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V.Ensure there are opportunities to exit upon happening of specified events
  1. Breach of terms/event of default
The shareholders, generally, have an exclusive and irrevocable option (the “Purchase Option”) to purchase the shares of another shareholder on other terms as they may agree in writing between themselves if the particular shareholder materially breaches the Agreement, unless such breach and its effects are fully cured within a specified number of days. The agreement specifies the events which would material breach.
  1. Material adverse change/ effect
The material adverse effect or material adverse change (called a MAC clause) states that if, after signing the shareholders agreement, circumstances are so fundamentally changed in a manner which affects the business prejudicially or the business faces a major claim or liability, the investor will not be under an obligation to invest in the company, or he will be able to exit if he has already invested by then. The company and promoters are required to give a warranty that no material adverse change has occurred on the signing date which repeats on the closing date. If a MAC occurs after investment is made, the investors can invoke rights to exit from the company under a typical shareholders agreement (for details, see the chapter on Exit Rights).

A MAC clause is intended to protect certain legitimate interests of the investor. For example, the clause could typically state that material impairment of the assets or the operations of the company, or inability of the promoters and the company to carry out their obligations under the agreement, or a change in law which renders essential terms of the agreement unenforceable, will discharge the investors of their obligation to invest, or enable them to exit from the company. This can be fair if it is appropriately drafted - no investor will want to invest if a drastic event makes it completely impractical to carry on the business of the company or renders key commercial terms of the transaction illegal – as that defeats the commercial purpose of the entire transaction.



Negotiation points                                                                                                                    
  1. The MAC can be drafted in a very loose manner to give the investors an opportunity to opt out of investing in the company (after signing) by assigning vague reasons. Sometimes, a change in market conditions or a recession in the particular industry could also qualify as a MAC. Founders should ensure that the MAC is restrictive and allows investors to refrain from investment (before completion) or exit (after completion) only if a genuine event which seriously affects the business of the company and which was absolutely outside the contemplation of both parties has taken place (and not an event which is extrinsic and pertains to external conditions only).
  2. To minimize vagueness in the SHA, founders should negotiate and include minimum thresholds for the value of claims or liabilities that could trigger a MAC clause in the shareholders agreement, instead of merely stating that any claim which ‘materially impacts the business’ could qualify as a MAC event. 


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