Introduction
The global disruptions wrought by the COVID-19 pandemic forced corporate lawyers, dealmakers, and courts across jurisdictions to confront a question that had long lurked at the edges of merger and acquisition practice: when does a material adverse change clause actually work? The MAC clause, also rendered in transactional documents as a material adverse effect or MAE clause, has historically served as a termination right for buyers in M&A agreements who encounter significant, unforeseen deterioration in the target company between signing and closing. For decades, these clauses were drafted broadly, invoked occasionally, and enforced almost never. The pandemic tested that equilibrium. The Jet Airways acquisition saga in India, the near-termination of large pharmaceutical and consumer goods deals in the United States, and a series of cross-border disputes involving regulatory approvals that evaporated overnight placed MAC clauses squarely at the centre of corporate law discourse.
In India, MAC clauses in acquisition agreements derive their enforceability and interpretive framework from the Indian Contract Act, 1872, particularly Sections 62 and 73, which govern novation, rescission, alteration of contracts, and the measurement of damages for breach. But these provisions provide only the broadest of scaffolding. The substance of what constitutes a “material adverse change” in the Indian context remains largely a function of contractual drafting, supplemented by a thin body of judicial guidance and a growing set of regulatory triggers imposed by the Reserve Bank of India and the Competition Commission of India. This article examines what the pandemic taught practitioners about MAC drafting in India, drawing comparisons with the sophisticated MAC jurisprudence of the Delaware Chancery Court and English commercial courts.
Legal Framework
A MAC clause in an Indian M&A agreement operates within the framework established by the Indian Contract Act. Section 62 provides that when the parties to a contract agree to substitute a new contract for an old one, or to rescind or alter it, the original contract need not be performed. This provision contemplates consensual modification or termination, which is the bedrock of any negotiated MAC exercise. Where a buyer invokes a MAC clause to terminate, both parties must either agree that a MAC has occurred or litigate the question. In the absence of agreement, the party asserting a MAC bears the burden of demonstrating its occurrence under the terms of the agreement.
Section 73 governs compensation for breach of contract, providing that when a contract is broken, the party suffering the breach is entitled to receive compensation for any loss or damage caused to them that naturally arose from the breach or that the parties knew, at the time of contract formation, would likely result from the breach. Where a buyer wrongfully terminates by incorrectly invoking a MAC clause, the seller’s claim for damages under Section 73 may encompass the difference between the deal price and the actual value of the business at the time of termination, together with costs and consequential losses within contemplation.
The Securities and Exchange Board of India’s Takeover Regulations, 2011, and the Foreign Exchange Management Act’s provisions governing cross-border acquisitions add further layers of regulatory conditionality to M&A agreements in India. The RBI’s prior approval requirements for certain foreign acquisitions of Indian targets, and the conditions it imposes on such approvals, create a category of post-signing events that sophisticated drafters must address. Whether a change in RBI approval conditions constitutes a MAC depends entirely on how the parties have defined the concept and which carve-outs they have negotiated into the clause.
Judicial Developments
The body of Indian judicial authority directly interpreting MAC clauses in M&A agreements is sparse, reflecting both the comparative novelty of sophisticated private M&A in India and the frequency with which such disputes are resolved through arbitration or negotiated settlements rather than court proceedings. The collapse of the Etihad-backed acquisition of a stake in Jet Airways and the subsequent insolvency proceedings, while not producing a definitive MAC judgment, provided the transactional bar with a vivid illustration of how MAC arguments are marshalled in practice. Etihad’s decision to decline further support to Jet Airways, and the failure of alternative acquisition discussions, raised questions about whether the MAC provisions in various shareholder and acquisition agreements had been triggered by the airline’s financial deterioration.
The more instructive precedents must be sought in Delaware, where the Chancery Court’s 2018 decision in Akorn, Inc. v. Fresenius Kabi AG stands as the first successful invocation of a MAC clause by a buyer in several decades. Vice Chancellor Laster’s opinion articulated a demanding standard: a MAC must represent a substantial deterioration in the target’s performance that is durationally significant, not merely a temporary setback. The Court found that Akorn had suffered both a general MAC, arising from a dramatic and persistent deterioration in its business performance, and a specific MAC arising from regulatory non-compliance that was unknown at signing. The opinion’s analytical framework, emphasising proportionality, duration, and the relative allocation of risk between signing and closing, offers Indian practitioners a useful template for drafting and dispute.
