Material adverse effect appears throughout an acquisition agreement — as a closing condition, as a qualifier on representations, and in covenants. Its definition governs all of them.

The core. Any change, event or effect that is materially adverse to the business, results of operations or financial condition of the target, taken as a whole.

Taken as a whole matters. Without it, an adverse effect on one product line or region could qualify.

Carve-outs. General economic and financial market conditions; conditions affecting the industry; changes in law or accounting; acts of war, terrorism, pandemics and natural disasters; the announcement or pendency of the transaction; actions taken at the buyer’s request or required by the agreement; and failures to meet projections, with the underlying cause remaining assessable.

Disproportionate effect qualifiers bring a carved-out event back in to the extent it affects the target disproportionately compared with others in the industry. Which carve-outs carry this qualifier is the central negotiation.

Prospects. Sellers resist including prospects, because it makes forward expectations part of the condition.

As a representation qualifier, material adverse effect sets a much higher threshold than materiality, and applying it across an entire representation article materially reduces the buyer’s protection.