Over the years I’ve written about materiality a number of times. The discussion in MSCD represents my most recent take, but I’m revisiting the subject for purposes of my forthcoming booklet on the structure of M&A contracts. While finalizing the booklet—a task that has taken me away from blogging—I’ve found myself considering an issue that I haven’t previously addressed head-on. Below is the current draft of the analysis of that issue that I propose adding to the booklet. It’s in the section discussing use of the defined term Material, defined so as to eliminate the ambiguity that otherwise afflicts material. I address elsewhere in the booklet factors to consider when deciding whether to modify a given representation using Material on its own or as part of the phrase material adverse change.
A representation might contain only one noun that could be modified by Material, as in .
 Schedule 4.8 lists each Material contract to which the Seller is party.
But often a representation contains two such nouns, raising the question whether, for purposes of adding a materiality qualification to the representation, you should modify one or the other noun, as in  and [2a], or both, as in [2b]. It would make the most sense to modify the noun that represents the focus of the representation. The focus of  and its variations is contract defaults, not the contracts themselves, so it would make the most sense to have Material modify default, as in .
 The Seller is not in Material default under any contract to which it is party.
[2a] The Seller is not in default under any Material contract to which it is party.
[2b] The Seller is not in Material default under any Material contract to which it is party.
By contrast, [2a] would seem both overinclusive and underinclusive—it would be rendered inaccurate by any default under any of the contracts in question, no matter how trivial, but wouldn’t be rendered inaccurate by default under a contract that doesn’t meet the high level of significance inherent in Material, no matter how serious the consequences of that default. And [2b] would be underinclusive—it would seem illogical to exclude from the scope of the representation, just because they involve contracts other than Material contracts, defaults that would otherwise fall within the definition of Material.
9 thoughts on “When Adding “Material” to a Representation, Which Noun Should You Modify?”
Which raises an interesting question: Suppose that a default under Contract X could be Material. Would that fact imply that Contract X is itself necessarily Material?
D.C.: I suggest that materiality of a given contract involves a different inquiry than does materiality of a default: the question of whether a default is, for the buyer, sufficiently important as to be a dealbreaker is much narrower and could well involve factors that won't have been evident to anyone considering the pre-default contract. Ken
How about "The Seller is not in default under any contract to which it is a party, which default would have a material adverse affect on the Seller's business or properties.
Of course you can define Material Adverse Effect elsewhere.
CtDon: As I mentioned in the post, deciding whether to use "material" or MAC involves a different analysis. Ken
I quite like CtDon's formulation, though it is perhaps the same as , but with the definition of "Material" (or rather, "Material Default") incorporated.
Generally, I think it can be problematic to define "Material" as an adjective where it is applied to different concepts. I would define "Material Default" separately from "Material Contract", "Material Adverse Effect", "Material Change" etc., if they were also used.
W: I think it's unhelpful to have "material" shift meanings depending on the context in which it occurs. Ken
It isn't exactly about changing the meaning – more a preference to set out the application of "material" to each term.
For example, a definition of Material Adverse Change to a business may specify whether materiality was seen from the perspective of any reasonable buyer or the specific buyer in question, and that (for example) the change had to be material in respect of the long term prospects of the business. A definition of "Material Contract" might specify a threshhold contract value, or state that an agreement with an unlimited indemnity was always material (or possibly refer to specific contracts set out in a schedule). I think a general definition of "materiality" is a step removed, and it may make it harder for a party to decide whether a change, contract etc. falls within the definition.
W: I don't think it would work to shift from the perspective of a reasonable person in the shoes of the buyer to the actual perspective of that buyer, no matter how unreasonable.
And I'm not sure that anyone would need to use "Material Contract" enough to warrant using it as a defined term, as opposed to just saying each time "with a value greater than $X."
More generally, I understand what you're aiming at, but I suspect it would be too unweildy.
I agree with Westmorlandia's approach above. The materiality of defaults, contracts and adverse changes to a business will all involve different sets of issues and it would be cumbersome to try and come up with and apply an overarching definition of Material to these terms. These are all distinct concepts and should be defined individually as required.