<aside> 💡 Material adverse effect (“MAE”) is used to determine a threshold to measure the negative effect of an event on the target business.

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• A buyer will desire protection from acquiring a business that has materially changed since it executed the SPA (typically where there is a deferred closing).
• MAEs are typically used to qualify representations, warranties and covenants.
• Consequently, an SPA can contain a condition precedent that permits a party to refuse to close a deal if the counterparty has suffered any MAE between the time the SPA was executed and the closing (a bring-down).
• A bring-down provision
  • causes the representations and warranties made at the time the SPA was executed to be restated at the closing.
• MAE is negotiated by the parties and should be clearly articulated in the definitions of the SPA. The breadth of the definition of MAE depends on the type of transaction, industry and negotiating power of the parties.

Materiality and MAE qualifications are generally used to determine:

• Whether the conditions precedent have been satisfied;
• The scope of the seller’s disclosures;
• If a misrepresentation or breach of warranty has occurred; and
• The losses resulting from such a misrepresentation or breach.