TLDR: A material adverse change clause gives a buyer the contractual right to walk away from, or refuse to close, a signed acquisition if the target’s business suffers a genuine, lasting collapse before closing. Delaware courts have spent three decades making that right almost impossible to exercise: broad carve-outs shield sellers from ordinary bad luck, and judges demand proof that harm will persist for years rather than quarters. Only one buyer in the state’s modern merger history has won an MAC fight outright. For dealmakers, the real contest happens at the drafting table, not in court, and that is where a Swiss M&A advisory partner earns its fee.
What the Clause Is Actually For
A merger agreement is typically signed months, sometimes over a year, before it closes. Regulatory clearance, financing, and shareholder votes take time, and in that gap almost anything can happen to the target: a lost customer, a product recall, a whistleblower complaint, a pandemic. The material adverse change clause, more often labeled a material adverse effect or MAE clause in the agreement itself, decides who absorbs that risk. If the target’s business deteriorates severely enough between signing and closing, the buyer can refuse to close, or terminate outright, without paying a breakup fee. Absent that level of deterioration, the buyer remains bound to the deal it signed, even if market conditions or its own appetite for the transaction have shifted.
Sellers want that bar set high. A buyer with a broad MAC right effectively holds an option to abandon the deal whenever the target has a rough quarter, which undermines the certainty a signed agreement is supposed to provide. Buyers want the opposite: a low bar that protects them from paying full price for a business that has quietly broken. The definition that ends up in the agreement is the product of that tension, and it is one of the most heavily negotiated provisions in the document.
The Carve-Outs Decide the Outcome
The operative language rarely stops at a general description of adverse change. It is followed by a long list of exceptions, known as carve-outs, for categories of harm the seller argues should never count: general economic or market conditions, changes in law, industry-wide developments, war and terrorism, and, since 2020, pandemics and public health emergencies. Most carry a carve-back: the exception disappears if the event hits the target disproportionately harder than its industry peers. That single test, disproportionate impact relative to similarly situated companies, is frequently where the entire dispute ends up being fought.
Because the carve-outs are so extensive, a buyer invoking a MAC clause after a bad quarter or an adverse regulatory shift is usually arguing against its own contract language before it reaches the merits. Sellers’ counsel spend the negotiation broadening these exceptions; buyers’ counsel spend it narrowing them and tightening the disproportionality test.
Delaware’s Deliberately High Bar
Even where a buyer clears the carve-outs, the Court of Chancery applies a standard built to make walking away difficult. In IBP, Inc. v. Tyson Foods, decided in 2001 after Tyson tried to escape its agreement to acquire IBP following a weak quarter, the court held that a material adverse effect must be durable rather than transitory, with the buyer bearing the burden of showing harm that threatens the target’s earnings power over a period measured in years, not months. That “durationally significant” formulation has governed every MAC dispute since.
The results follow the standard. In Hexion Specialty Chemicals v. Huntsman, decided in 2008 amid the financial crisis, the court found Huntsman’s declining results did not amount to a material adverse effect, and separately found that Hexion had breached its own covenants trying to engineer an exit. In Bardy Diagnostics v. Hill-Rom, decided in 2021, the court ordered Hill-Rom to close its acquisition of a medical device maker after a Medicare reimbursement rate cut, holding that Hill-Rom had not proven the cut would durably impair Bardy’s earnings potential, and that reimbursement changes fell within a regulatory carve-out regardless.
Akorn: The One Buyer That Won
The exception that defines the rule is Akorn, Inc. v. Fresenius Kabi. Fresenius agreed in April 2017 to acquire generic drugmaker Akorn for 4.75 billion dollars. Akorn’s performance then collapsed in the second quarter of 2017, well below both guidance and prior-year results, and whistleblower letters surfaced credible allegations that Akorn had systematically falsified data submitted to the FDA. Vice Chancellor Travis Laster found in October 2018 that Akorn had suffered a material adverse effect, that it had breached its regulatory representations in a manner that would reasonably be expected to produce one, and that it had failed to operate in the ordinary course pending closing. The Delaware Supreme Court affirmed that December, and the case remains, as Delaware’s high court itself noted, the first and still only time a state court has found a genuine MAE excusing a buyer from closing.
