MAE Clauses, Closing Conditions, and Interim Covenants: Negotiating the Gap Between Signing and Closing
Updated: 2 minutes ago
By Trenton Roberts and Rachel Jones
When a private acquisition signs and closes on different days, the purchase agreement has to decide who bears the risk of what happens in between. Antitrust clearance, consents, and financing can leave weeks or months between signing and the wire, while the seller still runs a business the buyer has agreed to buy.
Three provisions decide that allocation: the material adverse effect (MAE) definition, the other closing conditions (especially the bring-down of representations), and the interim operating covenants. Below is sample language for each, the case law that tells you how a court will read it, and where the parties usually land. Our post on reps and warranties in middle-market M&A covers the representations themselves.
A numeric frame for the MAE clause
Assume a buyer signs to acquire a company for $96,000,000, priced at 8.0x trailing adjusted EBITDA of $12,000,000. Antitrust clearance and two customer consents push closing out roughly 90 days. During that window, the target's second-largest customer, about 15% of revenue, gives notice that it will not renew. Management's revised forecast shows next-twelve-month EBITDA of $10,300,000, a 14% decline.
At 8.0x, the buyer is now paying for $1,700,000 of EBITDA that may not exist, or $13,600,000 of value. The buyer's question is whether it can walk or reprice. Under the case law below, a 14% forecast decline tied to one customer is very unlikely to be an MAE. If the buyer wanted protection against that specific risk, it needed to bargain for it directly, and we show how at the end of the next section.
The MAE definition, piece by piece
A representative seller-leaning definition:
"Material Adverse Effect" means any event, change, development, or effect (each, an "Effect") that, individually or in the aggregate with all other Effects, has had or would reasonably be expected to have a material adverse effect on the business, results of operations, or financial condition of the Company and its Subsidiaries, taken as a whole; provided, however, that none of the following, alone or in combination, shall constitute or be taken into account in determining whether a Material Adverse Effect has occurred: (a) changes in general economic, financial market, credit market, or political conditions in the United States or elsewhere; (b) changes generally affecting the industries in which the Company operates; (c) changes after the date of this Agreement in applicable Law or GAAP, or in their authoritative interpretation; (d) acts of war, sabotage, terrorism, cyberattack, or military action, or any escalation of them; (e) earthquakes, hurricanes, floods, pandemics, epidemics, or other natural disasters, acts of God, or calamities; (f) the announcement, pendency, or performance of this Agreement or the transactions it contemplates, including the identity of Buyer and any resulting loss of customers, suppliers, or employees; (g) any action taken at the written request of Buyer or that is required by this Agreement; or (h) any failure of the Company to meet internal or published projections, budgets, or forecasts (it being understood that the underlying causes of such failure may be taken into account unless otherwise excluded); except, in the case of clauses (a) through (e), to the extent such Effect has a disproportionate adverse effect on the Company and its Subsidiaries relative to other participants in the industries in which they operate (in which case only the incremental disproportionate effect may be taken into account).
What each piece does:
"Would reasonably be expected to" lets the buyer make a forward-looking showing instead of waiting for the damage to reach the financial statements.
Buyers ask to add "prospects" to the core. Sellers resist, because the word invites arguments built on projections the seller never represented.
"Taken as a whole" measures the effect against the whole enterprise, not one location or product line.
The carve-outs push systemic risk to the buyer. In AB Stable, discussed below, the court read the COVID-19 pandemic into a carve-out for "calamities." Sellers may also ask for an express carve-out for changes in tariffs or trade policy.
Clause (f) protects the seller when the buyer's identity, such as a competitor, drives customer defections. Keep the disproportionate-effect exception away from it.
Clause (h) removes a missed projection, but not its causes, from the analysis.
"Only the incremental disproportionate effect" stops a buyer from counting the whole industry-wide hit once it shows any disproportion. Buyers push to narrow clause (b) to the industry "generally" and to except a cyberattack aimed only at the target from clause (d).
How courts read it
Most reported MAE decisions come from Delaware, because many acquisition agreements choose Delaware law. They are the reference point parties negotiate against even when Texas law governs. In In re IBP, Inc. Shareholders Litigation, 789 A.2d 14 (Del. Ch. 2001), applying New York law, the court described an MAE as an unknown event that substantially threatens the overall earnings potential of the target in a durationally significant manner. In Hexion Specialty Chemicals, Inc. v. Huntsman Corp., 965 A.2d 715 (Del. Ch. 2008), the court said the decline should be measured in years rather than months and placed the burden of proof on the buyer seeking to avoid closing, absent contrary language.
