COVID-19 and Material Adverse Change Clauses

As the COVID-19 crisis continues, companies should check to see if their agreements allow for termination or nonperformance upon the occurrence of a “material adverse change” or “material adverse effect” (often called a MAC).  MAC clauses are frequently included in merger and purchase agreements, as well as financing agreements, and generally are triggered by material changes in certain assets or a company’s financial conditions, or a company’s inability to satisfy obligations.

Whether an event – such as the COVID-19 pandemic – qualifies as a MAC cannot be determined without analyzing the actual language of the MAC clause – these clauses are highly negotiated, and can be very broad or extremely narrow, with many clauses specifically excluding pandemics.  In addition, the analysis of whether a MAC has occurred may change as this crisis unfolds; while the effects of the crisis may not yet have caused a material change in a company’s financial position, the same may not be true as the crisis continues.

Further, the existence of a MAC will turn on the particular state’s law governing the contract.  While the analysis differs by state, courts have typically interpreted MAC clauses narrowly, focusing on several factors including whether the change was “material”, whether the risk was known or unknown at the time of contracting, and the length of the impact of the event.

As you review your contracts or consider including a MAC clause in future agreements, reach out to your Gordon Arata attorney with any questions.

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