Navigating Unforeseen Circumstances in M&A: The Role of MAC Clauses and Hardship Doctrine

1. Imagine a Belgian tech company being acquired by a multinational, with the share purchase agreement (SPA) signed in January and closing scheduled for April. In February, a major cyberattack strikes the target, severely disrupting its operations, causing significant customer losses, and attracting regulatory scrutiny. Should the buyer still be required to complete the deal at the agreed price? This scenario highlights the growing importance of Material Adverse Change (MAC) clauses in Mergers & Acquisitions (M&A) transactions, as well as Article 5.74 of the Belgian Civil Code (BCC), which codifies the so-called hardship doctrine under Belgian law. This blog explores how these two mechanisms interact and offers guidance for drafting business contracts in general, and SPAs in particular, in light of this evolving legal framework.

Understanding MAC Clauses

2. In M&A transactions where signing and closing do not occur simultaneously, MAC clauses typically allow buyers to "walk away" or renegotiate the initially agreed terms if, between signing and closing, a MAC occurs. This refers to circumstances that substantially affect the company's situation or activities. Thus, the fundamental purpose of MAC clauses is to protect buyers from significant changes that reduce the target company's value or potential after the SPA is signed.

3. What qualifies as a MAC may differ widely from one SPA to another. Some adopt expansive, open-ended language, while others define the concept more narrowly, often attaching specific thresholds or conditions. The scope can cover company-specific developments such as the departure of key personnel, the loss of major clients, a drop in inventory, the illness or death of senior executives, or the filing of lawsuits. But the scope can also range to broader external factors, including shifts in the economic landscape, changes in industry trends, regulatory developments, or fluctuations in market conditions.

4. Depending on the context, the above example of a cyberattack can be either company-specific or external, or a mix of both. It is therefore important to draft MAC clauses accurately. If formulated broadly enough to cover any cyberattack, the buyer (or seller: see below) will be entitled to reject the initially agreed price calculation, except under specific circumstances. The latter may, e.g., include the case where the cyberattack was committed by the buyer itself.

Often forgotten scenario in MAC Clauses: seller

5. In practice, MAC clauses are typically worded to protect only the buyer. However, one cannot exclude cases where the seller, rather than the buyer, may benefit from a MAC clause.

6. Let’s take an example, based on a true story. Imagine that the purchase price is agreed to be based on “closing accounts”, which means that there is usually an estimated price on signing but that the final price will be adjusted after closing to reflect the company's actual performance up to the closing date. This contrasts with the so-called “locked box” mechanism, where the price is fixed at a historical date before closing, for instance at the signing date. In the “closing accounts” scenario, what if a temporary MAC occurs between signing and closing with the effect of significantly reducing the final purchase price but without affecting the long-term profitability of the target? This could turn out to be in favour of the buyer. The latter would indeed pay much less than initially expected while becoming owner of the target with unaltered long-term valuation or profitability.

7. The seller, and not the buyer, may thus want to be protected by a MAC clause in such case. Even more so if the SPA excludes the application of any hardship doctrine (e.g. Article 5.74 BCC) to all parties, as is often the case in practice. For more details and nuances, see below 13.

8. We therefore recommend in SPAs, depending on the circumstances, to draft MAC clauses in such a way as to protect not only the buyer but also the seller, or to avoid the seller waiving any hardship doctrine. Indeed, whilst buyers typically focus on MAC clauses to protect against adverse changes, sellers may equally benefit from the hardship doctrine when unforeseen circumstances render their performance excessively onerous.

Understanding Article 5.74 BCC

9. Article 5.74 BCC implements the hardship doctrine that allows for contract renegotiation (for the purposes of adjustment or termination) when performance becomes excessively burdensome due to unforeseen circumstances. This marks a shift, initiated by Belgian literature and case law, from the classical pacta sunt servanda principle, which holds that contracts must be performed as agreed, even if conditions change.