Akorn, Inc. v. Fresenius Kabi AG, C.A. No. 2018-0300-JTL, 2018 WL 4719347 (Del. Ch. Oct. 1, 2018), aff'd, 198 A.3d 724 (Del. 2018), is the first Delaware decision to find an MAE and let a buyer terminate. The target's 2017 results showed year-over-year declines of about 25% in revenue, 105% in operating income, and 86% in EBITDA, against a prior record of steady growth, and the decline persisted for a full year with no sign of recovery. The court also found that pervasive regulatory compliance failures caused the target's regulatory representations to fail the MAE-qualified bring-down, and that the target had breached its ordinary course covenant.
Run our example through those cases. A 14% forecast decline linked to one customer, measured over a single forecast year, sits far from Akorn and close to the short-term setbacks that IBP and Hexion said do not qualify. The buyer will lose that argument.
The practical response is to stop asking the MAE clause to do a job it was not built for. If the buyer cares about a specific risk, it can bargain for a specific condition:
"Minimum EBITDA. Adjusted EBITDA for the twelve-month period ended on the last day of the most recently completed calendar month ending at least 20 days before the Closing Date, calculated in accordance with the Accounting Principles and in a manner consistent with the Adjusted EBITDA Schedule, shall not be less than $10,200,000."
The floor is 85% of the $12,000,000 signing figure. A seller asked for this will push for a lower floor, a calculation locked to an agreed schedule, exclusions for transaction expenses and buyer-requested actions, and a price adjustment instead of a walk right, for example a reduction of 8.0x any shortfall below the floor. Note that our $10,300,000 forecast clears the $10,200,000 floor, so the condition would not help this buyer. The number has to be set against the risk the buyer actually fears.
The other closing conditions
A buyer's condition set usually includes:
Accuracy of the seller's representations, under the bring-down standard discussed below.
Performance of covenants in all material respects, and no MAE since a reference date.
Expiration of any Hart-Scott-Rodino waiting period and other listed approvals, and no injunction.
Receipt of scheduled third-party consents, and the closing deliverables (officer certificates, payoff letters, lien releases, resignations).
On item 3, two current facts matter. The 2026 HSR size-of-transaction threshold is $133.9 million, effective February 17, 2026, with the size-of-person test still applying up to $535.5 million. And on February 12, 2026, in Chamber of Commerce of the United States v. FTC, the Eastern District of Texas vacated the FTC's 2024 rule that had expanded the HSR form. Filers are back on the prior form, the government's Fifth Circuit appeal is in abeyance through December 31, 2026, and the agencies have said they are considering a new rulemaking.
On item 4, sellers should insist on a list. "All consents required under any Contract" is a walk right in disguise. If a key lease requires landlord consent, address it in diligence, as we explain in our post on lease assignment and change of control clauses.
Texas law adds a construction point. Texas courts do not favor conditions precedent and will not read a provision as one unless the language compels it. In Criswell v. European Crossroads Shopping Center, Ltd., 792 S.W.2d 945 (Tex. 1990), the Supreme Court of Texas explained that terms such as "if," "provided that," and "on condition that" usually signal a condition, and that without such language courts tend to construe a term as a promise. If the agreement is governed by Texas law, label the conditions clearly, put them in a separate article, and state that each party's obligation to close is "subject to the satisfaction (or waiver by such party) of each of the following conditions."
The bring-down standard
A typical middle-market formulation:
"(a) Each of the Fundamental Representations shall be true and correct in all respects (other than de minimis inaccuracies) as of the Closing Date as though made on and as of the Closing Date; and (b) each of the other representations and warranties of the Company in Article III shall be true and correct (disregarding all qualifications as to materiality or Material Adverse Effect contained therein) as of the Closing Date as though made on and as of the Closing Date (except to the extent made as of a specified date, in which case as of such date), except where the failure of such representations and warranties to be so true and correct has not had and would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect."
Notes:
Fundamental representations (organization, authority, capitalization, title, brokers) get a near-flat standard. "De minimis" exists so a capitalization rounding error does not kill the deal.
"Disregarding all qualifications" is the closing-condition materiality scrape. Without it, a representation already qualified by materiality is tested twice.
An MAE bring-down puts most interim risk on the buyer. A buyer that needs more for one representation, such as financial statements or material customers, can ask for an "in all material respects" standard for that representation alone. In Akorn, the regulatory representations failed even the MAE-qualified test, so the standard is not toothless.
