12.5 Signing, Conditions Precedent to Closing 419Conditions precedent and “best efforts”. Conditions precedent can, in practice,
give a party ample discretion. For this reason, a condition precedent is often com-
plemented by a “dynamic” component setting out how that discretion may be used
(Volume II). For example, where a party does not have any obligation to close on
the transaction unless it has obtained the necessary debt financing, the vendor may
ask for a covenant that the acquirer would use its “best efforts” to obtain the fi-
nancing.
Particular remarks: material adverse change clause. MAC clauses can be used
in many ways in a business acquisition contract. A MAC clause can be a condition
precedent to closing, a warranty, or an information covenant. Material adverse
change can also trigger different sanctions depending on the context in which it is
used. The agreed sanctions can include no-closure, repudiation of the contract
(when it already has been closed), adjustment of the price, and damages.^41 MAC
clauses can also be general and specific.
A general MAC clause typically entitles the acquirer to terminate or not to
close in circumstances where the economic position of the target has been materi-
ally and adversely affected. Specific MAC clauses entitle the acquirer to terminate
or not to close if a specified event occurs; the idenfication of specific factors that
may give rise to a MAC will reduce the risk inherent in interpretation.^42 The ac-
quirer frequently seeks to include a MAC clause, whether expressed as a condition
or as a termination right. The vendor will resist MAC clauses provisions on the
basis that the vendor requires certainty that the deal will close.^43
The circumstances that can be regarded as a material adverse change depend on
the contract and the governing law. For example, whether the future business
prospects of the target will be covered by the MAC clause or excluded from its
scope tends to depend on the bargaining power of the parties.^44
Material adverse change being an Anglo-American concept, there is plenty of
case law in common law countries but in the interpretation of MAC clauses but lit-
tle case law in continental Europe.^45
In the US, the Model Stock Purchase Agreement published by the Committee on Negoti-
ated Acquisitions of the Section of Business Law of the American Bar Association contains
the following definition of MAC: “Since the date of the Balance Sheet, there has not been
any material adverse change in the business, operations, properties, prospects, assets, or
condition of any Acquired Company, and no event has occurred or circumstances exists
that may result in such a material adverse change.” This is nevertheless a circular definition
as it relies on the concept of material adverse change.
(^41) Schlößer D, Material Adverse Change-Klauseln in US-amerikanischen Unternehmens-
kaufverträgen, RIW 12/2006 pp 891 and 897.
(^42) See, for example, the judgment of the Delaware Court of Chancery in Frontier Oil Corp.
v. Holly Corp., No. Civ.A. 20502, 2005 WL 1039027 (Del. Ch. Apr. 29, 2005).
(^43) See Phillips J, Runnicles J, Schwartz J, op cit, p 480.
(^44) Schlößer D, op cit, p 894.
(^45) Ibid, p 890.