What is a material adverse effect in M&A?

A material adverse effect, or MAE, is a contractual definition of the kind of deterioration in a target's business that allows a buyer to walk away from a signed acquisition. It is almost always heavily qualified by carve-outs listing events that do not count. In practice it is a narrow exit: buyers with regret have tried to rely on it many times and have almost always lost.

How do courts decide whether an MAE has occurred?

Delaware courts, which hear many large US merger disputes, look for a decline that threatens the target's long-term earnings power in a durationally significant way, measured in years rather than months. Where a carve-out excludes industry-wide changes, the target must usually have been hit disproportionately compared with its peers. The first Delaware finding of an MAE came only in Akorn v Fresenius in 2018.

Why do MAE carve-outs matter in gambling deals?

The carve-out list is where the parties allocate risks specific to gambling: changes in law, adverse regulatory action, tax increases and the loss of a licence. Whether each sits inside or outside the definition decides who bears it. A buyer that accepts a change-in-law carve-out has agreed that a tax rise or an advertising ban is its problem rather than the seller's.

M&A

Material Adverse Effect (MAE)

Reviewed by iGaming Times editorial teamLast reviewed 24 September 2026

What is MAE?

A contractual definition of the kind of deterioration in a target’s business that lets a buyer walk away from a signed acquisition. Almost always heavily qualified by carve-outs.

Key takeaways

A material adverse effect clause defines the deterioration in a target's business that lets a buyer walk away from a signed deal.
Delaware courts set a high bar: the decline must be durationally significant, measured in years rather than quarters.
In gambling deals the carve-outs decide who bears changes in law, tax rises, regulatory action and the loss of a licence.

Why it matters

The MAE clause is the buyer’s exit of last resort, and in practice it is a very narrow one. Courts, particularly in Delaware, whose law governs many large US merger agreements, have set the bar high: a decline must be durationally significant, measured in years rather than quarters, and must hit the target disproportionately compared with its industry. Buyers with regret have tried this argument many times and almost always lost.

What makes the clause interesting in gambling deals is the carve-out list, because that is where the parties allocate the risks specific to this industry. Changes in law, adverse regulatory action, tax increases and the loss of a licence are all candidates, and whether each sits inside or outside the definition decides who bears it. A buyer that accepts a change-in-law carve-out has agreed that a tax rise or an advertising ban is its problem, not the seller’s, which in a sector where a single Budget can reprice a market is a substantial concession. The negotiation is usually invisible from the outside until something goes wrong, at which point the carve-out list becomes the whole argument. Anyone reading a merger agreement for what the parties actually feared should read the MAE definition before the price.

The bottom line

The MAE carve-out list is where a gambling deal allocates regulatory and tax risk. It is a better guide to the parties’ fears than the price is.

Sources

Akorn, Inc. v. Fresenius Kabi AG, Memorandum Opinion (1 October 2018) - Delaware Court of Chancery

Frequently asked questions

What is a material adverse effect in M&A?
A material adverse effect, or MAE, is a contractual definition of the kind of deterioration in a target's business that allows a buyer to walk away from a signed acquisition. It is almost always heavily qualified by carve-outs listing events that do not count. In practice it is a narrow exit: buyers with regret have tried to rely on it many times and have almost always lost.
How do courts decide whether an MAE has occurred?
Delaware courts, which hear many large US merger disputes, look for a decline that threatens the target's long-term earnings power in a durationally significant way, measured in years rather than months. Where a carve-out excludes industry-wide changes, the target must usually have been hit disproportionately compared with its peers. The first Delaware finding of an MAE came only in Akorn v Fresenius in 2018.
Why do MAE carve-outs matter in gambling deals?
The carve-out list is where the parties allocate risks specific to gambling: changes in law, adverse regulatory action, tax increases and the loss of a licence. Whether each sits inside or outside the definition decides who bears it. A buyer that accepts a change-in-law carve-out has agreed that a tax rise or an advertising ban is its problem rather than the seller's.