The English courts’ treatment of MAC clauses, most prominently in Grupo Hotelero Urvasco SA v. Carey Value Added SL, decided in 2013, adopts a similarly demanding standard. Blair J held that a MAC clause in a loan agreement required the defendant to show a significant and long-term adverse change in the financial condition of the borrower. The requirement that the change be long-term rather than transient, and that it be measured against the borrower’s financial condition at the time of agreement rather than in comparison to industry peers, provides a doctrinal baseline relevant to Indian drafters.
Contemporary Issues and Analysis
The pandemic exposed three structural deficiencies in standard MAC clause drafting as practised in Indian M&A transactions. First, most Indian acquisition agreements prior to 2020 contained general epidemic and pandemic carve-outs that were vague in their formulation, failing to distinguish between an epidemic’s general market effect and its disproportionate effect on the specific target. The litigation in the United States between AB InBev and its acquisition target, which was ultimately settled rather than adjudicated, demonstrated the danger of a MAC clause that broadly excluded “pandemic” effects without specifying whether the carve-out applied only when the pandemic affected the target in line with the industry generally, or also when the pandemic’s effect on the target was uniquely severe.
Second, Indian MAC clauses have historically failed to address the interaction between a pandemic exclusion and a disproportionate effect proviso. The sophisticated formulation, now standard in US acquisition agreements after ABInBev and in revised model forms published by M&A market groups, reads to the effect that events of a pandemic nature are excluded from the MAC definition, except and only to the extent that such events affect the target disproportionately relative to other participants in the industry. This formulation preserves the buyer’s protection where the target is uniquely vulnerable while respecting the general principle that systemic market risks belong to the seller once the deal is signed.
Third, the pandemic accelerated the integration of regulatory approval conditions as potential MAC triggers. In India, the RBI’s conditional approvals for certain foreign acquisitions frequently attach operational, financial, or governance conditions to the target or the combined entity. Where a post-signing regulatory development fundamentally alters the regulatory conditions attached to approval, or where an approval is withdrawn or materially narrowed, Indian practitioners have increasingly sought to address this explicitly in MAC definitions. The construction of “regulatory MAC” provisions requires careful attention to the distinction between a change in the regulatory landscape generally and a change specific to the target or the proposed transaction.
The Competition Commission of India’s conditional approvals in the e-commerce and technology sectors present a related challenge. Where the CCI imposes behavioural or structural remedies as conditions of approval, the buyer must assess whether those conditions materially impair the value of the business being acquired. Standard Indian MAC definitions do not adequately address this scenario, leaving buyers exposed to the risk that a CCI-imposed remedy that significantly curtails the target’s core business strategy may not satisfy the MAC definition as drafted.
Comparative and International Perspective
The contrast between the Indian and Delaware approaches to MAC clauses reflects deeper differences in M&A market maturity and judicial specialisation. Delaware’s Chancery Court, with its dedicated equity jurisdiction and deep expertise in corporate law, has developed a nuanced body of case law that gives transactional parties a relatively predictable framework within which to assess MAC arguments. The standard developed in Akorn, building on the earlier opinion in IBP, Inc. v. Tyson Foods (2001), establishes that short-term earnings misses or temporary business disruptions will not satisfy a MAC standard focused on long-term value.
English law, applied in many cross-border Indian acquisitions governed by English law choice clauses, reaches broadly similar conclusions through the interpretation of MAC clauses as conditions precedent to the buyer’s closing obligation. The Grupo Hotelero standard’s emphasis on long-term significance and the measurement of change against the position at the date of the agreement, rather than against projections or market expectations, maps reasonably well onto the Akorn framework.
