Evaluating Material Adverse Change (MAC) Clauses in the Loan Default Context (Part 2 of 2)
Guest Writer - Christopher T. Nixon, Winstead PC
In my earlier posting, I introduced this topic, and addressed several “challenges” in the meaning of the MAC clause itself in the particular factual setting of a distressed debt: is the change “material?” is the change “adverse?”
I then noted that a lender should be prepared for the borrower to contest such default declaration in the event the answer to any of the following questions is “Yes.”
Here are several more questions:
2. Do the loan documents contain a subjective MAC clause and require the lender to act reasonably or in good faith?
If the loan documents contain a subjective MAC clause, the borrower should review the loan documents to determine if the lender has a duty to act in "good faith" in determining whether a "material adverse change" has occurred, or whether such determination must be "reasonable." Furthermore, in interpreting the meaning of a subjective MAC clause, the parties should each determine whether "reasonableness" and "good faith" standards are implied by the particular state laws governing the loan documents.
3. Are there multiple inconsistent MAC clauses in the loan documents?
In the event the loan documents contain multiple inconsistent MAC clauses, a question of fact may arise as to whether the MAC clauses are enforceable.
4. Is the language of the MAC clause unclear?
The parties should pay particular attention to word choice and consider every word in the MAC clause in light of the circumstances of the particular transaction. Exacting language is particularly critical with respect to any negotiated carve-outs from the MAC clause. In addition, all applicable definitions must be carefully examined.
Please post a comment with any questions, comments or you own experience – real or hypothetical!
