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This article is written by Madhav Gawri, pursuing a Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from


On 14th January 2020, the WHO had indirectly informed the world that COVID-19 could not transmit through human contact. This tweet had indirectly put the world at ease, and the world resumed daily life. Subsequently, The MSCI World, S&P 500, STOXX Europe 600, and SENSEX India all these indices closed at record highs on 19th February 2020. But, after the truth comes to light, many countries put themselves into a social lockdown. This has not only affected the daily life of everyone, but it had a significant impact on the world economy. Businesses went off, there is a disruption in the supply change of every commodity, and there has been a steep decline in almost every kind of commercial activity. Even the stock markets have fallen more than 30%. This has affected the transactions and actions on M&A transactions also. With this effect, a question has arisen whether this situation calls for the application of the MAC/MAE clause?

What is the MAC/MAE clause?

The Material Adverse Change or Material Adverse Effect[i] clause is standards provisions that are part of the investment and acquisition agreement. This allows the investors to back out from the deal without any reparations because the provision states that due to the change in circumstances and its subsequent effect on the business, prejudicially or business faces a major claim or liability, which affects the material business adversely. This change affects the business negatively, which in turn losses the advantage for which the investor was investing.

Formation of the MAC/MAE clause

The purpose of this provision is to safeguard the investors’ interest. The clause shouldn’t be vague and widely defined. This provision is heavily negotiated between the parties. The seller would prefer to narrow the scope of the definition of materiality, whereas the buyer would prefer to keep it as broad as possible so that it is easier for the buyer to walk out of the transaction. In a case, the Supreme Court[ii] clarified that courts do not have the general power to absolve a party from the performance of its part of the contract merely because its production has become onerous on account of an unforeseen turn of events. It must be shown that they never agreed to be bound in a fundamentally different situation that had unexpectedly emerged. More significantly, courts will look at the specific wording of the MAE provision for the events which can allow for a discharge.[iii]

COVID-19 and MAC/MAE clause in India

The Indian Courts have failed to provide for a systematic guideline for determining the materiality of events. But, there are few provisions under India Laws which emit an essence of MAC indirectly in themselves. The SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 1997, prescribes that “any open offer can be withdrawn in circumstances where any condition stipulated in the agreement for acquisition attracting the obligation to make the open offer is not met for reasons outside the reasonable control of the acquirer, and such agreement is rescinded, subject to such conditions having been specifically disclosed in the detailed public statement and the letter of offer.[iv] Moreover, section 56 of the Indian Contract Act, 1872, provides for the concept of the doctrine of frustration of contract which says that by any reason if some event occurs after the contract is made and such an event is something which the promisor could not prevent then such a contract becomes void.
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Whether MAC clause can be triggered because of COVID-19?

In India, the Ministry of Finance on 19th February 2020 issued a notice, which provides that COVID-19 is a natural calamity, and hence a force majeure is applicable. The same may be invoked following the due procedures.

Force majeure means events that are beyond human control and hence extraordinary. Force majeure includes any act of God, natural disaster, war, labour unrest, epidemics, and strikes, etc. It can be applied as an exception that may be claimed by the performing party to a contract.

In the case of Energy Watchdog v. Central Electricity Regulatory Commission & Ors.[v], the Supreme Court of India restated the law of force majeure and laid down the following guidelines to be mindful of while invoking a force majeure clause:

  1. The very basis of such terms is that the events are beyond the reasonable control of the parties, and in such conditions, parties cannot be held liable for non-performance of obligations under the contract.
  2. While analysing the force majeure clause, it is also necessary to analyse if best endeavors have been taken to mitigate force majeure events.
  3. For an event to be considered as a force majeure, it is necessary that the same is unforeseeable by the parties.
  4. The event has rendered the performance impossible or illegal.

But, with respect to the MAC clause, the burden of proof lies upon the party who wants to invoke the same. If in a case, a party invokes this clause with respect to COVID-19, then the party has to prove how the business was disrupted due to COVID-19. These reasons and rationale can be presented from the points given below:

