Alberto Córdoba
Von Wobeser y Sierra, Mexico City
acordoba@vwys.com.mx

Eugenio Chinchillas
Von Wobeser y Sierra, Mexico City
echinchillas@vwys.com.mx

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.

Disputes frequently arise from MAC clauses, making it crucial for both sellers and buyers to consider potential litigation when assessing the scope of such clauses. Clauses with broader language give courts greater latitude in deciding if an event constitutes a MAC.

While common law jurisdictions like the US and Canada have established precedents for MAC clause interpretation, it is crucial to consider how these clauses might be viewed under different legal systems, such as the civil law system prevalent in Mexico.

This interpretive flexibility is especially important when evaluating events beyond the seller's control, like the implementation of tariffs. Regardless of whether they are mutual or unilateral, tariffs can be abrupt and unpredictable, making it challenging to foresee and measure their effects, though these effects could potentially constitute a MAC. A comparable concern exists with planned treaty revisions, such as the forthcoming 2026 renegotiations of the United States-Mexico-Canada Agreement (USMCA), which could substantially reshape the business environment for companies operating within its framework.

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 carve-outs: The definition often excludes adverse changes or events arising from specific risk categories:
   a) 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 (GAAP) and laws, along with force majeure events, such as war, terrorism and natural disasters.
   b) 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.
   c) 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.
   d) Business risks – company-specific risks, typically allocated to the seller instead of the company’s industry as a whole.

As stated above, business risks are typically allocated to the seller, while systematic and agreement risks are usually allocated to the purchaser. Indicator risks are more likely than not to be allocated to the seller.

3. Disproportionate exclusions: Although carve-outs limit the opportunities for buyers to invoke their MAC clauses, these exceptions are partially neutralised 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 an 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; and
4. the unpredictability of the event – determining whether the event in question was foreseeable.

While this area is still developing in Mexican law, US 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.

This criterion is more readily applicable within US and Canadian common law jurisdictions. However, Mexican courts, acting under civil law jurisdiction, are more likely to have a different approach when enforcing a MAC. This difference in legal approach means that Mexican courts may rely on distinct legal concepts, such as legal certainty and autonomy of will, or force majeure, when evaluating events impacting contractual obligations.

Mexican law emphasises the principles of legal certainty and autonomy of will, leading courts to interpret exceptions to contractual performance narrowly. Judicial precedents issued by Mexican courts have rejected the theory of unforeseeability as a basis to be exempt from the enforcement of a contract. This theory, similar to a MAC, holds that parties should be relieved of contractual obligations when unforeseen events fundamentally alter the circumstances under which a contract was entered into. Mexican courts have generally rejected this theory and have adopted a conservative stance, affirming that contractual obligations must be fulfilled according to the terms originally agreed by the parties, based on good faith and contractual autonomy, unless explicitly overridden by a specific legal provision, meaning that any changes to the terms of contracts due to unforeseen circumstances are not to be decided case by case by the courts, but must come from general legislative or regulatory measures.

Another relevant legal concept, more commonly recognised in Mexican law, is force majeure. This concept is more accepted by courts as there are specific statutory provisions regulating it. Such concept, while distinct from MAC, offers an alternative legal framework for evaluating unforeseen events that impact contract performance. To successfully invoke it as a defence for non-performance, certain legal thresholds must be met. These thresholds typically include: (1) the event must be beyond the parties’ control; (2) it must be physically impossible for the obligor to fulfil the obligation; and (3) it must be unforeseeable, meaning the non-performing party could not have reasonably anticipated it. Additionally, the event must make performance impossible for anyone, not merely more difficult, costly or resulting in a disproportionate burden on one party.^[1]

Mexican courts interpret force majeure narrowly, typically for physical impossibility, making it inadequate for economic hardship due to tariff changes or treaty amendments. Material adverse change clauses, focusing on significant economic impacts, may be enforceable in Mexico if clearly and narrowly drafted and legally sound. This is because Mexican courts emphasise contract terms and are generally unwilling to excuse performance for unforeseen events, a stance reinforced by a Supreme Court Covid-19 pandemic ruling.^[2] The Supreme Court held that the pandemic alone was insufficient to excuse performance or modify contracts, indicating a reluctance to accept broad hardship claims based solely on disruptive external events. Mexican courts are expected to prioritise the parties’ expressed intent, legal certainty and good faith compliance.

Therefore, in the specific context of a MAC clause invoked due to tariff changes or sudden treaty amendments, a Mexican court would likely adopt a cautious approach. The absence of explicit contractual provisions addressing these specific risks would significantly diminish the clause’s enforceability. The emphasis on contractual certainty and the original intent of the parties, suggests that Mexican courts would require a high threshold of proof and specific contractual language to uphold a MAC clause in such scenarios.

Recommendations for M&A transactions

To mitigate risks arising from USMCA renegotiation and tariffs, M&A agreements should clearly specify in their Material Adverse Change (MAC) clauses whether the termination of the USMCA or the imposition of tariffs constitutes such a change. Clear and precise language in MAC clauses is crucial for preventing future disputes, particularly given North America’s current geopolitical climate, where future MAC definitions will likely address these specific risks.

MAC clauses are vital for protecting against unforeseen events between signing and closing that could significantly harm a target company’s financial health or operations. A triggering event typically needs to be highly unforeseeable and have a material impact. Foreseeability implies that a company should not have been able to reasonably anticipate the event at signing; prior experience with similar events diminishes the likelihood of recurrence being unexpected. This element of surprise ensures that risks not factored into deal terms can be grounds for invoking a MAC clause.

Given the inherent uncertainty of North American geopolitical and trade policy changes, proactive risk mitigation involves explicitly stating in MAC clauses whether USMCA termination or new/increased tariffs constitute a Material Adverse Change.

Similar to the evolution of MAC clauses following the Covid-19 pandemic, political uncertainty surrounding international trade agreements and tariffs is expected to drive a similar development. Parties will likely seek greater clarity and protection by directly addressing these risks in MAC definitions. This proactive approach acknowledges the increasing need to account for systemic and geopolitical risks that can significantly impact a business.

Clear and unambiguous language in drafting MAC clauses is paramount for preventing future disagreements over interpretation and application, as vague language can lead to costly and uncertain legal battles. Due to North America’s evolving geopolitical landscape, characterised by dynamic trade relations and potential policy shifts, future MAC definitions will likely directly and specifically address risks related to international treaty negotiations and the imposition or threat of tariffs.