyer the right to walk away from a deal in case a detrimental event occurs to the target business in the time window between signing and closing.
A MAC clause is very context dependent, and specific scenarios covered by the clause are often heavily negotiated. In the context of the pandemic, a very common practice for a MAC clause is to outline that the pandemic must have a disproportionate negative impact on a business relative to the industry it is in, for instance by pushing financial measures such as EBITDA or revenue below a certain threshold. But in practice, exercising this clause is anything but straightforward.
In a MAC clause, the wording is of the essence. It is on the basis of the way the clause is formulated that the right to walk away will be granted or denied to the buyer. Next to wording, it is also important to consider whether the events that the clause covers were known at the time of the signing; quite a paradox, considering that this clause is used to protect the buyers from unforeseen circumstances, isn’t it?
Very few people, back in 2019, were expecting a global shutdown due to the spread of a dangerous virus, and even fewer included this possibility in a MAC clause in a deal before the pandemic. However, a lot has changed since then. Hence, in addition to the traditional Business, Market, Finance, and Compliance MACs, buyers and sellers can expect to see the inclusion of newer and more specific MAC circumstances in future deals. The adoption of more MAC clauses will hopefully benefit both buyers (by providing an extra layer of protection against losses) and sellers (by having better defined and less general terms and phrasing of these clauses). What is left to see is whether both these parties will understand that this type of clause is intended to protect them both, and whether they will let go of some of the inflexibility and unwillingness to compromise that often has stemmed from MAC in courts.