In the darkest depths of a corporate merger agreement lies the MAC clause, a term that permits the acquirer to walk away from a transaction if, between signing and closing, the target company experiences a “Material Adverse Change.” Multibillion-dollar deals rise or fall based on the anticipated interpretation of a MAC clause, and invocation of the clause in a sensitive transaction could trigger the collapse of the global financial system. In short, the MAC clause is the most important contract term of our time. And yet—due to an almost total lack of case law—no one knows what it means.
In this Article I explain the MAC clause using a new conceptual tool for drafting and interpreting contracts, the “standard clause analysis.” For any default rule of contract law, practitioners can be expected to develop a “standard clause analog” in order to easily contract around the default. Given this relationship between default rules and their standard clause analogs, if one is given, the other can be deduced. This is the “standard clause analysis,” and it can be used in two ways, which I call “forward” and “reverse.” In a forward standard clause analysis, one begins with a default rule and advances to its standard clause analog. The forward standard clause analysis can be used to predict the existence of standard clause analogs that have yet to be observed. And in a reverse standard clause analysis, one begins with a standard clause and advances to the default rule with which it is associated. The reverse analysis is a powerful method for interpreting contract terms.
After introducing and describing the standard clause analysis, I put it to practical use. I begin by applying the forward analysis to the common law doctrine of frustration, and predict that a “frustration clause” exists, or will soon come into being, and that it would resemble a reverse-Force Majeure clause and be found in relatively high-value contracts. These predictions are then confirmed with several examples of frustration clauses observed in the real world: the Morals clause, the Walkaway clause and, most notably, the MAC clause.
Then I apply the reverse analysis to the MAC clause and show it to be a standard clause analog of the frustration doctrine that alters the default rule by (a) permitting excuse on the basis of a significant (but less than total) loss in contractual value, (b) excusing the acquirer based on frustration of a “secondary” (as opposed to its “primary”) purpose, and (c) shifting major exogenous risks (such as an economic recession or a natural disaster) from the target to the acquirer.
I conclude with a case study to demonstrate the difference between the MAC clause and the default frustration doctrine: Bank of America’s recent $50 billion acquisition of Merrill Lynch in late 2008. During the brief three-month period between signing and closing, Merrill lost an astounding $15 billion, but the conventional wisdom—shared by Federal Reserve Chairman Ben Bernanke, among others—is that Merrill’s loss failed to trigger the MAC clause. I disagree. While the default frustration doctrine would not have offered any relief, Bank of America did indeed have viable grounds to invoke the MAC clause, properly understood, and walk away from the Merrill deal.