Germany: A Corporate/M&A: Mid-Market Overview
Navigating Geopolitical Complexity in M&A: Key Considerations for Deal Makers
The German M&A market finds itself in an era of unprecedented turbulence. While a certain upward trend has emerged, the much anticipated “bounce back” has failed to materialise. The war in Ukraine, now in its fifth year, alongside the Iran crisis, volatile energy and commodities prices, persistently high interest rates, as well as a challenging environment for the transatlantic partnership, to name but a few factors, are causing significant valuation gaps and exceptional uncertainty for deal makers. The current Iran crisis vividly illustrates this dynamic: every headline about an escalation in the Gulf region drives up oil prices and increases production costs for countless European enterprises. For target companies with energy-intensive business models, such as chemicals, logistics, steel or transportation, the ability to pass on crisis-driven cost increases to customers has become a central element of any thorough due diligence.
Against this backdrop, dusty tools from the M&A practitioner’s toolbox have been polished and restored to prominence. MAC clauses, vendor loans, holdbacks, escrows and earn-out structures have all become (highly) relevant again. However, it is the material adverse change (MAC) clause that has become a lightning rod for heated negotiations between buyers and sellers.
The MAC clause: guardian angel or Pandora’s box?
Material adverse change clauses originated in Anglo-American legal practice and serve a conceptually straightforward purpose: they allow the purchaser to withdraw from or renegotiate an agreement if material adverse changes occur between signing and closing. Global political crises, armed conflicts and natural disasters all have one thing in common – they can each constitute a “material adverse change”.
In German law, MAC clauses are typically situated within the framework of the German Civil Code (BGB) under Section 313 (frustration of the basis of the transaction) and Section 446(1) (transfer of risk in a sale). The primary advantage of a well-drafted MAC clause over relying solely on such statutory provisions (the applicability of which is typically excluded in a share purchase agreement) is that it enables the purchaser to withdraw directly from the agreement, bypassing the need to first request an amendment as stipulated by law.
However, practitioners must resist the temptation to view MAC clauses as a simple insurance policy. The reality is far more nuanced.
From the buyer’s perspective, MAC clauses allocate risks that could diminish the target’s value to the seller – and importantly, they also reflect the risk distribution already inherent in German sales law, where the seller bears the risk of deterioration until closing. In non-recourse W&I-insured transactions, MAC clauses serve an additional function by offsetting general exclusions in insurance coverage for events such as armed conflicts or nuclear and environmental disasters, which would otherwise leave the buyer without any recourse.
For the seller, it is a very different story. MAC clauses with indeterminate withdrawal rights function much like options in that they are almost always beneficial for the holder and almost never for the writer. The consequences of a failed transaction for the seller are severe, ranging from enormous losses to potential insolvency. Even the mere invocation of a MAC argument places the seller under extreme pressure, trapping them in a “double bind” where every action must work, regardless of whether the transaction proceeds or fails. The structural vulnerabilities inherent in the seller’s position only serve to intensify this pressure. A seller who, in the period between signing and closing, looks for alternative buyers or, for example, delays fulfilling the closing conditions, runs the risk of breaching their obligations, even if they are acting in good faith.
For the buyer, the downside is remarkably limited: at worst, they have to complete the transaction, which is precisely what they would have to do anyway. The buyer controls whether the MAC conflict even arises, can calmly analyse the risks before taking action and can terminate the dispute at any time by simply offering to close.
Deal or no deal: practical approaches
Despite these tensions, the current crisis environment demands that practitioners engage seriously with MAC concepts. The geopolitical MAC clause is a targeted response to today’s risk landscape. Rather than relying on abstract formulations, practitioners should consider whether the clause expressly covers geopolitical events such as new sanctions, the escalation of armed conflicts, or surging energy costs resulting from such escalation.
Typical carve-outs remain essential. For instance, well-drafted MAC clauses exclude general market developments that do not disproportionately affect the target compared to sector peers, as well as legislative changes, changes in accounting standards and consequences of the transaction becoming public knowledge.
Furthermore, MAC concepts must be embedded in the broader discussion of all buyer-protective mechanisms, including warranties, indemnities and, in particular, conduct-of-business covenants that address the period between signing and closing. Compliance covenants should oblige the target to avoid establishing new relationships with sanctioned persons or jurisdictions between signing and closing. Earn-out structures can absorb valuation uncertainty in cases where future energy cost developments remain unclear. In many transactions, these mechanisms already provide adequate buyer protection without the transaction uncertainty that MAC clauses inevitably introduce. Finally, the target’s pricing power – ie, its ability to pass on cost increases – should be systematically assessed as part of any geopolitical due diligence.
The verdict: handle with care – but handle it
Paradoxically, despite constant crises, MAC clause usage in German M&A transactions has actually declined in recent years, likely due to sellers maintaining strong negotiating positions and market participants accepting that unforeseen events have become “the new normal”. During the pandemic, “anti-MAC” clauses even appeared, clarifying that neither party could invoke the effects of the pandemic as grounds for withdrawal.
In times of geopolitical uncertainty, however, MAC clauses may once again become a useful contractual tool. They require precise drafting and clear definitions; ambiguities invite disputes and enforceability problems, although these may actually benefit the purchaser. Anyone who uses MAC clauses without due care risks turning a negotiated partnership into a battlefield – one where the seller almost always has more to lose.