Material adverse change clauses allocate the risk that a target deteriorates between signing and closing. In a Vietnamese acquisition that gap is rarely short: merger control clearance, licence amendments and investment registration steps routinely add weeks or months, and the business the buyer priced is not always the business it receives.
The material adverse change clause is a walk-away right, not a price mechanism, and tribunals treat it that way. A buyer that wants protection against ordinary trading volatility should be negotiating the completion accounts, an earn-out or a specific indemnity; a material adverse change clause is reserved for events that durably and disproportionately damage the target’s earnings power.
The material adverse change clause is drafted for the gap between signing and closing. Photo: Pexels.
A material adverse change clause allocates the risk that the target deteriorates between signing and closing. In Vietnam acquisition agreements, the clause may allow a buyer to refuse completion or terminate when a sufficiently serious event affects the target’s business, assets, liabilities or ability to perform. Because the remedy is exceptional, the trigger and exclusions must be drafted precisely.
Purpose of a material adverse change clause
Signing fixes the commercial agreement, but completion may depend on regulatory approvals, restructuring or third-party consents. During that gap, the buyer is exposed to changes it did not price. A material adverse change clause protects against major target-specific deterioration while preventing the buyer from walking away because of ordinary volatility or buyer’s remorse.
Defining material adverse change
The definition normally focuses on an event, circumstance or change that has, or is reasonably expected to have, a material adverse effect on the target’s business, financial condition, assets, operations or prospects. The parties should decide whether the test applies to the target alone or the target group as a whole.
“Material” should not be left entirely abstract. Depending on the deal, the parties may use financial thresholds, loss of a key licence, termination of a critical contract, prolonged factory shutdown or other measurable consequences. A purely numerical test may miss regulatory or reputational events that threaten long-term value.
Durational significance of a material adverse change
A temporary disruption may not justify termination. The clause can require an adverse effect to be lasting or reasonably expected to continue for a meaningful period. The relevant duration should reflect the industry and investment horizon. A short outage in a stable business differs from permanent loss of market access or a core operating licence.
Common exclusions
Sellers commonly seek exclusions for changes resulting from:
- general economic, political or financial-market conditions;
- changes affecting the target’s industry generally;
- changes in law, regulation or accounting standards;
- currency, interest-rate or commodity-price movements;
- war, civil unrest, natural disaster, epidemic or similar force-majeure events;
- announcement or performance of the transaction;
- actions required by the SPA or approved by the buyer; and
- failure to meet forecasts, where the underlying cause may still be considered.
The exclusion list should match the target’s real exposure rather than follow a template automatically.
Exclusions are the real negotiation. A seller will push to carve out general economic and market conditions, changes in law or accounting standards, industry-wide effects, currency movements, pandemics and natural disasters, acts of war, and any effect arising from the transaction itself or from actions the buyer required. Each carve-out shifts a category of risk back to the buyer, so a buyer accepting a long exclusion list should insist on the disproportionate-impact exception below, otherwise the material adverse change clause protects almost nothing.
Disproportionate-impact exception
A buyer may accept general-market exclusions only if the target is not disproportionately affected compared with comparable businesses. The comparison group, geography and industry should be realistic. The agreement should also clarify whether only the disproportionate portion counts toward the MAC.
Vietnam-specific regulatory risks
A target-specific licence suspension, land-use problem, environmental shutdown or administrative sanction may be an appropriate trigger. By contrast, a general regulatory change affecting an entire sector may fall within an exclusion unless it affects the target disproportionately.
Regulatory approval failure should normally be addressed as a separate condition precedent rather than forced into the MAC definition. The distinctions are explained in conditions precedent versus closing conditions in Vietnam M&A.
Several Vietnamese risks sit awkwardly between the parties. Withdrawal or suspension of a conditional business licence, revocation or non-renewal of a land use right certificate, a change in the foreign ownership ratio applicable to the target’s business lines, and enforcement action following a tax or social insurance inspection can each destroy value quickly. Because these are specific and identifiable, they are usually better handled as express conditions precedent or specific indemnities than left to a general material adverse change test.
Durational significance is what separates a downturn from a MAC. Photo: Pexels.
Relationship with warranties and covenants
A material adverse change clause should not replace seller warranties or interim operating covenants. Warranties address factual accuracy, while conduct-of-business covenants regulate decisions between signing and closing. The MAC clause covers sufficiently serious change, including events that may not constitute a contractual breach.
