THE MAC TRAP: WHEN DEALS DIE ON A CLAUSE

Material adverse change clauses sit quietly in merger agreements until a crisis strikes – a mine fire, a pandemic, or a market collapse – and the inevitable question arises: can the buyer walk away from the deal? 

Introduction

A material adverse change clause (MAC, or MAE – material adverse effect) is an M&A transaction’s emergency exit. It allows a buyer to terminate a signed agreement and withdraw from the deal if the target business suffers a significant adverse change between signing and completion.

 In practice, successfully invoking one is another matter entirely. Australian courts and regulators have consistently held that MAC clauses are not a mechanism for escaping an unfavourable deal, and the bar for establishing a genuine MAC is high. When Peabody Energy triggered its MAC clause to exit a US$3.78 billion acquisition of Anglo American's Australian coal assets in August 2025, it walked into one of the most contested corners of M&A law.

How MAC Clauses Work

MAC clauses are commonly drafted as conditions precedent to completion, allowing a buyer to refuse to complete the transaction if a material adverse change occurs before closing. They generally take one of two forms: quantitative MAC clauses and qualitative MAC clauses. 

Quantitative MAC clauses are tied to measurable financial metrics, such as a specified decline in EBITDA, net assets or revenue. They offer greater certainty but require objective financial evidence to support their invocation. 

By contrast, qualitative MAC clauses rely on broader language, typically referring to any event, circumstance or change that has, or is reasonably likely to have, a material adverse effect on the target's business, financial condition or operations. While more flexible, their application is often contentious and may invite interpretive dispute.

Equally important are the carve-outs – events expressly excluded from the MAC definition regardless of severity. Common carve-outs include general economic conditions, industry-wide developments, changes in law, and matters attributable to the acquirer's own conduct. Negotiating these carve-outs is often the most commercially significant aspect of MAC drafting as they determine how risk is allocated between the parties and can substantially limit a buyer's ability to rely on broader market or industry events to terminate a transaction.

The Legal Standard

To qualify as a MAC under Australian law, the adverse change must be significant, substantial and not temporary when assessed objectively against the target business as a whole. The burden of establishing a MAC rests on the buyer. While Australian authority is limited, the cases convey a consistent message: MAC clauses are intended to address deal-threatening events, not to provide a mechanism for renegotiating or exiting a transaction that has become less attractive.

Woolworths & Grace Bros (1980s) – Australia’s First Successful MAC

Following a significant deterioration in Grace Bros' financial performance, Woolworths invoked a MAC condition triggered by events deemed materially adverse "in the opinion of Woolworths" and withdrew from its $186 million takeover bid. The NSW Supreme Court upheld its right to do so, making Woolworths the only Australian case in which a court has clearly recognised a buyer’s ability to walk away from an acquisition based on a MAC clause. 

The case is now regarded as an outlier. Its outcome depended heavily on a subjective trigger that gave Woolworths broad discretion to determine whether a MAC had occurred. ASIC and the Takeovers Panel have since required MAC conditions to be framed objectively, making Woolworths an example of a drafting approach that no longer survives scrutiny.

Paladin Energy & NGM Resources (2010)¹ — The Takeovers Panel Draws the Line

Paladin Energy sought to exit its takeover of NGM Resources (a Niger uranium explorer) after al-Qaeda-linked gunmen abducted seven people from a mining town 250km from NGM's tenements. The Takeovers Panel rejected the claim, finding that Paladin would have known that abductions in northern Niger were not uncommon, and that the specific event did not materially affect NGM's tenements.  The Panel also imposed a materiality threshold despite its absence from the clause's express wording, reinforcing that MAC-style termination rights require genuine material adverse impact, not merely adverse events.

The decision reinforces a recurring principle in Australian M&A: a buyer cannot invoke a MAC based on risks that were known or foreseeable when the deal was agreed. Sophisticated acquirers are generally taken to have factored such risks into the transaction price, rather than preserved them as a basis for terminating the deal.

Mayne Pharma & Cosette (2025)² — The Landmark Modern Decision

Cosette Pharmaceuticals agreed to acquire Mayne Pharma under a Scheme Implementation Deed containing a quantitative MAC clause. A MAC was defined as an event, occurrence, change, circumstance or matter reasonably expected to reduce Mayne Pharma's Maintainable EBITDA by at least A$10.76 million in 12 months, subject to carve-outs for matters fairly disclosed during due diligence.

Cosette Pharmaceuticals sought to exit its A$672 million acquisition of Mayne Pharma, citing disappointing Q3 FY25 earnings and a letter from the FDA concerning one of Mayne's products.

Justice Black rejected both grounds: a change in earnings forecasts was not itself an event diminishing actual EBITDA; the underlying performance issues had already been disclosed in the data room; and Cosette could not isolate the effect of the alleged adverse events from broader economic conditions. The Court also indicated that Cosette's pre-signing conduct may have amounted to an election to affirm the transaction, potentially waiving its termination right.

