Contracting Trouble: Interpreting MAC Clauses in Indian M&A

“India’s mergers and acquisitions (M&As) market recorded deals worth $45.44 billion in the first half of 2025, up nearly 3.3 per cent from a year ago, even as ultra large-ticket transactions remained subdued.”

This growth delineates the importance and complexity of M&A activity in the country, where M&A transactions frequently involve two businesses combining, whether by merger or acquisition, with high levels of uncertainty and possibly significant value to be achieved if everything goes according to plan.

Parties also rely on contractual processes that will allow them to manage these uncertainties associated with M&A transactions, such as a Material Adverse Change (MAC) clause. The MAC clause, as it relates to M&A transactions, provides that a buyer may terminate or renegotiate a transaction if the target company has suffered a “material adverse change” in its business, financial condition, or prospects during the interim period between signing and closing.

The COVID-19 pandemic demonstrated the inadequacies of many existing boilerplate MAC clauses. The pandemic caused disruptions and operational challenges that significantly impacted target companies. Ultimately the pandemic posed unprecedented challenges in defining the everyday notions of what constitutes a MAC. This led to challenges and heightened scrutiny regarding the nature, significance of MAC clauses and the mechanism that should apply as they relate to the drafting and negotiation of the MAC clause in Indian deals.

In this article, we will consider the legal treatment, practical relevance and shifting drafting practices of MAC clauses in post-pandemic Indian mergers and acquisitions, with the aim of blending legal perspectives with acquisition strategies to assist users of MAC clauses in subsequently managing or navigating this concept in deals.

Indian Interpretation of MAC Clauses

MAC clause is a privately negotiated contractual provision that aids in risk allocation in M&A deals, especially for buyers as it gives buyers the right to terminate or renegotiate the deal when there has been a specified major adverse event that affects the target company between entry into the contract and closing. The enforceability of a MAC clause in India will be governed by the Indian Contract Act, 1872.

Section 32 of the Indian Contract Act, 1872 deals with contingent contracts, as it relates to contracts whose performance depends upon the occurrence of a particular event. Section 56 deals with the frustration of the contract which renders performance of the contract impossible, or unlawful. Indian courts require the standard for frustration to be sufficiently high as merely being economically difficult or inconvenient for the performance of the contract is insufficient. The courts specify that frustration is to be invoked in cases of legal or natural impossibility.

Indian courts have not yet directly adjudicated on MAC clauses in M&A resulting in limited domestic jurisprudence. They have relied on general principles like the intention of the parties, good faith and reasonableness in interpreting contractual rights and obligations. The recent Supreme Court decision in the 2017 case Energy Watchdog v. Central Electricity Regulatory Commission[1] confirmed a strict approach in a case where the assessees tried to argue that unforeseen circumstances, while not materially impactful entirely, justified the frustration of the contract under Section 56.

The Court reiterated that only occasions that lead to true impossibility, not just hardship, would justify frustration of a contract under Section 56. This indicates that parties to a MAC clause will have to establish a much higher threshold of justification, as courts are unwilling to excuse performance for mere change unless it is so material that it destroys the underlying purpose of the contract.

In cases with no decided precedent, Indian courts will look to use foreign jurisprudence, particularly Delaware courts in the United States, for guidance. In particular, the Akorn v. Fresenius[2] and In re IBP, Inc. Shareholders Litigation will provide courts with useful guidelines when interpreting MAC clauses. In both of these cases courts found that a MAC must be “substantial” and have a “durationally significant” impact on the target’s business. Domestic legal writing and commentary on these principles is increasing and shaping the new paradigm for MAC clauses in India.

MAC v. Force Majeure Clauses

MAC clauses and force majeure (FM) clauses are mechanisms of managing risk in contracts. However, MAC clauses address issues in different circumstances and under different legal frameworks. MAC clauses will be triggered by a materially negative change in a party’s financial condition or business operations that may threaten the viability of the deal. Unlike a referral to force majeure, MAC provisions are subjective and involve the discretion of the parties in determining whether a “material” event has taken place, and there are issues that arise about what constitutes a “material” change.

Conversely, FM clauses aim to relieve one or both parties from non-performance caused by unforeseen external events, such as natural disasters, war, governmental actions, that ultimately makes the contractual performance objectively impossible or unlawful. FM clauses are typically more definite than MAC clauses, as they usually are descriptive in a list of events that are covered by the clause; and the clause is triggered only after the event has taken place and performance was prevented.

FM clauses are objective and operate after the fact. They typically require an event that makes performance impossible (or illegal), and it must be an unforeseeable external event. Most FM clauses condition excusable performance on specific, anticipated events occurring, while MAC clauses usually have the broadest interpretation to address business operational interruptions related to transaction viability.

The COVID-19 pandemic brought the differences between these clauses together, because parties quickly broached the question of whether their business disruptions arising from COVID-19 triggered the protections afforded by MAC clauses or whether a party could argue that it was also entitled to the protections afforded by the force majeure clause.

