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Uncertainty in Debt Finance: Reconceptualising Material Adverse Change Clauses



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Lalafaryan, Narine 


From a legal and economic perspective, the global financial crisis, terrorist attacks, wars, natural catastrophes, and COVID-19 all have one thing in common: they potentially count as “material adverse change” events. Such events are typically unpredictable and have severe consequences for the global economy. To help manage the fallout from such negative events, businesses in economically valuable and complex deals, such as corporate debt financing or mergers and acquisitions (“M&A”) deals, include special contractual risk allocation provisions, called Material Adverse Change/Effect (“MAC”) clauses.

Despite increasing popularity, vague drafting and the lack of case law have made the application and construction of MAC clauses extremely ambiguous and uncertain. The uncertainty affecting MAC clauses has been acknowledged by courts, scholars, practitioners, economists, and policymakers. However, there has been a paucity of scholarly engagement with MAC clauses in debt finance. The importance of addressing MAC clauses in debt finance is evident from the fact that the vast majority of high-profile debt financing deals attach great importance to MAC clauses.

Destabilising events in the markets, including the COVID-19-driven crisis (aggravated by Brexit) especially emphasise the urgency for academic inquiry. Events of this kind might force many despairing lenders and buyers in high-profile deals to attempt to rely on MAC clauses as a basis for renegotiating or calling off no-longer-profitable debt financing or M&A deals. The impact of abruptly terminating such deals, that are worth jointly trillions of dollars, may cost the global financial system a fortune, if not a “life”.

This thesis is the first to answer the question of whether MAC clauses are efficient in corporate debt financing agreements. It proposes a novel “Theory of MAC Clauses in Debt Finance” that is based on solution-driven economic insights to explain the misunderstood and unrealised nature of MAC clauses in debt finance and emphasise their role in orchestrating financing deals and linked relationships (i.e., those beyond the immediate financing deal). By doing so this thesis reconceptualises MAC clauses in debt finance and challenges a common perception of loan financing contracts. It argues that loan financing contracts are expected to be renegotiated: they are expected to be continued and not ended, however, they are expected to be renegotiated (re-priced) due to the dynamic nature of debt finance.

Chapter 1 provides an overview of the research purpose, scope, limitations, research questions, methodology, contributions, and findings of this thesis.

Chapter 2 (the doctrinal part) is the first to (i) investigate MAC clauses both in debt finance and M&A and to study the implications for their similarities and differences in these two areas, (ii) compare the English and Delaware case law on MAC clauses (both in debt finance and M&A), (iii) analyse the influence of Delaware’s judicial principles on MAC in English law, and (iv) study the implications of the COVID-19-driven crisis on the interpretation and application of MAC clauses in debt finance.

Chapter 3 (the law-and-economics part) provides a new conceptualisation of MAC clauses by explaining their various ex-ante (pre-contractual) and ex-post (contractual) effects in corporate debt financing. This chapter proposes a novel “Theory of MAC Clauses in Debt Finance” to explain the potential ex-ante and ex-post effects of MAC clauses. It introduces multifunctional effects of MAC clauses in loan financing agreements, where many of these multifunctional effects have not been identified previously. This theory reconceptualises MAC clauses and challenges the common perception that loan financing agreements are not expected to be renegotiated. The “Theory of MAC Clauses in Debt Finance” produces six major findings. First, MAC clauses are important not only in the context of the acceleration of loan facilities; more important is their role in the renegotiation of loan finance deals (both ex-ante and ex-post). Second, MAC clauses have multifunctional effects (e.g., improving governance, providing restructuring impulses, countering uncertainty, signalling with acceleration, from a functional perspective having the effect of a penalty default rule, and others) and play a key role in ex-post re-pricing of credit. Third, in the context of loan financing, it is not only information asymmetry that is a big problem, additionally, exogenous uncertainty also plays a critical role. Fourth, debt covenants, including financial covenants, are expected to be renegotiated. Loan contracts are expected to be renegotiated (re-priced) due to the evolving nature of debt finance. Fifth, debt governance through monitoring, renegotiation, and exit has come to play an important role in the operation of the firm. Finally, the current market practice does not differentiate between the two functions of MAC clauses (drawdown and post-drawdown), as it provides the same definition for both notions of a MAC. This is a problem in economic terms, and lawyers should address this by drafting MAC clauses differently in the context of drawdown and post-drawdown (as discussed in detail in Chapter 3).

Chapter 4 (the functional comparative part) is the first to undertake an inter-jurisdictional functional comparison of the practical effects of MAC clauses under New York, Delaware, and English law. This chapter focuses on a problem-based functional research question and is at the inter-section of two disciplines: law and economics. The foundation (yardstick) for the comparison is the economic problem of creditor protection when exiting the contractual credit relationship in reliance on MAC clauses. To answer the main question, what are the functional requirements for the lender for exiting a contractual relationship in reliance on MAC clauses, this chapter further poses three functional sub-questions based on the three core elements (knowledge, drop in value, and duration) that are inherent to the practical application of MAC clauses.

Chapter 5 provides a summary of the conclusions and findings of the three substantial parts of this thesis. This thesis finds that MAC clauses in debt finance are efficient; they are a valuable creation of Anglo-American legal systems. Their efficiency, however, could be substantially improved based on the recommendations set forth in Chapter 5. In addition, this thesis concludes that a common understanding of the nature of loan financing, that loan financing agreements are not expected to be renegotiated, is not always been accurate. This thesis argues that loan financing agreements are often expected to be renegotiated. They are expected to be continued and not ended: they are expected to be renegotiated (re-priced) due to the evolving nature of debt finance. Chapter 5 also (i) provides recommendations for further advancing MAC clauses in debt finance and (ii) outlines new directions of research stemming from this thesis.





Steffek, Felix


Material Adverse Change, Debt Finance, Law and Finance, Economic Analysis of Law, Information Asymmetry, Uncertainty, Pricing, Debt Governance, Debt Decoupling, Risk Diversification, Alternative Finance Providers, Traditional Lenders, Exogenous Risks, Endogenous Risks, English law, Delaware Law, New York Law


Doctor of Philosophy (PhD)

Awarding Institution

University of Cambridge
Hogan Lovells PhD Scholarship (merit-based) in collaboration with the University of Cambridge, Faculty of Law