Even in the US where MAC clauses are more common it remains uncommon for a MAC clause to be invoked as a justification for deal termination. More often it is used as a basis for renegotiation. There have been a number of cases in the Delaware courts regarding MAC clauses which have established the challenges in enforcing a MAC clause to terminate a transaction. The burden of proving that there has been a MAC is a heavy one. Drafting of such clauses is interpreted narrowly by the courts. In fact, the Delaware courts have found that a standard MAC occurred in only one case, and the facts of that case were extreme. There have been fewer cases in the English courts as to interpretation of MAC but the cases that there have been suggest that English courts may adopt the Delaware approach. The more specific the MAC trigger and any materially threshold, the better likelihood of being able to enforce a MAC. As we have mentioned the value of a MAC to a buyer becomes more important where there is a longer gap period even if only used as leverage to enable a buyer to reopen pricing discussions. MACs seek to address the economic risk that the value of the business is adversely impacted between signing and closing. This economic risk is proportionately greater the longer the period of any gap. We have seen some creative structures agreed upon which seek to address the risk of a long gap period such as passing net economic benefit of the target group from the seller to buyer in the gap period. While this does not alter the downside risk for the buyer of the value of the target business being adversely impacted in the gap, in this structure, which was admittedly bespoke, there is some risk mitigation by way of the buyer obtaining the profits of the business during the gap.

In addition the buyer may feel more comfortable with a termination right for breach of gap controls where the buyer is relying on gap controls to restrict the seller from activities that could adversely impact regulatory processes and timetables, for example the expansion to another territory or an acquisition. Where this is the case a buyer might seek additional protection from the seller by way of indemnification.

This is unsurprising given our analysis regarding the changing regulatory environment globally. The increased reach and complexity of antitrust and FDI regimes, which are increasingly sector agnostic and which do not necessarily correlate to deal size, means clearance timelines can extend for significant periods. We are seeing increased scrutiny and longer investigations. Whilst many of these have statutory deadlines by which they have to provide responses, some can delay the commencement of the statutory decision period until the relevant authority deems the application complete. Alternatively, they can ‘stop the clock’ each time they request further information, or can decide they need more time to assess a deal or consider remedies. All of this means it can be difficult to gain clarity on timing expectations. As a result, long stop dates are needed to ensure the transaction does not prematurely terminate if an expected clearance has not been obtained in time. If an extended long-stop date is expected and the parties are discussing transitional services that will apply for a period post-closing, consider whether the parties are able to take any steps in the gap period to resolve the need for post-closing transitional arrangements. For example, if the seller should be obliged to progress arrangements to complete any carve-out, or should the buyer have to ready their systems or undertake necessary expenditure in order that the need for transitional services falls away. The reality is that neither party is likely to be willing to expend significant amounts of money or re-organize its group if they do not have certainty that a transaction will become unconditional. To the extent the parties do agree to undertake any steps, they must be mindful of antitrust requirements and have a clear understanding of who will bear the cost of such steps. The appropriate long stop date for your transaction will be determined by a number of factors including the relevant regulatory conditions, the cost of keeping financing available for the duration and the bargaining power of the parties (for example, in a competitive auction, a shorter long stop date is likely to be sought by the seller). Seeking guidance from advisors who have been through the relevant regulatory processes means you can leverage their experience to anticipate likely timeframes.

You should work with your advisers to ensure you fully understand your coverage position prior to agreeing the policy and, ideally, prior to signing the transaction documents, so that you can negotiate (or resist) any additional protections as against the other party should the W&I insurance policy fail to respond. Extending the gap between signing and completion can change the conversation, since the risk of a breach increases the longer the gap period. If buyers are concerned about the risk of a breach being discovered, that is not covered by W&I insurance, or if the parties agree to return to the negotiating table upon an uninsured breach being discovered, it is likely a buyer will request some coverage from sellers, depending on the bargaining positions of both parties. This may be a price chip, a termination right, or a right to claim against the seller for breach of warranty during the gap. All of this prejudices the nil recourse a seller will have expected, and may materially alter their commercial outcome. There is a separate practical question around whether parties can actually obtain W&I insurance cover for the increasing lengths of time that deals are taking to complete. Where possible, it is worth raising any expectations on the length of any gap period upfront with your W&I insurance brokers. They can test capacity in the market at the non-binding indications stage to confirm which insurers are able to offer coverage for extended periods. However, to the extent the length of the gap period only becomes fully understood during underwriting (or the gap period extends further after signing the transaction), do discuss with your broker what the requirements of the underlying insurer will be in respect of such a period. Most insurers that we have experience with are able to cover nine month gap periods, and many can provide coverage for up to 12 months. We are aware of a smaller subset of insurers who can offer terms beyond 12 months. Insurers have been known to be willing to be creative in order to land a policy especially if it is a time of greater capacity in the industry. The key for the insurers is to understand whether anything has changed in the gap period. If the length of gap is particularly long, some insurers have a standard list of further underwriting questions they will ask in addition to any bring down disclosure exercise undertaken between the parties. These questions will likely focus on, among other matters, changes to the target and any changes to the transaction structure in the gap period. Understanding the expected conditionality and length of gap period for your transaction early in the transaction process will help to smooth this process and obtain the best levels of coverage.