Courts and practitioners, aggressively, had to ascertain the exacting nature of the application of each clause by examining the drafting, purpose, and intent of the MAC or the force majeure clause itself, all of which highlights the need for an accurate allocation of identified transaction risks and careful contracting inclusive of deals made in India.

Effect of COVID-19 on MAC clauses

MAC clauses have always been relevant in merger and acquisition transactions but have certainly heightened in relevance following the Covid-19 epidemic. These clauses are designed to permit an acquirer to exit from the transaction if unforeseen events cause material disruptions of the target’s business between signing and closing. The significance of the pandemic proved to businesses that they are arguably more vulnerable to such catastrophes, and the importance of clear and objective wording in drafting MAC clauses cannot be over-stated.

The impacts of Covid-19 have also proven to a great deal of legal research and analysis regarding the MAC clause because the impacts on many businesses are still unknown. There is a tendency now for buyers to demand actual references to pandemic-related disruptions (lockdowns, supply chain disruptions, border closures, etc.), while sellers seek to limit any potential pandemic disruptions to clearly defined materiality thresholds so as to avoid a potentially unlawful termination of the transaction. The need to negotiate MAC clauses with reference to pandemic-related disruptions has made the negotiation of MAC clauses difficult and complicated and often required multiple rounds of discussions to achieve a suitable balance between the interests between the parties.

In 2020, the case of Halliburton Offshore Services Inc. v. Vedanta Ltd[3]., emerged and came to serve as an important judicial lens for the applicability of MAC provisions. The Delhi High Court rejected a claim that the pandemic had rendered it impossible to perform the contract, and stressed that it was insufficient for a party to establish a claim that they could not perform due to inability to pay for their suffering or merely due to financial hardship, to properly establish the ground of fulfillment of a contract.

The decision illustrates the high threshold that will have to be exceeded before MAC clauses will be invoked, even when dealing with unprecedented circumstances such as a pandemic, and it is useful to consider the option to employ more specific wording and more objective standards when drafting MAC provisions.

The legal principles arising in Indian contract law, specifically stemming from Section 56 of the Indian Contract Act, 1872 and the SEBI regulations actually support the use of MAC clauses, as they provide support for frustration doctrine that allows a party to withdraw from an agreement where the ability to perform in accordance with the agreement would be made impossible by an event that is beyond your control.

However, recent judicial rulings demonstrate a high bar to meet in order to rely on these clauses. Thus, moving forward, MAC provisions will continue to further grow, with pandemic related occurrences frequently come to define how MAC provisions are communicated. The Covid-19 pandemic, reinforced the distinction for negotiated and explicit MAC provisions encourages and protects the parties’ rights as both purchasers and sellers in unforeseen circumstances.

Case Study: LVMH- Tiffany & Co.

The LVMH/Tiffany & Co. merger is an excellent case study on the implementation of MAC clauses in M&A transactions. The merger agreement contained a MAC clause, which allowed for the exclusion of certain events such as natural disasters, but did not explicitly mention pandemics or public health emergencies. When Covid-19 resulted in massive losses to Tiffany’s topline revenues and the temporary closure of many stores, LVMH contended that these operations constituted a Material Adverse Effect, and undertook efforts to renegotiate the purchase price. Tiffany countered that the exceptions in the MAC clause which included force majeure events, meant that LVMH should not have been able to invoke the clause based on the Covid-19 pandemic.

The agreement also contained “disproportionality carvebacks,” which meant, if the company Tiffany suffered disproportionate effects as compared to its industry competitors, the MAC provisions might apply anyway, regardless of the exception. This word choice allowed LVMH to make the argument that even if Tiffany was affected by the pandemic, it was affected to such an extent that it still merited continuing the talks on the acquisition.

They eventually settled on a price that was lower than originally agreed, with LVMH paying $15.8 billion instead of $16.2 billion. The case demonstrates the importance of drafting specifically tailored MAC clauses with thresholds and exceptions tailored to account for extraordinary events such as pandemics, and to reduce ambiguity in high-stakes transactions.

Can MAC Clauses Be Triggered In Bad Faith Under Indian Contract Law?

The Uncertain Role of Good Faith in Indian M&A

MAC clauses exist to allocate risk and uncertainty in M&A transactions, their implementation in a country like India poses critical questions regarding subjective application and opportunism. Unlike certain jurisdictions that provide for an explicit or implied obligation of good faith in commercial transactions, there is no question of the obligation to behave in good faith being a default requirement in Indian contract law in sophisticated, arm’s length agreements between commercial parties.

While good faith is recognized in principle by the General Clauses Act, 1897 and general judicial declarations, Indian courts have limited the application of any good faith requirement to cases involving consumer disputes, employment contracts, or where there is significant bargaining devolved incompetence, expressed as unequal bargaining power.

