Material Adverse Change Clauses in M&A: The Risks of United States-Mexico-Canada Agreement Renegotiation and Tariff Uncertainty

Material Adverse Effect (“MAE”) or Material Adverse Change (“MAC”) clauses are key provisions designed to allow parties to opt out of a transaction when an unforeseen risk arises that materially affects the business operations of a target company or both parties in the case of a merger. This unforeseen risk must have a material negative impact on a company’s business and must occur within a specific timeframe, typically until the closing date of the transaction.

Like any contractual provision, the scope of a MAC clause can be as broad or as specific as the parties negotiate. Buyers typically prefer broader MAC clauses to encompass all possible changes that could significantly impact a target’s overall earnings potential or main business operations. In contrast, sellers often advocate for more narrowly defined MAC clauses to avoid assuming risks related to events beyond their control.

When considering the breadth of a MAC clause, both sellers and buyers must account for potential litigation, as these clauses often lead to disputes.

A broader clause grants courts more discretion in determining whether an event qualifies as a MAC. This flexibility is particularly relevant when assessing events outside the seller’s control, such as the imposition of tariffs. Whether mutual or one-sided, tariffs can be sudden and sporadic, making their impact difficult to anticipate and quantify—yet their effects could potentially constitute a MAC.

A similar issue arises with planned treaty amendments, including the upcoming renegotiations of the United States-Mexico-Canada Agreement (“USMCA”) in 2026, which could significantly alter the business landscape for companies operating under its jurisdiction.

MAC clauses are generally structured as follows:

1. Base Definition – The clause typically defines a MAC as any unknown event, fact, occurrence, circumstance, development, or change that has had, or is reasonably expected to have, a material adverse effect on the company, including its business, financial condition, or operational results.
2. Exceptions or Carveouts – The definition often excludes adverse changes or events arising from specific risk categories:
   1. Systematic risks – Risks affecting many companies, not just the target. Examples include broad changes to economic, business, industry, market, political, and social conditions. Additionally, systematic risks pertain to changes to generally accepted accounting principles and laws, along with force majeure events, such as war, terrorism, and natural disasters.
   2. Indicator risks – Signs that the target company’s value has been impaired. Examples include credit rating downgrades of company debt, missed earning projections, and changes in security prices and trading volumes.
   3. Agreement risks – Risks related to publicly announcing the acquisition and fulfilling related contract obligations. Such risks may include the termination of employees or the loss of customers due to an acquisition.
   4. Business risks – Company-specific risks, which are typically allocated to the seller instead of the company’s industry as a whole.

Business risks are typically allocated to the seller, while systematic and agreement risks are usually allocated to the buyer. Indicator risks are more likely than not to be allocated to the seller.

3. Disproportionate Exclusions – Although carveouts limit the opportunities for buyers to invoke their MAC clauses, these exceptions are partially neutralized by disproportionality exclusions. Such exclusions shift risks back to the seller, conditioned upon the seller being disproportionately affected compared to other companies within the same industry. This exclusion is limited to the extent that the target company is disproportionately impacted. Therefore, if a systematic risk is covered by an exception that is qualified disproportionally, courts will have to consider whether the net change to the target company qualifies as a MAC.

Assessing a Potential MAC

Courts evaluating a potential MAC may consider several factors, including:

1. The full text of the agreement – including the specific wording of the MAC clause.
2. Relevant facts and external factors – particularly those uncovered during due diligence, to determine the parties’ intentions.
3. The magnitude of the alleged MAC – assessing its actual or potential impact.
4. The unpredictability of the event – determining whether the event in question was foreseeable.

While this area is still developing in Mexican law, U.S. and Canadian courts have commonly assessed the unpredictability of the event triggering the MAC. An unforeseen event is more likely to support a finding that a MAC has occurred, whereas a known or predictable event is less likely to qualify as one.

The USMCA has been scheduled for renegotiation since its enactment. But does this alone make any related MAC a known event? Or would it require concrete statements by elected officials and repeated patterns of government actions, such as consistent tariff threats or their imposition, to move from uncertainty into predictability?

A sufficiently broad MAC clause would typically encompass legislative changes, including treaty modifications. However, for such changes to trigger a MAC, they must be unforeseen, meaning the party invoking the clause lacked sufficient information to anticipate their potential adverse effects and had not already been impacted by them.

With respect to the USMCA, companies are generally expected to monitor government policies and statements that could affect their business operations, including scheduled treaty renegotiations. Therefore, unless explicitly addressed in the agreement, amendments to the USMCA would likely not trigger a MAC clause, as they would not qualify as unforeseen events.

However, if the USMCA was suddenly terminated before its scheduled expiration, a buyer in a transaction could argue that such an event was unforeseen and invoke a MAC clause.

The same consideration applies to tariffs. If prior conduct or repeated threats by government officials have made tariff actions reasonably foreseeable, they may be factored into a company’s planning. However, unexpected or disproportionate tariff measures that deviate from prior patterns could still be considered unforeseen events capable of triggering a MAC.

Recommendations for M&A Transactions

A MAC clause serves as a protective measure against unforeseen events that could severely threaten a company’s long-term profitability. For an event to qualify as unexpected, a company must be unable to reasonably anticipate it based on available information, nor have been previously affected by it. If an event was foreseeable or had already impacted the company, it may not justify invoking a MAC clause.

To avoid uncertainty related to the USMCA renegotiation and the potential imposition of tariffs, parties to a transaction should explicitly address these risks in their MAC clauses. The definition of a MAC should specify whether the termination of the USMCA or the imposition of tariffs constitutes a MAC. Clear and unambiguous language is critical when drafting and negotiating MAC clauses to prevent disputes. Given current the geopolitical landscape of the North American region, it would not be surprising for future MAC definitions to directly address these risks. As we experienced a development in the MAC clauses during and after the COVID19 pandemic, it is expected that we will see a new development in these types of clauses caused by political uncertainty related to international treaty negotiations and the imposition or threat of tariffs.

References

• Scala, Vincent. 2021. “Changes to material adverse effect clauses following major events: Evidence from COVIF19”. Saint John’s Law Review: 549.
• Grech, Jonathon M. 2003. “‘OPTING OUT’: Defining the Material Adverse Change Clause in a Volatile Economy.” Emory Law Journal 52 (Summer): 1483.
• Hall, Kari K. 2003. “How Big is the MAC? Material Adverse Change Clauses in Today’s Acquisition Environment.” University of Cincinnati Law Review 71 (Spring): 1061.
• Fairstone Financial Holdings Inc. v. Duo Bank of Canada, 2020 ONSC 7397.
• In re IBP, Inc. S’holders Litig., 789 A.2d 14 (Del. Ch. 2001).