A Material Adverse Change Clause (“MAC Clause”) is often used in middle market M&A in the aerospace and defense industry. They are often found in purchase agreements when the signing of the agreement takes place prior to the actual sale of the business (“Deferred Closing”).
Parties may agree to a Deferred Closing due to matters that require third-party consent, such as regulatory approvals (e.g. CFIUS or HSR). In these cases, buyers typically require MAC clauses, which give them the right to walk away from the deal in the event of a material adverse change occurring between the signing and the closing (the “Interim Period”). For obvious reasons, the definition of ‘material adverse change’ is often heavily negotiated between the parties. With a MAC Clause, the seller assumes the risk that the sale may not be consummated, if there is a material adverse change during the Interim Period.
Accordingly, unless there is a compelling reason to structure the sale with a Deferred Closing, we usually advise our clients to effectuate their sales through a simultaneous signing and closing (“Sign & Close”). If there are conditions present that require resolution prior to closing, we advise our clients to work with their legal counsel to try to achieve those resolutions prior to signing, so as to enable a Sign & Close.
Over the past 22 years, the vast majority of our sale mandates have resulted in Sign & Close transactions. While there are cases where Deferred Closings are appropriate, we encourage middle market A&D company sellers to talk with their M&A legal counsel about the benefits of Sign & Close and the means to avoid Deferred Closings.
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