At the beginning of 2020, it became known that the Polish airline company LOT decided to purchase its German rival which was part of the Thomas Cook Group which became insolvent in 2019. The deal was signed in January, but on 13 April 2020, it became known that LOT pulled out of the deal because of COVID-19.[1]

This is a prominent example, but certainly not the only example where a purchaser of a company might try to rescind an acquisition of a company hit by the COVID-19 pandemic. This article analyzes whether the COVID-19 pandemic constitutes a material adverse change and whether transactions that were signed, but not closed, could be terminated on the basis of a so-called MAC clause.

What is a MAC clause

A material adverse change clause (so-called MAC clause) allows a purchaser to pull-out of a deal if circumstances have occurred between Signing and Closing that have materially adversely affected the target company. The longer the time between Signing and Closing in a transaction, the higher the risk to the purchaser and the more likely that the purchaser would insist on such a termination right. Technically it is not a termination right, but the absence of a material adverse change is included in an SPA as a Closing condition. If the deterioration is not remedied by an agreed date (Long-Stop Date), the buyer or the seller is then entitled to withdraw from the contract.

While there are many different ways of drafting a MAC clause, a typical example of a MAC clause could read as follows:

“This Agreement shall be closed pursuant to § 9 para. (5) only if the following conditions (“Closing Conditions”) shall have been fulfilled or, in the case of lit. b), d) and e) below, duly waived by the Purchaser in writing:


  1. e) No circumstances have occurred until the Scheduled Closing Date that have materially adversely affected, or are reasonably likely to materially adversely affect, the Target’s assets, business, financial condition, results of operations or prospects, provided that for the purposes of this Closing Condition any adverse effects on the Target’s assets, business, financial condition, results of operations or prospects shall be considered material only if their financial impacts exceed EUR [___] in any individual case or EUR [___] in the aggregate.”

In some agreements, the Parties agree that certain adverse changes shall not be considered material adverse changes in the meaning of the Closing condition. Typical examples that Parties exclude are: (i) a general down-turn in the economy or the market, (ii) any change in Applicable Law or (iii) any loss, damage, cost or liability to the extent that the Seller has compensated the Purchaser in respect of it by a payment in cash.

There are, however, also cases of a “MAC warranty”, that means the seller warrants that no material adverse change will happen between Signing and Closing. If such change does happen, the purchaser would have a claim for compensation against the seller.

MAC clauses in legal practice

The England & Wales High Court discussed the interpretation of a MAC warranty in Levison v. Farin ([1977] 2 All ER 1149) . The court found that a drop of 20% in net asset value could be considered a material adverse change.

Moreover, a recent decision from October 2018 by the Delaware Court of Chancery on an MAC Clause has sparked international interest (Akorn, Inc. v. Fresenius Kabi AG, C.A. Nr. 2018-0300-JTL (del. Ch. 1. October 2018). The court ruled that adverse circumstances can only be considered a material adverse change if they are material when viewed from the longer-term perspective of a reasonable acquirer, which is measured in years. Fresenius Kabi AG was entitled to rescind the agreement because there has been a sufficiently serious adverse change after signing of the contract. Akorn’s earnings dropped drastically with sales down 25 percent and operating profit down 105 percent. EBITDA decreased by more than 50%, which according to the court was a serious and adverse change with long-term impact.

Does the COVID-19 pandemic qualify as a MAC? 

The COVID-19 pandemic is confronting our globalized world with a completely new and unprecedented situation. Due to the unpredictability of the further development, there is no clear-cut answer to the question whether buyers can back out of a transaction due to the current crisis. There are, however, decisive factors which can already be taken into account when assessing the legal situation.

In a first step, it will be necessary to take a look at the respective contract. The specific wording of the MAC clause will determine in which cases a withdrawal from the contract will be possible.

First, parties may have excluded general economic events, epidemics and other natural disasters from the definition of material adverse change. Second, the clause may foresee the exclusion of MAC if the global economy as a whole is in a difficult situation (so-called “market MAC”) other than the target company itself (so-called “business MAC”). A purchaser might not be successful in arguing that the COVID-19 pandemic constitutes a MAC if the target company is hit by the crisis, but is not worse off than other companies in the same industry. Third, the MAC clause may exclude such negative changes which were known to the buyer or which the buyer ought to have known. In such case, the signing date will play a decisive role in whether the buyer can rely on a MAC. On March 11, 2020, a worldwide pandemic was declared by the WHO. Sellers could therefore use this day to argue that in the case of SPAs concluded after this date, the buyer was aware of the reduced future prospects due to the pandemic. Others may even argue that the beginning of the outbreak of the epidemic could be taken as a basis, with the argument that a global impact was foreseeable at that time.

If the Parties have not limited the MAC Clause in a way to exclude the COVID-19 pandemic, in a second step it has to be determined whether the pandemic reaches the threshold of a MAC.

This is probably the most difficult part, because (i) there is no case law to rely upon and (ii) the further development and implications of the pandemic are not yet predictable. So far, it is not foreseeable when the restrictions on trade and economic activity will be suspended and if the restrictions will be imposed again if there is a second wave of the pandemic. Here are some of the arguments that we are likely to see:

Sellers are likely to rely on the Delaware Court’s interpretation of MAC clauses and will argue that there is no material adverse change unless the COVID-19 pandemic leads to long-term effects. For purchasers it might be difficult to establish that the long-term (several years) earning potential of the target company is impacted when the future is as unpredictable as today. This being said, the COVID-19 pandemic has such dramatic effects on certain industries, such as the travel or airline industry, that a purchaser may well be able to prove a long-term impact on the earning potential.

Purchasers will of course offer a broader interpretation of the MAC clause and will argue that the Delaware Court’s interpretation is not binding on other courts and arbitral tribunals.

Moreover, purchasers might be more successful to argue a material adverse change where the target company is in a bad position to deal with the crisis, e.g. where the company has only a few cash savings and high operating costs and less successful where the target company might after the crisis be better off relative to its competitors.

To sum it up: Whether a purchaser can claim compensation or can pull out of a deal first and foremost depends on the scope of the MAC clause. Secondly, it will depend on the court’s or tribunal’s interpretation of the MAC threshold. Thirdly, it will depend on the specific situation the target company is in and how devastating the impact of the COVID-19 pandemic is.