Image by Mohamed Hassan from Pixabay

This post has been authored by Gunjan Garg, a B.A.LL.B (Hons.) candidate at the National Law Institute University, Bhopal.


The COVID-19 pandemic has overturned the face of not just global economy and businesses, but also M&A landscape and future deal-making.[i] The pandemic has compelled us to revisit all ongoing contracts including but not limited to employment contracts, tenancy agreements, EPC contracts, supply agreements, etc. Another such set of agreements being relooked at are investment agreements, specifically the MAC/MAE clauses in these agreements. Material Adverse Effect (“MAE”) or Material Adverse Change (“MAC”) clauses, often found in share purchase agreements, financing contracts, underwriting agreements, etc. are specific contractual clauses that allow the buyer to terminate the contract before completion, upon the occurrence of any event, which “materially” affects the economic viability of the investment. MAC/MAE clauses operate in the interim period between signing and closing of the deal, thus providing the buyer with the right to walk away from the transaction. Moving towards the objective of deal certainty, such clauses allocate risks and liabilities assumed by both parties.

Through this article, the author intends to delve into the impact of COVID-19 pandemic on investment agreements and the changes expected in their clauses post the pandemic.

Understanding the Structure of MAC/MAE Clause

A typical MAC clause generally consists of three parts:

1. Basic MAC:

This part usually defines the events, circumstances, changes or effects, which will constitute a material change in business, financial prospects, revenue or operations of the target and allow the buyer to walk out from the transaction, thus placing the risk on the seller. Parties seldom define what amounts to “material change” and leave it on the courts for specific adjudication.

2. Exclusions from MAC:

The second part carves out several exceptions from the basic MAC clause, which will not amount to any material change, thus shifting the risk from the target to the buyer. The exceptions are majorly deal-specific, depending upon the nature of the transaction and the specific industry. For example, any change in law or events having an industry-wide impact, force majeure, etc.

3. Exceptions from the exclusions:

These exceptions from the above-defined exclusion put the risk back on the seller. For example, changes in general market conditions which affect the target and/or its subsidiaries disproportionately as compared to its peers.

Impact of COVID-19 on Investment Agreements and Suggestions for Renegotiating the Clauses

For contracts entered into in pre-COVID-19 times, it is unclear whether MAC clauses will be triggered or not due to the looming market uncertainty over the long-term impact of the pandemic on various businesses. The triggering of MAC clauses will not only depend upon the language of the contract and its governing law, but also upon the specific sector and industry. The impact will be different for essential/non-essential items as well as manufacturing and services industry. However, for transactions still under negotiations, there is a need to relook the contractual terms of transaction documents.

1. Standstill covenants:

These covenants prohibit either party from soliciting any further investment or securities from another until the closing date. Due to this ongoing pandemic, it is now evident that the closing of current deals will be effectively delayed. Therefore, it is suggested that these covenants should be reconsidered and renegotiated if required.

2. Extending Timelines:

Assuming that the signing of transaction documents has taken place or is about to take place, closing will be delayed until the lockdown is lifted. It is suggested that the parties consider extending the long-stop date for execution of contracts.

While a document must be stamped immediately at the time of or before the execution of the agreement,[ii] registration of mandatory documents is to be done within 4 months of the date of signing.[iii] Both registration and stamping may be impeded due to the lockdown. While no relaxations have been announced by the government yet for registration of documents, for agreements not yet executed, parties may reconsider extending the date of execution post lockdown to adhere to statutory compliances.

However, in case timelines are extended, it is suggested the parties settle issues such as who will bear the risk of delay, and for what period, and what degree of change in the target’s financial results and operations will be allowed if the pre-closing period is exceptionally long.[iv]

3. Conditions Precedent (“CP”) and Diligence Requirement:

Due to the limited operation of regulating bodies such as National Company Law Tribunals (“NCLT”), Competition Commission of India, Securities and Exchange Board of India, local municipal authorities, banks, courts, etc., pending regulatory and third party approvals/licenses maybe delayed due to lockdown resulting in filing limitations. It is suggested that either the low importance actions be shifted to the conditions subsequent clause or the long-stop date be extended for the performance of CP’s.

Additionally, while the RBI has extended the moratorium on loans by another three months till 31 August, 2021,[v] lender approvals for acquisitions will be affected. From the lender’s perspective, CP should be amended to ensure long-term return on his investment and sufficient working capital to service loans.

Ongoing due diligence should focus on corporate compliances[vi], review of leave and license agreements, material contracts with customers and suppliers, Foreign Direct Investment restrictions[vii] (if applicable), and labour law compliances (especially in light of extensive lay-offs by various companies due to COVID-19.[viii]

4. MAC Clause:

The buyer should ensure that phrases like “pandemic”, “outbreak”, “act of god”, “lockdown” and other similar events are specifically included in MAC clauses for clear delineation of risks. A more exhaustive MAC clause covering all such events would be buyer-friendly and thus provide walk-away rights.

The target on the other hand should ensure that exceptions to the basic MAC clause are clearly carved out. For example specific exceptions like “poor financial performance”, “change in law” or “change in tax regime”, “fall in revenues” should be negotiated in a MAC clause.