Analysis of the Material Adverse Change Clause in the Indian Context

[Guest post by Tushit Mishra, who is a Third Year Student at NALSAR University of Law]


The economic viability of an agreement in securities transactions is subject to a wide range of factors, due to which agreements concerning mergers and acquisitions (M&A) are constantly under a cloud of uncertainty. The past realization of such uncertainty with regards to risk mitigation and allocation regarding a transaction in securities has resulted in the inclusion of “material adverse change” clauses (MAC Clauses) in M&A transactions. MAC Clauses operate in the interim period between the time an agreement is entered into and the completion of the M&A transaction, and they confer a right to either of the parties to the contract (usually the buyer) to terminate the contract (or be released from performance) upon the occurrence of an event which has a material adverse effect on the economic viability of the companies involved in such agreements.[1] The analysis of the cases concerning interpretation of a MAC Clause (especially its scope of operation) reveals that the standard to determine whether an event constitutes MAC is extremely high. However, courts from different jurisdictions have failed to provide an analytical framework for determining as to what constitutes as “materiality”.[2]

This post aims to analyze the scope of MAC Clauses and their enforcement in India. Elsewhere, the Delaware Chancery Court in the United States (US) as well as the Takeover Panel in the United Kingdom have, in major pronouncements, laid down a subjective analysis of the scope of MAC Clauses and their application. Both the adjudicatory machineries convey the proposition that the events of exceptional nature, which have long term adverse or disastrous consequences, qualify as MAC.[3] In contrast to the decisions in US and UK, the very question of validity of MAC clauses in India, specifically in the context of a public takeover offer under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (the Takeover Regulations), still remains unanswered. Although the new changes brought in effect in Takeover Regulations in 2011 provide a framework for inclusion of MAC clauses in agreements, the divergent judicial opinions with regard to enforcement of MAC clauses pose a situation of uncertainty, thereby staining and affecting the very purpose behind such clauses in M&A transactions.

Way Forward: Inclusion of Regulation 23(1)(c) in the Takeover Regulations

In India, the Takeover Regulations were proposed and drafted by the Takeover Regulations Advisory Committee (TRAC) headed by Mr. C. Achuthan, wherein the committee incorporated several changes and amended provisions relating to the open offer process that existed in the 1997 version of Takeover Regulations. A remarkable change was brought in the 2011 version by the inclusion of Regulation 23(1)(c). The said regulation provides a new ground for withdrawal of open offer and holds that an open offer can be withdrawn in circumstances where:

“(c) any condition stipulated in the agreement for acquisition attracting the obligation to make the open offer is not met for reasons outside the reasonable control of the acquirer, and such agreement is rescinded, subject to such conditions having been specifically disclosed in the detailed public statement and the letter of offer”

Hence it provides a leeway to the acquirers to include conditions such as MAC Clauses in the agreement wherein non-fulfillment of such conditions will merit withdrawal of open offer. However, such condition ought to be disclosed in the offer documents. Moreover, the withdrawal of the offer document would also be accompanied by a rescission of the agreement which triggered the making of the offer in the first place.

Analysis of Judicial Pronouncements in India-

In the case of Nirma Industries Ltd. and Anr. v. Securities Exchange Board of India,[4] the promoters of Shree Rama Multi Tech Limited (SRMTL) entered into an agreement with Nirma Industries wherein they borrowed a sum of Rs. 48.94 crores and pledged equity shares of SRMTL in return in favour of Nirma Industries. Upon default in payment by SRMTL, Nirma Industries invoked the pledge which entitled them to acquire the share capital of 24.5% of the total equity shares of SRMTL. In accordance with the Takeover Regulations of 1997, Nirma Industries made a public announcement within the stipulated time. Meanwhile, a special investigative audit unearthed the fact that the promoters of SRMTL had perpetrated fraudulent transactions resulting in embezzlement of funds in excess of Rs. 350 crores. Accordingly, Nirma Industries filed an application with the Securities and Exchange Board of India (SEBI) for withdrawal of the open offer on the basis of the emergence of extraordinary facts that merit withdrawal. Nirma Industries’ application for withdrawal of the open offer was rejected by SEBI and subsequently by the Securities Appellate Tribunal (SAT). The order of SAT was challenged by Nirma Industries and the case further came up for consideration before Supreme Court of India. The Supreme Court in the present case held that while interpreting the Regulation 27(1)(d) of the 1997 Takeover Regulations that the rule of ejusdem generis will be applicable. Regulation 27(1) which enumerates the grounds for withdrawal, is as follows:

27. (1) No public offer, once made, shall be withdrawn except under the following circumstances:—


(b)the statutory approval(s) required have been refused;

(c)the sole acquirer, being a natural person, has died;

(d)such circumstances as in the opinion of the Board merit withdrawal

Here, the court held that sub-regulation (b) provides for a ground relating to a legal impossibility, whereas sub-regulation (c) provides for allowance of withdrawal in case of a natural impossibility. Hence, the two sub-regulations form a common genus of impossibility. Therefore reading sub-regulation (d) by applying the canon of ejusdem generis provides the conclusion that withdrawal under this sub-regulation shall be confined to the circumstances which will render the performance of open offer obligation impossible on the part of buyer.

Further, in the case of Securities Exchange Board of India v. Akshya Infrastructure Pvt. Ltd.,[5] the Supreme Court followed its earlier decision in the case of Nirma Industries and held that a delay of 13 months on SEBI’s part was insufficient to merit the withdrawal of the open offer. Moreover, in Pramod Jain v. Securities Exchange Board of India,[6] the SAT in its order followed the technical interpretation of the Supreme Court in the two decisions viz. Nirma Industries and Akshya Infrastructure and thereby, refused to grant withdrawal of the open offer even though there was a delay of two years in obtaining SEBI’s approval for the open offer. SAT’s ruling was in turn confirmed by the Supreme Court in Pramod Jain v. Securities and Exchange Board of India.[7]

The holding of the Supreme Court in Nirma Industries (and followed by the other cases mentioned above) is pertinent with regards to validity of MAC Clauses under the Takeover Regulations, 1997. On the basis of the ruling of the Supreme Court, one could conclude unequivocally that existence of MAC Clauses in the offer document will not be useful to seek SEBI’s permission for withdrawal of the open offer. It is pertinent to note that impossibility is a higher standard as compared to “material adverse change”. For example, the existence of a MAC may cause adverse civil consequences to the buyer, but it does not mean that the performance of such transaction is rendered impossible. Therefore, when impossibility has been established as the sole ground for grant of withdrawal, acquirers may not be in a position to rely upon circumstances that amount to MAC (in a form that is lesser than that of an impossibility) in order to withdraw an open offer.

In the light of this discussion, it is important to consider how a significant change to the settled position was brought by the enactment of Takeover Regulations, 2011. Applying the ruling in the Nirma Industries to the new regulations on withdrawal of open offer, it can be concluded that the new provisions do not form a common genus of impossibility and hence the proposition that was held in Nirma Industries would not be applicable in the current Takeover Regulations.

Regulation 23(1)(c) of the Takeover Regulations, 2011, as excerpted earlier, is not confined to the ground of impossibility. It thereby provides a scope for inclusion of MAC Clauses in the agreement which, if successfully proved, will result in allowance of withdrawal of open offer. At the same time, as mentioned earlier, upon invocation of the MAC Clause, both the transaction envisioned in the agreement as well as the open offer triggered by it would fail. This does not evisage a scenario where the open offer fails, but the transaction under the agreement continues. That would not be equitable.

With regards to the validity of MAC Clauses in the 2011 version of Takeover Regulations, it is important to consider the order passed by SEBI last year in the matter of open offer of M/s Jyoti Limited.  In this case, SEBI dealt with the matter concerning an open offer made by Lavjibhai Daliya and Anjani Residency Private Limited to acquire 75% of equity shares of Jyoti Limited, a public listed company. After public announcement of the open offer, the target company approached SEBI and requested it to issue directions against the acquirers for providing incorrect details in the draft letter of offer. Moreover, the target company disclosed the fact of its registration with the Board for Industrial and Financial Reconstruction (BIFR). It was stated that the target company is a sick industrial company therefore no change in the management should be allowed without the permission of the BIFR. The target company further obtained an order from the BIFR to maintain the status quo in terms of control of the company until the pendency of the matter before the BIFR. Hence, effectively the open offer made by the acquirers was kept on hold.

