In upstream oil and gas M&A transactions, the circumstances surrounding a deal can change dramatically between signing and deal completion. Upstream oil and gas assets are exposed to highly volatile commodity price benchmarks, rapid shifts in international regulatory frameworks, and geological or subsurface uncertainties. When a significant event, or series of events, causes a substantial change in the value of a transaction, buyers frequently search their transaction documents for optionality or a lever to renegotiate the headline purchase price. The primary contract mechanism for this risk allocation is the Material Adverse Change (MAC) or Material Adverse Effect (MAE) clause.
Function of the MAC Clause in Upstream Asset Deals
A MAC clause operates as a bargained-for risk allocation mechanism. It usually takes the form of a condition precedent to completion, or as a warranty given by the seller at completion that no MAC has occurred. Regardless of which form is used, the buyer is granted the right to walk away from the transaction if an adverse event occurs between signing and completion (the interim period) that materially devalues the business, asset base, or financial condition of the target company or asset.
The utility of the MAC clause, to a buyer, therefore, lies in shifting the risk of target-specific adverse events away from the buyer during the interim period. In upstream oil and gas transactions, this interim period can be lengthy due to necessary regulatory consents or approvals, amplifying the buyer's exposure to changes in the asset or business.
The Strategic Structure: Definitions, Carve-Outs, and the Disproportionate Impact Exception
MAC clauses have historically been much less common in English law governed transaction agreements than US law governed transaction agreements. A reason for this may be that, broadly speaking, the English law approach to drafting is that business risk transfers to the buyer on signing, whereas in US law agreements business risk is more often transferred at completion.
In English law governed transaction agreements, the use of MAC clauses therefore tends to be deal and sector dependent; MAC clauses are more common in the oil and gas sector than in most other sectors but are often still resisted by sellers who seek deal certainty (and transfer of business risk) following signing. Reflecting the different principles of when business risk transfers, US MAC clauses are often widely drafted and cover any event or circumstance that has an adverse impact on the target company or its business, limited by carve-outs for general economic, market, political or regulatory changes.
Where MAC clauses are accepted in English law transaction documents, they tend to focus on specific events such as damage to important facilities or prolonged oil and gas production shut-ins, with the materiality threshold set as losses above a defined monetary amount or as a percentage of the equity value of the target business, or perhaps as the total loss of a specific asset with a reinstatement cost above a specified value, or a shut-in beyond a defined duration.
Accordingly, where MAC clauses are included in English law agreements (whether as a condition precedent or a warranty), the scope of the clause will become a key point of negotiation. To avoid granting buyers an unconditional or subjective right of termination, sellers seek to leave as little as possible to subjective interpretation, with each element of the definition being subject to negotiation. The standard of judgment the clause imposes is itself a drafting choice. Where a MAC clause is drafted subjectively, turning on the invoking party’s opinion, the party need only show an honest and rational belief that a MAC has occurred, not an objectively adverse effect (Cukurova Finance International Ltd v Alfa Telecom Turkey Ltd [2013] UKPC 2), a requirement reiterated more recently in Lombard North Central Plc v European Skyjets Ltd [2022] EWHC 728 (QB). As that is a materially easier test for a buyer to satisfy, sellers generally insist on an objective standard with defined triggers.
In recent years the English courts have provided some guidance on MAC clauses – and have almost always been required to do so where clauses did not set out clear trigger events, materiality thresholds or market carve-outs. Although buyers may want to leave room for subjective interpretation, the lesson is usually that such an approach gives rise to a real risk of disputes and often, such as in the case of BM Brazil v Sibanye [2024] EWHC 2566 (Comm) discussed below, risk of a finding against the buyer. MAC clauses are construed under ordinary principles of contractual interpretation rather than any special canon: the court asks what a reasonable person with the parties’ background knowledge would understand the words to mean (Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896; Rainy Sky SA v Kookmin Bank [2011] UKSC 50). While the parties’ language is given primacy, even where the result seems commercially harsh (Arnold v Britton [2015] UKSC 36), interpretation remains a unitary exercise balancing language against commercial common sense (Wood v Capita Insurance Services Ltd [2017] UKSC 24).