Mayne Pharma is now the leading Australian authority on MAC clauses. It provides the clearest guidance to date on the objective assessment of MAC clauses, the evidentiary burden on a buyer, the operation of disclosure carve-outs, and the risk that post-signing conduct may amount to an election to affirm the transaction.

Case Study: Peabody Energy & Anglo American

Peabody Energy agreed to acquire Anglo American's Australian steelmaking coal business, including a portfolio of Bowen Basin mines, for US$3.78 billion. A key asset was Moranbah North.

After a gas ignition event halted operations at Moranbah Nort

h in March 2025, Peabody asserted that a MAC had occurred and, following unsuccessful renegotiations, terminated the transaction in August 2025. Anglo commenced arbitration, alleging wrongful termination and arguing that the incident caused no lasting damage and did not satisfy the contractual MAC threshold.

The dispute raises familiar questions. Peabody argues that Moranbah North was central to the deal and that its indefinite suspension fundamentally altered the value of the transaction. Anglo contends that a disruption at a single mine within a broader portfolio cannot constitute a MAC, particularly where the asset remains capable of recovery. The case also echoes Paladin & NGM in asking whether known industry risks – such as underground fires and gas ignition events in underground coal mining – can support a MAC claim or are simply risks assumed at signing.

Key Drafting Takeaways for Dealmakers

Although the law in this area continues to evolve, particularly following Mayne Pharma and the ongoing Peabody–Anglo American dispute, several established principles can guide the negotiation and drafting of MAC clauses.

Use quantitative thresholds where possible: The A$10.76 million EBITDA threshold in Mayne Pharma & Cosette provided a clear and objective benchmark, making Cosette's inability to satisfy it fatal to its MAC claim. By contrast, purely qualitative MAC clauses are more susceptible to interpretive disputes and regulatory scrutiny. 

Manage disclosure carve-outs carefully: Mayne Pharma confirms that matters fairly disclosed during due diligence cannot later be relied upon to establish a MAC, even if they prove materially adverse. Sellers therefore have a strong incentive to disclose known risks comprehensively, while buyers must carefully assess disclosed information before signing and cannot later invoke a MAC based on risks that were already apparent from the data room.

Address undisclosed pre-signing matters: In private transactions, parties should consider whether the MAC clause is intended to capture only post-signing events or also adverse matters that existed before signing but were discovered later. Where warranty protection is limited, buyers should not assume that a general MAC clause will extend to undisclosed pre-existing issues. If that outcome is desired, the MAC definition should expressly cover pre-existing matters that were not fairly disclosed during due diligence.

Tailor MAC exceptions to the transaction: The scope of a MAC clause is often shaped as much by its exceptions as by its triggering language. Common carve-outs include effects arising from the announcement or implementation of the transaction, as well as broader external developments such as changes in law, regulation, economic conditions, exchange rates, commodity prices, natural disasters, war and pandemics. These exceptions reflect the principle that market-wide or systemic risks are generally borne by the buyer unless they disproportionately affect the target relative to its peers. The appropriate allocation of those risks will depend on the nature of the target's business and should be negotiated accordingly.

Consider asset-specific conditions precedent: If the Peabody–Anglo agreement had included a condition tied directly to Moranbah North's operational status – for example, requiring active longwall production at completion – Peabody may have had a clearer basis for terminating the transaction than relying on a general MAC clause. Where a single asset drives a substantial portion of deal value, asset-specific conditions can provide greater certainty and may justify the additional negotiation required.

Consider price adjustments over termination: Price adjustment mechanisms may be preferable to termination rights. In transactions where value is concentrated in a key asset, a pre-agreed price adjustment triggered by a prolonged operational disruption may be preferable to relying on a MAC clause. This approach can reduce the risk of costly disputes and provide a more predictable outcome for both parties, albeit at the cost of exposing sellers to some post-signing value risk.

The Bottom Line

Australian courts and the Takeovers Panel have consistently made clear that MAC clauses are not a remedy for buyer's remorse. From Woolworths to Paladin/NGM and Mayne Pharma, the authorities emphasise objective assessment, careful attention to causation, and a reluctance to permit buyers to walk away from deals based on risks that were known, foreseeable or insufficiently material.

The Peabody–Anglo American arbitration will test how those principles apply where a transaction is affected by the shutdown of a key asset in a declining commodity market. Whatever the outcome, the case is likely to influence the drafting of resource-sector M&A agreements for years to come. Its broader lesson is simple: a MAC clause is only as effective as the drafting behind it.

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¹ Re NGM Resources Limited [2010] ATP 11

² In the matter of Mayne Pharma Group Limited [2025] NSWSC 1204