In complicated forms of commercial contracts, including M&A, the pacta sunt servanda principle that to abide by the contract as written continues to be the law of the land. The Indian Supreme Court has ruled that good faith cannot be used to rewrite an explicit and express exchange between sophisticated contracting parties, but it can be used as a guide to reasonably interpret ambiguous contractual provisions, or for policing egregious misconduct (e.g., fraud, concealment).

Bad Faith Invocation and the MAC Clause

This regulatory gap enables sellers to use or abuse MAC clauses in a strategic way especially as we see volatility in economic periods of time. For example, a buyer may enact a MAC clause not because a buyer has experienced detrimental, sustained impact distinction and continuity to the target’s business but simply because it has found a less attractive deal than anticipated after signing due to adverse market conditions.

The recent LVMH–Tiffany & Co. dispute provides a global example: LVMH attempted to invoke the MAC clause when the global luxury sector was under duress as a means to put additional pressure on the (allegedly) not very good price with Tiffany’s. Although settled, the case exemplifies the inherent risk that MAC clauses can exist to impose as pressure tactics more so for overall market declines.

Section 23: Public Policy as a Safeguard

Within India, the only statutory equivalent to a substantive bad faith doctrine is Section 23 of the Indian Contract Act, 1872, which disallows agreements (and their operation) that are against public policy. An assertion of a MAC clause that is arbitrary, pretextual, and/or which acts solely in response to changing interests or pressures on the purchaser in ways that undermine post-pandemic recovery and investor confidence could be argumented against as contrary to public policy and thus would be unenforceable.

The courts, faced with these situations, will inquire into the alleged negative change in the context of proportionality and the industry context, and perhaps leaning on international jurisprudence. For instance, UK courts have denied withdrawals where buyers acted out of improper reasons or failed to demonstrate any matter of objective lasting impairment, as happened in Travelport v. WEX. Similar standards, surrounding the good faith invocation of the MAC clause, may be needed from Indian courts.

Judicial Innovation and the Road Ahead

Without explicit statutory reforms, evolution in Indian M&A law regarding MAC clauses will likely occur through judicial interpretation. Possible developments include:

• Recognition of an implied obligation of good faith in invoking MAC clauses, especially in deals impacting public shareholders or the broader market.
• Judicial scrutiny of proportionality and motive, where courts may examine whether the alleged material adverse effect is unique to the target company, or whether the clause is being used as an opportunistic negotiating lever.
• Increased borrowing from international precedent, as Indian courts add layers of fairness and purposive interpretation, with a view to sustaining certainty and discouraging abuse.

As India’s M&A market matures, the interaction between public policy, good faith, and contract certainty will only grow in relevance. The coming years may see Indian courts step in to set boundaries on the real-world use of MAC clauses and reaffirm the principle that contracts even buyer-friendly ones should not be tools for opportunism against the backdrop of systemic economic change.

Conclusion

The post-pandemic age has altered the scope and significance of MAC provisions in Indian M&A transactions, recasting them as both critical tools for managing risk and repositories of uncertainty. That said, Indian courts remain unwilling to reduce the hurdle to invoking MAC provisions, still requiring as they do both a truly meaningful, long-lasting effect on a target company’s business, as opposed to simply a temporary setback in its financials. However, this judicial conservativism has created an even greater impetus (or need) for the respective parties to draft with clarity and specificity, as parties addressed the limitations of generic drafting towards bespoke MAC provisions that defined “materiality”, established objective financial conditions precedent, and clearly identified exceptions for industry-wide and pandemic-specific consequences in their contracts.

Nonetheless, the lack of an also assumed duty of good faith in sophisticated commercial contracts does afford the ability to opportunistically raise issues at times, although the doctrine of public policy as contained in Indian law may in time offer some process-facilitating resistance to that to the extent it develops as jurisprudence. In the current context, buyers and sellers approach MAC negotiations with heightened protagonist awareness and sellers want tight definitions, exclusions, etc. The negotiation of MAC provisions and respective interpretative values often appears to drive transaction dynamics and build more resilient risk sharing models. In the end, the future of Indian M&A will depend upon the manner in which the evolution of MAC clauses as a product of contract design, economic equity, and flexibility occurs in circumstances beyond either parties control at some unknown point in the future. As courts and practitioners work together to advance, certainty and equitable treatment, the MAC clause will remain central for both non-ideal consequences and maintaining the continued viability of India’s transactional marketplace.

Author:– Shirin Sarkar,  in case of any queries please contact/write back to us at support@ipandlegalfilings.com or   IP & Legal Filing.

[1] Energy Watchdog v. CERC, (2017) 14 SCC 80.

[2] Akorn, Inc. v. Fresenius Kabi AG, 2018 WL 4719347 (Del. Ch. Oct. 1, 2018).

[3] Halliburton Offshore Services v Vedanta Limited (O.M.P. (I) (COMM) & I.A. 3697/2020.