A reader in Italy asked me about a short article that he had seen on www.breakingviews.com. I wasn’t familiar with this site, but it describes itself as “the leading international source of online financial commentary.” (Click here to go to the article; you’ll need to subscribe, or at least register for a free trial.)
The article in question is about “material adverse change” (MAC) provisions. (Yes, materiality again!) It focuses on the definition of MAC in the agreement providing for sale of Home Depot’s supply unit, and it says the following:
A material adverse effect in this case is defined as “any event, change, circumstance or effect that individually or in the aggregate has had or would reasonably be expected to have a materially adverse effect on the business, assets, results of operations, or financial condition” of the company.
The article suggests that presence of the word “circumstance” in this definition might serve to make it easier to trigger a MAC provision:
It’s hard to say exactly what type of difference [the word “circumstance”] can make. But such words can muddy an agreement. The buyers’ lawyers might claim that “circumstance” refers to the perception of certain facts changing, despite the facts themselves staying the same. The seller would almost certainly disagree.
This dissent could land the two parties in court—something neither has an interest in happening.
I have no idea where the author got this idea; she doesn’t cite any support. I suggest that the author is attributing way too much significance to the word “circumstance.” Here’s what I say in my MAC law review article:
Instead of referring to a material adverse change, often the definition of MAC will state that MAC means any change, effect, development, or circumstance that is materially adverse to … , or some variation thereon. The extra language is superfluous and is evidence of lawyers’ penchant—generally misguided—for synonyms and near-synonyms. It is better simply to state that MAC means any material adverse change in ….
But that doesn’t mean that a misguided court couldn’t somehow attribute significance to “circumstance.” If you include blather in your contracts, you can’t complain if someone seeks to attribute unintended meaning to it.