Taking into account the lengthy proceedings before the BIFR, the acquirers requested SEBI for a withdrawal of the open offer. In this case, SEBI in its order held:

“4.5.6. As stated in the preceding paragraph 4.5.2, the provisions of Regulation 23(1) of the Takeover Regulations, 2011, are similar to the provisions of Regulation 27(1) of the Takeover Regulations, 1997. Consequently, the ratio laid down by the Hon’ble Supreme Court in the matters of Nirma Industries Limited and Another vs. SEBI and SEBI v. Akshya Infrastructure Private Limited with respect to Regulations 27(1) of the Takeover Regulations, 1997, are squarely applicable to the provisions of Regulation 23(1) of the Takeover Regulations 2011 (Emphasis Supplied)

Considering the fact that completion of the open offer process was not impossible, SEBI rejected the request for withdrawal of open offer. The analysis of this case highlights the ambiguity or uncertainty that exists in the interpretation of regulation 23(1) of the Takeover Regulations, 2011. It has been earlier mentioned that the rule of ejusdem generis will not be applicable to the regulation 23(1) of Takeover Regulations, 2011, as the provisions therein do not form common genus of impossibility. Hence, the ruling of SEBI in Jyoti Limited, wherein it affirms the applicability of ratio laid down in Nirma Industries to the Regulation 23(1), gives further scope for uncertainty whereby the whole question of validity of MAC Clauses under the Takeover Regulations, 2011 remains unanswered. Moreover, the ambiguity with regards to validity of the MAC Clauses defeats the very purpose of such clauses wherein the buyer or acquirer intends to protect themselves in case of transactions which cause serious adverse civil consequences.


The ambiguity that arises in Indian context need to be addressed by creating a balance in the precedential value of the Supreme Court decisions under the Takeover Regulations 1997 on the one hand, and the re-enactment of the takeover norms in the form of the Takeover Regulations, 2011. By its order in Jyoti Limited, SEBI has clarified that the jurisprudence under Takeover Regulation, 1997 would continue to apply to the Takeover Regulations, 2011. However, SEBI failed to provide any explanation for such stance. The new inclusion in Takeover Regulations, 2011 has brought in a fundamental change which forbids the continuation of existing jurisprudence in toto without considering the altered position. This discrepancy needs to be addressed in order to bring some level of congruity and certainty in takeover jurisprudence with respect to MAC Clauses. SEBI may consider doing so either in its future orders, or even through a discussion paper it may float on this topic that has acquired considerable prominence (given that the issue has made its way to the Supreme Court on no less than three occasions).

– Tushit Mishra

[1] Kenneth A. Adams, A legal-usage Analysis of “Material Adverse Change” Provisions, 10 Fordham J. Corp. & Fin. L. 9 (2004).

[2] Alana A. Zerbe, The Material Adverse Effect Provision: Multiple Interpretations & (and) Surprising Remedies, 22 J.L. & Com. 17, 36 (2002).

[3] In Re IBP, Inc. Shareholders Litigation v. Tyson Foods, Inc., No. 18373, 2001 Del. Ch. LEXIS 81 (June 15, 2001); Offer by WPP Group Plc (“WPP”) For Tempus Group Plc (“Tempus”), Case No. 2001/15(November 6, 2001) , The Takeover Panel.

[4] AIR 2013 SC 2360 (also discussed on this Blog here).

[5] AIR 2014 SC 1963 (also discussed on this Blog here).

[6] (2017) 1 CompLJ 184 (SAT) (also discussed on this Blog here).

[7] Also discussed on this Blog here.

About the author

Add comment


Enter your email address to subscribe to this blog and receive notifications of new posts by email.

Top Posts & Pages


Recent Comments


web analytics

Social Media