To trigger the hardship mechanism under Article 5.74 BCC, five conditions must be met: (1) performance has become excessively difficult, (2) the change was unforeseeable, (3) it is not attributable to the debtor, (4) the debtor did not - explicitly or implicitly - assume the risk related to such change when concluding the contract, and (5) the contract or the law does not exclude such renegotiation.

If these conditions are met, the debtor may request renegotiation. During this phase, obligations remain in place. Should renegotiation fail, a court may be asked to step in, either to adapt the contract to what the parties would reasonably have agreed had they foreseen the change, or to terminate the contract (partially or fully) from a date after the change occurred.

10. Depending on the context, the above example of a cyberattack will usually fall under Article 5.74 BCC. Such cyberattack will thus enable the buyer (or seller: see above 6) to say no to the initially agreed price calculation, except under specific circumstances (e.g. in case the cyberattack was committed by the buyer resp. seller itself).

11. Is Article 5.74 BCC mandatory law? Although the legislator refers to Article 5.74 BCC as supplementary law, it is worth noting that several Belgian authors argue that this is only partially accurate. The provision is explicitly linked to the role of the judge as guardian of the weaker party — a purpose that is uneasy with the idea of a general contractual exclusion. This interpretation is further supported by the fact that Article 5.73 BCC, concerning performance in good faith, is classified as mandatory law. As a result, some Belgian authors argue that a full exclusion of Article 5.74 BCC through a standard clause appears problematic. Other Belgian authors, who regard a general exclusion as valid in principle, acknowledge that exceptional cases may occur in which Article 5.74 BCC would still apply despite its general exclusion, such as situations amounting to an abuse of rights.

What do judges say about the enforceability of a total exclusion of Article 5.74 BCC in transactional documents? To date, and to our knowledge, no Belgian court has ruled on this. It thus remains uncertain whether Belgian courts will uphold a full contractual opt-out when one party attempts to invoke Article 5.74 BCC. That said, in a B2B context the potential imbalance between so-called stronger and weaker parties is typically less pronounced than in B2C relationships. Therefore, in a B2B context the risk of a court setting aside such a total exclusion and instead applying Article 5.74 BCC nonetheless is, in our view, considerably lower.

If the parties do not intend to exclude the application of Article 5.74 BCC and are willing to rely on the hardship doctrine in case of unforeseeable changes, then no further action is required. Indeed, Article 5.74 BCC will automatically apply to the transactional document in such case.

Often forgotten scenario in Article 5.74 BCC: positive changes

12. Another often overlooked scenario arises when an SPA, whether or not containing a MAC clause, does not generally exclude Article 5.74 BCC or, as is sometimes the case in practice, generally excludes it for one party only (typically the buyer) but not for the other (typically the seller). More specifically, what if, in any of these cases, the target company's value does not decrease but increases dramatically between signing and closing due to external factors?

13. Consider this example, also based on an actual case: a Belgian company manufacturing protective equipment, particularly face masks, is sold on the basis of a December 2019 valuation of EUR 1 million, with signing in January 2020 and closing scheduled for April 2020. When the COVID-19 pandemic strikes in March 2020, demand for face masks skyrockets, and by closing, the company's valuation has surged to EUR 10 million.

If the purchase price is based on a locked box mechanism under the SPA, the seller would ordinarily be required to complete the transaction based on the 1 million EUR valuation. However, where the SPA contains no exclusion of Article 5.74 BCC (at least not for the seller, as is sometimes the case in practice), can the seller invoke the hardship doctrine under said provision to refuse closing or demand renegotiation because of the increase in valuation? In our view yes, provided that all five conditions of Article 5.74 BCC are fulfilled, which appears to be the case here. Unfortunately, since in practice most SPAs do contain a general exclusion of Article 5.74 BCC or of any hardship doctrine, the seller will mostly be stuck.

In the same example, if, on the contrary, the purchase price is based on a closing accounts mechanism, it is not the seller but the buyer who may be in a difficult situation in the presence of a general exclusion of Article 5.74 BCC (or of any hardship doctrine). Indeed, the buyer will then eventually have no choice but to pay a purchase price dramatically higher than initially expected at time of signing.