Indian law lacks a comparable body of judicial interpretation. The absence of a specialised commercial court with deep M&A jurisdiction, combined with the time and cost of litigation in the High Courts, means that most MAC disputes in Indian transactions are resolved through arbitration. The Indian Arbitration and Conciliation Act, 1996, as amended, provides a framework for such arbitrations, but arbitral awards addressing MAC clauses are rarely published, depriving the market of the benefit of reasoned judicial analysis.
The UNIDROIT Principles of International Commercial Contracts address the related concept of hardship, providing that where performance has become excessively onerous due to a fundamental change of circumstances, a party may request renegotiation. This is broader and more equitable than a contractual MAC right, but provides a useful reference point for understanding how international commercial law conceptualises the allocation of risk in long-term agreements.
Practical and Policy Implications
The practical lessons of the pandemic period for Indian M&A practitioners are significant. Buyers seeking to preserve MAC rights must draft with far greater precision than has historically been customary in Indian acquisition agreements. The MAC definition must specify: the reference period against which deterioration is measured; the financial metrics that will be used to assess materiality (revenue, EBITDA, net assets, or a combination); whether the standard is absolute or comparative to industry peers; the treatment of regulatory changes as MAC events; and the scope of carve-outs for systemic events together with any disproportionate effect proviso.
The interaction between MAC clauses and earnout provisions in Indian acquisition agreements is a further area of complexity. Where a portion of the acquisition consideration is contingent on post-closing performance metrics, a MAC in the target’s business prior to closing may affect both the buyer’s willingness to close and the baseline against which earnout performance is measured. The drafting of earnout provisions that appropriately adjust for pre-closing MACs, without creating perverse incentives for buyers to invoke MAC clauses opportunistically, requires careful attention.
From a policy perspective, the Indian government’s interest in promoting foreign investment in strategically important sectors suggests a role for clearer regulatory guidance on the interaction between MAC clauses and RBI or CCI approval conditions. Where a regulatory authority’s conditions of approval fundamentally alter the transaction economics, transactional parties should have a clear framework for assessing whether a regulatory MAC has occurred and how it may be remedied.
Suggestions and Reforms
Several reforms would strengthen the MAC clause regime for Indian M&A practice. First, the RBI should develop and publish guidance on what constitutes a “material” change in the conditions of a foreign investment approval, providing a regulatory definition that acquisition agreements can incorporate by reference. This would reduce uncertainty about the trigger conditions for regulatory MAC provisions.
Second, the Bar Council of India and the Indian law firm community should consider developing model MAC clause language adapted for Indian market practice, analogous to the model provisions developed by the American Bar Association and the English Law Society. Such model language could address pandemic carve-outs, disproportionate effect provisos, regulatory MAC events, and the measurement framework for materiality in a manner that reflects Indian market norms and statutory context.
Third, the Indian judiciary should consider developing specialised commercial benches with dedicated M&A jurisdiction, as the National Company Law Tribunal has jurisdiction over insolvency proceedings. A specialised M&A court would enable the development of a coherent body of case law on MAC clauses and related acquisition agreement provisions, reducing reliance on arbitration as the default dispute resolution mechanism and making MAC jurisprudence more accessible to market participants.
Fourth, legislative attention might usefully be directed to whether Section 73’s compensation framework adequately addresses the distinctive damages claims that arise in MAC disputes, particularly where a buyer’s wrongful invocation of a MAC clause prevents the seller from realising the time-sensitive benefits of a deal.
Conclusion
The MAC clause emerged from the pandemic as a drafting priority rather than a boilerplate afterthought. The Indian M&A market’s experience with deals disrupted by regulatory changes, business deterioration, and systemic shocks demonstrated the inadequacy of standard MAC formulations inherited from earlier, less turbulent deal environments. The lessons from Delaware, England, and the Indian market’s own disputes converge on a common principle: the allocation of risk between signing and closing must be made explicit in the MAC clause, with careful attention to the definition of materiality, the scope of carve-outs, and the treatment of regulatory developments. The drafting lessons from disputed M&A terminations are ultimately lessons in precision, a quality that Indian transactional practice must cultivate if it is to meet the complexity of a market that is increasingly integrated with global M&A flows.