| Case | Year | MAC/MAE Found? | Core Issue |
|---|---|---|---|
| IBP v. Tyson Foods | 2001 | No | Weak quarter judged transitory, not durationally significant |
| Hexion v. Huntsman | 2008 | No | Downturn insufficient; buyer’s own breach penalized |
| Akorn v. Fresenius | 2018 | Yes | Business collapse plus regulatory fraud allegations |
| AB Stable v. Maps Hotels | 2020/2021 | No MAE; ordinary-course breach instead | COVID-19 shutdown of hotel operations |
| Bardy Diagnostics v. Hill-Rom | 2021 | No | Medicare rate cut deemed non-durable and carved out |
COVID-19 Exposed a Different Fault Line
The pandemic gave dealmakers their first live test of MAC language against a genuinely systemic shock, and the result was instructive. In AB Stable VIII v. Maps Hotels & Resorts, a 5.8 billion dollar deal for fifteen luxury hotels signed in September 2019, the Court of Chancery found the pandemic’s effect on the target did not constitute an MAE, largely because a systemic, industry-wide event falls squarely within the standard carve-outs. The seller lost the case anyway. Between signing and closing it had shut two hotels entirely, laid off or furloughed roughly 5,200 employees, and halted non-essential spending, reasonable responses to the crisis that nonetheless breached its covenant to keep operating in the ordinary course without the buyer’s consent. The Delaware Supreme Court affirmed in December 2021 that reasonableness was beside the point: the covenant required consent, and consent was never sought.
The lesson had little to do with the MAE definition. It showed that the interim covenants governing how a target runs its business before closing can end a deal just as effectively as an MAE clause, with a far lower evidentiary burden. A pandemic carve-out protects a seller from an MAE claim; it does nothing for a seller that stops running its business the way the contract said it would.
Negotiating the Clause Before You Need It
Every case above turned on language drafted long before any dispute existed: how tightly a carve-out was worded, whether a disproportionate-impact test applied, how “ordinary course” was defined for a business facing conditions nobody anticipated at signing. Litigating a MAC clause after the fact is expensive, slow, and, on Delaware’s track record, weighted heavily against the buyer. The leverage sits at the drafting stage, when a seller’s known risks and operating realities are still visible and can be priced into the carve-outs, the disproportionality test, and the covenants that bind the business through closing.
Neumarz advises boards and sponsors on that negotiation directly, structuring MAC and interim-covenant language against the specific risk profile of the transaction rather than market-standard boilerplate that may not hold up when tested. Getting the definition right before signature is far cheaper than discovering what a court thinks it means afterward.
References
- Cadwalader, “M&A Update: Akorn Falls Far from the Tree,” https://www.cadwalader.com/resources/clients-friends-memos/ma-update-akorn-falls-far-from-the-tree-delaware-chancery-court-finds-a-material-adverse-effect-for-the-first-time-in-akorn-inc-v-fresenius-kabi-ag-et-al
- O’Melveny, “Delaware Supreme Court Upholds Rare Ruling That Material Adverse Event Allowed Purchaser to Negate Merger,” https://www.omm.com/insights/alerts-publications/delaware-supreme-court-upholds-rare-ruling-that-material-adverse-event-allowed-purchaser-to-negate-merger/
- Potter Anderson, “Hexion Specialty Chemicals, Inc. v. Huntsman Corp.,” https://www.potteranderson.com/insights/cases/Hexion-Specialty-Chemicals-Inc-v-Huntsman-Corp-C-A-No-3841-VCL-Del-Ch-Sept-29-2008-Lamb-V-C
- CaseMine, “IN RE IBP, INC. v. TYSON FOODS, INC.,” https://www.casemine.com/judgement/us/5914b9b5add7b0493478c9cd
- Kramer Levin, “Sustained or Transitory? Delaware Court of Chancery Finds No MAE Absent Proof of Durationally Significant Effect on Business,” https://www.kramerlevin.com/en/perspectives-search/sustained-or-transitory-delaware-court-of-chancery-finds-no-mae-absent-proof-of-durationally-significant-effect-on-business.html
- Paul, Weiss, “Delaware Court of Chancery Permits Buyer to Terminate Merger Due to Target’s Failure to Operate in the Ordinary Course; But Finds No MAE Due to COVID-19,” https://www.paulweiss.com/practices/transactional/mergers-acquisitions/publications/delaware-court-of-chancery-permits-buyer-to-terminate-merger-due-to-target-s-failure-to-operate-in-the-ordinary-course-but-finds-no-mae-due-to-covid-19?id=38871
- Cleary M&A and Corporate Watch, “The Delaware Supreme Court Speaks on ‘Ordinary Course’ Covenants,” https://www.clearymawatch.com/2021/12/the-delaware-supreme-court-speaks-on-ordinary-course-covenants/