Interim operating covenants
The seller promises to operate in the ordinary course and to refrain from listed actions without consent. Sample language with the seller's usual protections:
"From the date of this Agreement until the Closing, except (i) as set forth on Schedule 6.1, (ii) as required by applicable Law or this Agreement, (iii) for any commercially reasonable action taken in good faith in response to an emergency or to an Effect described in clauses (a) through (e) of the definition of Material Adverse Effect, provided that the Company notifies Buyer as promptly as practicable and consults in good faith with Buyer regarding such action, or (iv) with the prior written consent of Buyer (which shall not be unreasonably withheld, conditioned, or delayed), the Company shall conduct its business in the ordinary course of business in all material respects. Buyer shall be deemed to have consented to any request under this Section 6.1 if Buyer does not object in writing within five Business Days after receipt of a written request delivered to the individuals listed on Schedule 6.1(b)."
What each piece does:
Clause (iii), the emergency exception, is the lesson of AB Stable VIII LLC v. MAPS Hotels and Resorts One LLC, 2020 WL 7024929 (Del. Ch. Nov. 30, 2020), aff'd, 268 A.3d 198 (Del. 2021). The pandemic fell within the "calamities" carve-out, so there was no MAE. But the seller made drastic changes to hotel operations without seeking the buyer's consent, and the covenant required operation "in the ordinary course of business consistent with past practice in all material respects." The Delaware Supreme Court affirmed that the breach excused the buyer from closing, and it noted the parties could have limited the covenant to breaches that would amount to an MAE, but did not.
The covenant above drops "consistent with past practice," which AB Stable read as tying the seller to its own historical behavior even in an unprecedented event. Buyers often want that phrase back. A middle ground is "consistent with past practice in all material respects, taking into account any changes in circumstances."
Deemed consent after five business days keeps a buyer from freezing the business by not answering. Buyers resist it for debt, equity issuances, and acquisitions. Naming the buyer's contacts sounds clerical, but a request sent to the wrong person is how sellers lose these disputes.
The negative covenant list (equity issuances, debt, liens, asset sales, acquisitions, capital expenditures, compensation, material contracts, settlements, and tax elections) should carry dollar thresholds so routine decisions do not need consent.
One limit applies to buyers. Interim covenants that give a buyer operational control over a competitor before HSR clearance can raise gun-jumping concerns under Section 7A of the Clayton Act and Section 1 of the Sherman Act. Ordinary negative covenants that protect the value of the deal are generally acceptable. Consent rights over pricing, customer terms, or day-to-day decisions are where problems start. Our post on clean team agreements and gun-jumping covers this.
Efforts and financing
In Williams Cos. v. Energy Transfer Equity, L.P., 159 A.3d 264 (Del. 2017), the Delaware Supreme Court read "commercially reasonable efforts" as an affirmative obligation to take reasonable steps toward closing, and held that a party cannot rely on a failed condition its own breach materially contributed to. In Snow Phipps Group, LLC v. KCAKE Acquisition, Inc., 2021 WL 1714202 (Del. Ch. Apr. 30, 2021), a buyer that did not use the required efforts to obtain its debt financing was ordered to close. Sellers who cannot avoid a financing risk should ask for a commitment letter at signing and a reverse termination fee. On a $96,000,000 deal, a 5% fee is $4,800,000. Size it against what a broken process would cost the seller in employees and customers.
Termination and the outside date
Require a 30-day cure period for breach-based termination, bar a party in breach from using the outside date, tie any automatic extension to regulatory review that is actually pending, and list what survives: confidentiality, expenses, any reverse termination fee, and liability for fraud or willful breach.
For Texas deals, check the forum clause too. Effective September 1, 2025, H.B. 40 lowered the Texas Business Court's amount-in-controversy threshold for actions arising out of a qualified transaction from $10 million to $5 million, so a failed middle-market deal can now land there.
Where each side lands
Sellers want broad carve-outs, an MAE bring-down, an emergency exception and deemed consent, scheduled consents, and no financing condition. Buyers want "prospects," a wider disproportionate-effect exception, specific conditions for priced risks, stricter bring-downs for key representations, and past-practice language.
A common middle ground: the seller's definition without "prospects," an MAE bring-down with a near-flat standard for fundamental representations, a specific condition only for a risk the buyer can describe in one sentence, an emergency exception with notice and consultation, and an outside date with a regulatory extension.
How we can help
We negotiate purchase agreements for buyers and sellers in middle-market transactions, including the conditions, covenants, and termination terms that govern the period between signing and closing. If you have a draft on your desk, email info@robertsandwillie.com or call (469) 910-4017. Sending a message does not create an attorney-client relationship.
This article is for general information and is not legal advice. Cases, statutes, and thresholds are summarized for general discussion, and their application depends on the facts, contract language, and governing law of each transaction. Attorney Advertising. Roberts & Willie, PLLC, Dallas, Texas; Trenton Roberts, responsible attorney.
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