What is a material adverse change clause in an Ontario acquisition?

A material adverse change (MAC) clause — also called a material adverse effect (MAE) clause — in an Ontario business purchase agreement allows the buyer to walk away from the deal if, between signing and closing, a significant negative change occurs in the target business. It is typically a closing condition: the buyer is not obligated to close if a MAC has occurred.

What qualifies as a MAC is heavily negotiated. Sellers push for extensive carve-outs — events that expressly do not constitute a MAC even if they harm the business. Common carve-outs include general economic downturns, industry-wide conditions, changes in law, and pandemics. The buyer wants a broad MAC definition with minimal carve-outs, while the seller wants to limit the buyer's ability to use the clause as an exit ramp for deal regret.

In practice, successfully invoking a MAC clause to walk away from a deal is very difficult, particularly in Canadian courts. The change must be substantial, durationally significant (not a short-term blip), and unknown to the buyer at signing. Courts have set a high bar in comparable jurisdictions.

MAC clauses also appear in the representations and warranties, where the seller warrants that no MAC has occurred since a reference date.