The Materiality Threshold
Where it is not defined, the meaning of “material” will be considered in context (both of the drafting and the relevant assets or business), however in Grupo Hotelero Urvasco SA v Carey Value Added SL [2013] EWHC 1039 (Comm), Mr. Justice Blair (in a decision arising in a lending/finance rather than M&A context) set out core principles, including that to qualify as "material" the change must be significant and not merely temporary, and must significantly affect the target's ability to perform its obligations (where the clause is limited to "financial condition," this is assessed primarily by reference to the target's financial information rather than its prospects or external market conditions), and the change is measured against the target's financial condition as at the date specified in the clause, and a party cannot invoke a MAC on the basis of circumstances it knew about when it entered the agreement unless those circumstances have themselves materially worsened.
In BM Brazil v Sibanye it was held that “material” requires something to be significant or substantial assessed on a case by case basis, with several factors to be considered: the transaction size; the nature of the assets concerned; the length of the sale process; and the complexity of the SPAs. Of particular note is Mr. Justice Butcher’s observation (made obiter, since the court held the event was not material on any view) that a reduction in equity value of 20% or more would be material, a reduction of more than 15% might be sufficient, but 10% would likely be too low to be considered material. A comparable order of magnitude appears in the older acquisition case Levison v Farin [1978] 2 All ER 1149, where a 20% fall in the target’s net asset value was held to be material; notably, because the warranty was tied to a specific, defined change, the buyer could rely on it even though it had been told of the circumstances causing the fall. By contrast, a mere downward revision of the target’s financial forecasts did not clear the bar in Ipsos SA v Dentsu Aegis Network Ltd [2015] EWHC 1726 (Comm).
To avoid uncertainty as to the intended meaning of ‘materiality’, sellers will often seek to specify thresholds of materiality that must be met, often by reference to a change in the equity value of the target business.
The Forward-Looking Baseline
The definition of a MAC often encompasses not just existing adverse changes but also events that could "reasonably be expected to" result in a material adverse change in the future. In BM Brazil v Sibanye the High Court confirmed such a test requires an assessment at the date of termination based on information available at that time, evaluated from the perspective of a reasonable person, and that the event must be more likely than not to have that effect; a mere risk of a future material adverse change will not suffice.
Systemic Market Carve-Outs
It is usual for the definition to provide that market-wide factors, such as shifts in global economic conditions, geopolitical events, or industry-wide commodity price benchmarks cannot, on their own, be considered a MAC.
Buyers often seek a qualification to these carve-outs, such that if an industry-wide event impacts the target asset(s) disproportionately compared to peer operators in the same basin or region, such an event will constitute a MAC. For example, a global oil price drop hurts all producers, but if the target's high extraction cost or specific pipeline dependence makes it uniquely vulnerable, the impact may be disproportionate.
Following the principles in Travelport Ltd v WEX Inc [2020] EWHC 2670 (Comm), it is important to properly define the comparative peer group for the disproportionate impact exception (if indeed the seller is willing to accept that market changes with a disproportionate impact on the target assets could be a MAC). If the clause compares the target to 'companies in the energy industry’ generally, a buyer may struggle to identify why the specific issue affected it in a particular way. Instead, by narrowing the group to 'independent exploration and production companies operating in offshore’ in a particular jurisdiction, the disproportionate impact may be demonstrated more readily. The essential point is that the definition of the comparator group is often outcome-determinative and can cut either way. in Travelport the court preferred the buyer's wider comparator, so it should be defined with precision to match the protection sought.
Conclusion
In English law-governed contracts, broadly drafted MAC clauses remain the exception and not the norm. For sellers, where a MAC clause is to be accepted it should be as narrow and specific as possible—often a useful question to ask the buyer is “What risk are you specifically worried about between signing and completion?” and to provide for that (e.g. loss of a key asset) rather than to provide generally for ‘material adverse changes’ to the target business or asset.
For buyers, although a narrower scope of drafting may reduce the potential application of the clause, in reality it will be important for the buyer to be very confident a MAC has in fact occurred before refusing to complete the transaction – failing to do so can give rise to significant liability for the buyer. This exposure arises because a buyer that terminates on a wrongly-invoked MAC bears a high burden of proving the MAC and risks liability to the seller for repudiatory breach of contract; a good-faith but mistaken belief that a MAC had occurred will not necessarily provide a defence. A tightly drafted MAC clause, aimed at specific risks, may therefore also protect the buyer where the relevant event has occurred.