  1. Quantitative Effect: It means that what amount of profit is the company losing due to the effect of the unforeseen circumstances. In the Delaware Court of Chancery in AkornInc. v. Fresenius Kabi[vi] allowed the acquirer to be allowed to revert its investment on the ground that the business started to receive revenue 25% as that of it when it was before the unforeseen event had affected the investment company.[vii] Significantly, the trial court held that it would go by the language in which the MAC provision is drafted and would not supply any meaning to the particular words of it. This was upheld by the Supreme Court of Delaware subsequently. If the party invoking this clause proves that due to the effect of the unforeseen event, there is a substantial loss of profit, then the court may favour that party.
  2. Durational Aspect and Quantitative Effect: To call for the application of MAC, the durational aspect and quantitative effect must be taken into consideration. The relation between both must be the durational aspect, and the quantitative impact on profits must be inversely proportional. Meaning as the effect and lockdown days due to COVID-19 increase, it must lead to a decrease in the number of profits for a more extended period of time. Whether a MAC has occurred, the company’s performance generally should be evaluated against its results during the same quarter or period of the prior year to minimize the effect of seasonal adjustments.[viii] For activation of MAC, the circumstantial effect and evidence must be looked into. The above concept must not be followed blindly, and it must be made sure through instances and proof that due to the spread of COVID-19, the profits of the body corporate has decreased.
  3. Industry-wise effect: Many countries are in lockdown, but it doesn’t mean that not even one authority of business is in operations. It is obvious that essential businesses cannot shut down in any situation. Even in the lockdown for COVID-19 essential commodities are still being traded across the country. Therefore, if the business in which the investor is investing is pertaining to the trade of essential commodities, then there cannot be any reason to invoke MAC.

Most Affected Industry

The industry which is going face the worst impact of the coronavirus is going to be the ‘Sports & Entertainment Industry.’  Across the globe, almost every major sporting event from the English Premier League in England and the NBA in the United States of America has been either cancelled or is put on a halt to practice social distancing. No contact sport can be played, the clubs and teams in these major sporting events are facing huge losses as they are losing revenue in form of ticket, jersey sales and biggest of them all, that they are losing television revenue. Many clubs are on the brink of bankruptcy if their seasons in their corresponding league is not restarted. Even if the matches are allowed to be played, then it would be played in empty stadiums and under strict regulations to practice social distancing correctly. Moreover, the entertainment business is going to incur huge losses. The closing of movie halls, governments across the globe discouraging gathering of people and this would impact the promotion of movies and sitcoms.

Worst Economic Effect on European Countries due to the Coronavirus

Almost 30% of the world’s coronavirus cases have occurred in the continent of Europe.[ix] The end of this pandemic is nowhere near. According to the report[x] of the United Nations, Department Economic and Social Affairs (DESA), the biggest economies in Europe are projected to shrink by 5.5% this year. The pandemic has initiated a domino effect, the practice of social distancing has led to almost no growth, no generation of real income and a decline in the employment of people in the continent. Moreover, the continent has the highest percentage of old-age people, who are most vulnerable to the virus. As a precaution, international travel is going to be disregarded and that is going to lead in the downfall of the continent’s real income and GDP itself. South-Eastern Europe is the most vulnerable as it is heavily dependent on FDI from China which is surely going to reduce substantially.


COVID-19 pandemic is declared as a force majeure, but even after it being declared as a pandemic, it cannot be believed that it calls for triggering of the MAC clause. Application of the same is circumstantial and depends from case to case in accordance with how it has been formulated in the contract. The parties should carefully review and assess everything aspect of the business, which is affected due to the pandemic and keep in mind the sustainability of the business. Steps must be taken with reasons and rationale. With no vaccine in site, it is believed that the worst of the coronavirus has yet to come.


Regulation 23(1) (c) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2018

Energy Watchdog V. Central Electricity Regulatory Commission, 2017 (4) SCALE 580

Akorn, Inc. v. Fresenius Kabi AG C.A. No. 2018-0300-JTL

Regulation 23(1)(c) of the SEBI (Substantial Acquisition and Takeovers) Regulations, 1997

(2017) 14 SCC 80

AG C.A. No. 2018-0300-JTL

C.A. No. 2018-0300-JTL

Hexion v. Huntsman 2008 Del. Ch.

‘Worldometers,’ available at {last visited: 14th May 2020}

World Economic Situation and Prospects as of mid-2020, available at


[i] Regulation 23(1) (c) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2018

[ii] Energy Watchdog V. Central Electricity Regulatory Commission, 2017 (4) SCALE 580

[iii] Akorn, Inc. v. Fresenius Kabi AG C.A. No. 2018-0300-JTL

[iv] Regulation 23(1)(c) of the SEBI (Substantial Acquisition and Takeovers) Regulations, 1997

[v] (2017) 14 SCC 80

[vi] AG C.A. No. 2018-0300-JTL

[vii] C.A. No. 2018-0300-JTL

[viii] Hexion v. Huntsman 2008 Del. Ch.

[ix] ‘Worldometers,’ available at {last visited: 14th May 2020}

[x] World Economic Situation and Prospects as of mid-2020, available at

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