Material Adverse Change
AdvancedA material adverse change clause is a provision in an acquisition or financing agreement that allows a party, usually the buyer or lender, to withdraw or renegotiate if a significant negative change occurs in the target's business or financial condition before completion.
Between signing and completing an acquisition, weeks or months may pass. During this time, the target's business could deteriorate seriously. A material adverse change clause, also called a material adverse effect clause, protects the buyer against this risk.
Agreements typically define what counts as material and list exclusions, such as general economic conditions, changes in the industry as a whole, changes in law or events affecting all companies similarly, unless the target is disproportionately affected.
For example, if a target company suddenly lost its largest customer and most of its profits before completion, the buyer might argue that a material adverse change had occurred and seek to terminate the deal.
In practice, courts in several jurisdictions have set a high bar for buyers seeking to rely on these clauses, generally requiring a significant and long-lasting decline. Successful claims are rare. Following the COVID-19 pandemic, many agreements began specifically addressing pandemics in their exclusions.
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