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The Warsaw Voice » Law » November 18, 2009
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MAC-Planning for the Worst
November 18, 2009   
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Parties to commercial contracts try to foresee and legally address most potential trouble areas in mutual relations either by express provisions of the contract or by relying on statutory laws.

But just as fiction is sometimes stranger than life, so the actual scenarios played out for real are often complicated and fall outside of specific contractual clauses. The countermeasure for "the unforeseen" lies in general clauses. One that is particularly relevant in times of economic distress is a "material adverse change" clause. A MAC refers to unspecified events and circumstances that may seriously and negatively harm the situation of the other party or its assets in a way that impairs its ability to fulfill its obligations under the contract.

A MAC typically goes active in three major types of event. First, if an event or series of events materially impairs the ability of one side to deliver on its promises. Second, if it has a material adverse effect on the business, condition (financial or otherwise) or assets of a party. Third, if it has a material adverse effect on the validity or enforceability of the contract or the rights and remedies of the parties. Recently, a fourth type has burst on the scene: massive turmoil on the markets and material change in the economy.

If any of these events occur, the other party has certain remedies. As MAC is most commonly used in acquisition transactions and financing contracts, the occurrence of such events allows either side to pull out of the planned acquisition or suspend disbursement/accelerate repayment respectively.

Until last year MAC clauses where treated as a customary component of an agreement, but were not seen as particularly important or useful. The markets were on the up, the value of investments rising and businesses had no need to rely on the real effectiveness of MAC clauses. As a result, they were included with little negotiation and used more as additional trigger events for activating other provisions of the agreement. This has all changed. The sudden change to almost zero growth in Poland made potential acquisitions more vulnerable and extremely dependent on changing valuations. This has led borrowers to break covenants in financing agreements or to make other potential defaults which had hitherto been neglected by financiers in happier times.

Like a sprinter discovering steroids, MAC clauses suddenly rose to prominence as a premier negotiated element in new transactions. Parties to existing contracts quickly revisited them to see what they had actually signed up to. In some cases, lawyers were called in to assess practical application of them if things turned nasty.

Although MAC clauses tend to look like broad provisions relating to unspecified events, in reality it is down to detailed facts and wording as to whether use can be made of them in the given situation. The party interested in asserting must prove the legal, technical or commercial influence a given MAC event has on the other party's ability to perform obligations or on its assets, the project or the contract documentation. Moreover, this cannot be just any adverse effect which will not generally influence the commercial position of the affected party or relations between parties. The influence must be substantial and truly endanger or harm the position of the claimant in terms of the given contract.

For example, if we call upon MAC to enable withdrawal from a contracted future acquisition on the grounds of a major downturn in the economy, we must evidence what real change has been caused by the downturn on the given sector of the economy and on the specific investment. Some interpretations go even further and demand that MAC can only be resorted to if the given project has been impacted to a greater extent than similar investments/assets on the same market.

The experience of the recent worldwide events in the financial markets and the economy have eloquently proved the need for MAC provisions in certain contracts. But it has also forced lawyers and businessmen alike to rethink the contents and practical value of MAC clauses. For a long time to come MAC clauses will be carefully negotiated, probably until the bad days are forgotten and we all once again believe that valuations can only go higher.

Mateusz Toczyski, counsel at Salans law firm
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