14. This demonstrates that Article 5.74 BCC, contrary to a standard MAC clause, operates as a two-way street: not only to cover adverse changes but also positive changes on the target’s valuation or potential.

More importantly, this also demonstrates that one should think twice before providing for general exclusions or waivers of Article 5.74 BCC in SPAs (even if only for the buyer). It may indeed be recommended, in many cases, to expressly tackle the above often forgotten scenario of a positive change in the SPA.

Relation between MAC and Article 5.74 BCC

15. Whether a MAC clause can be considered a modulation of the hardship doctrine, now codified in Belgian law through Article 5.74 BCC, will ultimately depend on its formulation in the SPA and is a matter of contractual interpretation.

16. For instance, if a MAC clause in a SPA merely provides that signing shall not occur in the event of a specific circumstance (e.g. the loss of a key customer), without any reference to Article 5.74 BCC, it is unlikely to be regarded as a modulation of that provision. In such cases, there is a risk that Article 5.74 BCC - unless expressly excluded - continues to apply alongside the MAC Clause. This is not only because the provision is, in principle, of a supplementary nature, but also because a court may interpret the absence of any explicit or implicit reference to Article 5.74 BCC as an indication that the parties did not intend to derogate from it. As a result, other unforeseeable events such as economic or geopolitical developments that render performance excessively onerous can still fall under Article 5.74 BCC. Such events will therefore potentially justify refusing to proceed with closing under the initially agreed terms.

17. Conversely, if the parties clearly express in the MAC clause that they intend to modulate Article 5.74 BCC, and they limit its application to a narrowly defined situation (for example, the loss of a specific customer), the clause may validly operate as a contractual adjustment of that provision. In such a case, the scope of Article 5.74 BCC is contractually limited, with the effect that the buyer (and seller) may only invoke the specific event set out in the MAC Clause. All other unforeseen circumstances, including economic or geopolitical developments for example, are then expressly excluded. A question may, however, still arise with respect to positive changes (see above 12-14): are they excluded as well in such case? This is delicate, so a clear wording in this respect in the SPA is all the more advised.

18. In any case, as mentioned above, an important caveat applies here. Indeed, despite the supplementary nature of Article 5.74 BCC (see above 11), it remains uncertain whether Belgian courts will uphold a full contractual opt-out when one party attempts to invoke the provision.

Conclusion

19. Whether a MAC clause qualifies as a modulation of the hardship doctrine, now explicitly incorporated into Belgian law in Article 5.74 BCC, ultimately depends on its wording and the broader contractual context. To avoid uncertainty, parties should expressly and accurately address how the MAC clause interacts with Article 5.74 BCC, rather than relying on implicit assumptions.

20. Two important observations should be kept in mind when doing so. The first one is that both MAC clauses and Article 5.74 BCC can operate to the benefit of both parties. This challenges the traditional practice whereby only buyers insist on MAC clauses to protect against adverse developments, while sellers are usually not protected by MAC clauses. At most, sellers can then invoke the hardship doctrine (esp. Article 5.74 BCC) when unforeseen circumstances make performance excessively burdensome. They can, however, not invoke this doctrine if they accepted to waive it in the SPA, which is often the case in practice.

The second observation is that, contrary to standard MAC clauses, Article 5.74 BCC can cover not only adverse but also positive changes to the target’s valuation or potential.

21. Although a contractual exclusion of Article 5.74 BCC appears permissible in principle, its appropriateness is more questionable than it might appear at first glance, and its enforceability has not yet been tested before Belgian courts. In a B2B context, the likelihood of a court setting aside such an exclusion is lower but not eliminated. Until further jurisprudence provides clarity, careful drafting and explicit allocation of unforeseen risks remain the most effective way to ensure contractual certainty.

For another article from our firm on a (partially) related topic during the pandemic, click here.