Article

Material Adverse Changes: Decoding a Legal Enigma

Authors: Scott R. Hyman, Carol D. Pennycook and Nicholas C. Williams

When negotiating a financing commitment, a prospective borrower is often asked to agree that the lender may refuse to advance funds or may terminate the credit facility if there is a “material adverse change” or if an event occurs that has had or may have a “material adverse effect”.

Borrowers tend to view this limitation, commonly referred to as a MAC clause, as reflecting a lack of confidence on the part of the lender in the borrower’s business or managerial abilities, or an unwillingness by the leader to commit. Lenders tend to view the inclusion of MAC clauses as a necessary protection, functioning as a failsafe to protect them against gaps in diligence and unforeseen events.

This article discusses the impact and utility of MAC clauses, from the perspective of both the borrower and the lender.

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