The effects of the global Covid-19 pandemic are being felt both in daily life and in the global economy. German M&A transactions are not unaffected by this. As a result of the pandemic, many companies and in some cases entire industries have found themselves in financial difficulties. For European medium-sized companies, the central question is to what extent the highest possible transaction security can be established in times of Covid-19 when selling the company. To this end, so-called MAC clauses can be integrated into transaction agreements, as these make it much easier for interested buyers to sign the contract.
What is a MAC clause?
The term MAC clause originated in Anglo-American law and stands for “Material Adverse Change” clause. In the event of a significant negative change in the net assets, financial position and/or results of operations of the target company between the signing and closing of the contract, the buyer of the company has the right to rescind the purchase agreement or demand an adjustment of the purchase price.
How the MAC clause increases transaction security
At first glance, the MAC clause is therefore not in the interest of the seller, as it leads to a shift of risk between signing and closing of the purchase agreement. On closer examination, however, it guarantees the execution of the already signed sales contract in the event of a negative change in previously defined events or developments and thus increases transaction security. Typical MAC clauses relate either to events and changes in the company (Company MAC) or in the general market (Market MAC). As an example, the spread of the global Covid-19 virus could therefore be integrated into the MAC catalog or, for example, a significant drop in orders at the target company.
Have MAC clauses become more important as a result of Corona?
This leads to the question of whether the Covid-19 driven pandemic is now seeing increased MAC clauses in the M&A market? First of all, it must be stated that a buyer’s right of rescission essentially depends on the form of the purchase agreement. Furthermore, it must be examined whether pandemics are to be classified as natural catastrophes. However, this seems rather unlikely at this stage. In practice, it is often the case that the parties stipulate a determination of quantitative hurdles, such as a sales shortfall of 25 percent in relation to the business plan for the next three financial years. However, the buyer is very much in favour of the MAC clause in order to hedge against not only company-specific risks but also industry-specific risks.
This is why sellers should avoid MAC clauses
On the seller side, the MAC clause should be avoided or only include a limit on target company-specific items. Superficial factors such as mere probability of occurrence of deteriorating situations without concrete quantification and concretization should be avoided. Furthermore, the seller can reduce the buyer’s motivation by insisting on the agreement of a so-called “break-up fee”. This provides that in the event of a MAC clause-conditional rescission, the buyer must pay a fixed compensation sum stipulated in advance in the contract.
MAC clauses as a rarity in Germany
In the European market, however, MAC clauses tend to be the exception. For example, the CMS M&A Study of 2019 shows that in Europe only around 15 percent of M&A purchase agreements include a MAC clause, whereas in the U.S. 97 percent of all M&A purchase agreements do. In Germany, S&I insurance is a more common tool for preemptively hedging transaction risks. Here, it can be seen that prior to Covid-19, around 15 percent of transactions included S&I insurance and by the end of 2020, the figure was 17 percent, with the proportion at around 50 percent for deals with a transaction size of over EUR 100 million.
Increased transaction security through MAC clauses
The MAC clause is applied between the M&A process steps of signing and closing. Nevertheless, on the basis of transaction security, both parties (buyer as well as seller) should completely relinquish or essentially limit the legal consequence of withdrawing from the transaction contract. Whether a wave of MAC clauses will be triggered in Europe, especially in Germany, depends on two main factors: the wording of the contract and the negotiation skills of both parties, taking into account the impact of the pandemic. Provided that a MAC clause results in a purchase price adjustment, it may well contribute to transaction certainty.