The SPA should state whether warranty breaches count toward the MAC test and whether disclosed matters are excluded.
Knowledge, foreseeability and disclosed risks
Sellers may argue that a buyer should not invoke a MAC for facts known at signing. Buyers may respond that a known risk can develop into an unforeseen, materially worse outcome. The clause should address whether disclosed circumstances, predictable consequences or specified identified risks remain covered.
Burden of proof and procedure
The party relying on the MAC should give prompt written notice describing the event and expected effect. The agreement may provide a consultation or cure period before termination. Evidence, access to information and mitigation cooperation can reduce premature disputes.
The buyer should generally bear the burden of establishing the trigger. In arbitration or litigation, precise drafting and contemporaneous evidence will be critical.
Remedies
The clause should state whether a MAC permits postponement, refusal to close, termination or another remedy. A termination right may expire at closing, while damages for a separate covenant breach may survive. Deposits, costs, confidentiality and accrued claims must be addressed if the deal ends.
Material adverse change drafting checklist
- Define the affected business and measurement period.
- Use objective indicators where possible.
- Require durational significance for temporary events.
- Tailor exclusions to the target and sector.
- Include a proportionate-impact exception where appropriate.
- Separate approval risk from business deterioration.
- Coordinate the clause with warranties and interim covenants.
- Set notice, evidence, cure and termination procedures.
Conclusion
A material adverse change clause should protect against exceptional deterioration, not provide a general option to renegotiate. In a Vietnam acquisition agreement, the strongest clause combines a focused definition, carefully negotiated exclusions, measurable consequences and a clear remedy. That structure gives both parties greater certainty during the period before closing.
Frequently asked questions about material adverse change
What counts as a material adverse change in a Vietnam acquisition?
There is no statutory definition; it is whatever the agreement says. In practice a change must be material against the target’s earnings power, durable rather than short-lived, and outside the agreed exclusions. Courts and tribunals in the jurisdictions whose law is usually chosen set a high threshold: a fall in one quarter’s revenue is generally not enough, whereas the loss of a licence the business cannot operate without, or the permanent loss of its principal customer, may be.
Should the clause use a numerical threshold?
A quantified trigger, for example a fall of more than a stated percentage in EBITDA measured over consecutive quarters, gives certainty and is increasingly used in Vietnamese deals where reliable management accounts exist. The trade-off is rigidity: a purely numerical test can miss a qualitative disaster such as a criminal investigation. Many agreements combine both, with a numerical safe harbour plus a qualitative catch-all.
Who has to prove a material adverse change occurred?
The party seeking to rely on it, which is normally the buyer refusing to close. That burden is heavy in practice, and it is why the procedural wording matters: the agreement should require written notice within a short period, specify the evidence to be provided, and give the seller a defined cure period before termination rights become exercisable.
Can a buyer use the clause to renegotiate price?
In commercial reality it is often used that way, but it is a blunt instrument. Invoking it wrongly exposes the buyer to a claim for wrongful termination and to loss of any deposit. Where the concern is value rather than viability, a completion accounts adjustment, an escrow retention or a specific indemnity gives a proportionate answer without putting the whole transaction at risk.
How does the clause interact with conditions precedent?
A material adverse change condition sits alongside the regulatory and third-party conditions and is tested at closing. Identifiable Vietnamese approval risks, such as merger control clearance or an amended investment registration certificate, should be separate conditions with their own long-stop dates, so the general clause is left to deal with unforeseen deterioration rather than known process risk.
Next step
Before signing, list the specific events that would genuinely stop the deal and test each one: if it is identifiable, make it a condition precedent or an indemnity; only what is left belongs in the general clause. Check the corporate approvals and registration steps required under the Law on Enterprises, since those set the real length of the signing-to-closing gap.
IVLF Lawyer negotiates material adverse change protection, conditions precedent and completion mechanics for buyers and sellers in Vietnam. An experienced Vietnam M&A lawyer will size the clause to the actual regulatory timetable rather than to a precedent from another market. See our legal services or contact IVLF Lawyer.
Related reading: Managing conditions precedent before closing, Representations and warranties in Vietnam M&A, and Warranty and indemnity insurance in Vietnam M&A.
This article is provided for general information only and does not constitute legal advice for any specific case. Regulations may change – please consult a qualified professional before acting. Should further analysis be required, please contact one of our lawyers below.
