Contracts Built for Uncertainty In a Stagflationary Economy

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Introduction

In a time of economic uncertainty, businesses are finding new ways to adapt, grow, and protect their profit margins. Characterized by high inflation, sluggish growth, and elevated unemployment, economists refer to this period as one of “stagflation.” Rising borrowing costs and uncertain earnings have prompted new methods of risk allocation. Global M&A activity slowed in 2024 as stagflation eroded confidence in company valuations. Rather than halting deals, it has reshaped how businesses structure M&A contracts. Merger agreements are reexamining boilerplate terms to address macroeconomic shocks. Material Adverse Change (MAC) clauses are being refined to account for inflation and rate spikes, while earn-outs and price adjustments now help distribute valuation risk. The persistence of stagflation has driven more adaptive payment structures to preserve deal value amid volatility, shifting M&A from rigid transactions to contracts built for uncertainty.

Material Adverse Change Clauses

A MAC clause is a key risk management tool that M&A lawyers use to protect buyers from the unpredictable economic effects of stagflation.Commonly used in M&A purchase agreements, the “Material Adverse Change” (MAC) clause, also known as a “Material Adverse Effect” (MAE) clause, allows a buyer to exit a deal if a significant change occurs to the target company between the signing and closing of a transaction. These clauses commonly contain specific carve-outs, or exceptions, for industry-wide changes or shifts in law, with qualifiers for disproportionate effects.

Although Material Adverse Change (MAC) clauses may appear simple in concept, their practical application is much more complicated, often due to disagreements over what constitutes an event significant enough to fundamentally alter the transaction. Used in M&A deals since the 1940s, MAC provisions have evolved significantly in form and substance. Historically, acquirers have struggled to invoke them successfully due to the high bar courts impose. Today, inflation and rising interest rates have further blurred the distinction between market-wide and target-specific harm—an issue magnified in the aftermath of the COVID-19 pandemic.

In 2018, the Delaware Supreme Court’s landmark decision in Akorn, Inc. v. Fresenius Kabi AG marked a turning point in M&A law, recognizing a valid Material Adverse Effect (MAE) that allowed a buyer to terminate a merger. Fresenius had agreed to acquire Akorn, a pharmaceutical company that was the target of acquisition by Fresenius, experienced a sharp and lasting decline in financial performance, suffering a 105% year-over-year drop in operating income, as well as a decrease in EBITDA and EBIT by 55% and 62%, distinguishing it from merely cyclical declines seen in earlier cases. Whistleblower letters later revealed that Akorn had misrepresented its compliance with FDA regulations and concealed serious data and quality control failures. The Court held that Akorn’s sustained performance drop constituted a “general MAE” and its regulatory violations a separate “regulatory MAE.” Emphasizing that an MAE must be durationally significant, the Court confirmed that termination is possible under exceptional circumstances—highlighting the importance of precise risk allocation and “disproportionate effects” qualifiers in MAE carve-outs.

The uncertainty that Akorn seemed to clarify was soon tested by the COVID-19 pandemic, which further complicated the MAE landscape. The pandemic’s market disruption prompted sellers to add pandemic-specific carve-outs and strengthen force majeure language to prevent buyers from invoking MAC clauses to abandon deals. Before the March 2020 shutdowns, only 12.5% of MAE provisions explicitly excluded pandemics or forces majeure; by mid-2020, 24% contained pandemic carve-outs, and 42% included general force majeure language. A 2023 survey of 300 M&A agreements reflected this shift, showing increased use of buyer-protective terms: “disproportionately affect” language appeared in 91% of deals (up from 83%), and 81% included the phrase “would reasonably be expected to,” a 16% rise from the prior survey and a 52% increase over the past decade.

Recent developments underscore a continued movement toward precise risk allocation and adaptability in M&A contracting. The combined influence of Akorn and the pandemic has driven parties to draft clearer provisions addressing industry-specific and systemic risks. As economic volatility persists, MAC clauses remain essential tools for managing transactional uncertainty, balancing flexibility with predictability to ensure equitable outcomes for both buyers and sellers in an evolving market.

Earn-outs and price adjustment clauses

In a traditional transaction amidst a period of stagflation, sellers are forced to depress their valuations while buyers make investments with the risk of overpaying for a company that ultimately falls short of expectations. This dynamic has led parties to increasingly rely on earn-outs—contract provisions that defer a portion of the purchase price until pre-determined performance goals are met. According to Latham & Watkins’ M&A Dealmakers Prepare for 2024 Recovery report, 23% of middle-market deals in 2024 included an earn-out, a significant increase compared with deals completed during periods of lower inflation. By only providing additional payment when certain goals are achieved, incentives for investing help ensure that nominal growth metrics are tied to profitability instead of price-level distortions.

Price adjustment clauses are another tool increasingly used in modern contracts. These provisions automatically adjust consideration when specified thresholds for inflation, exchange rates, or input costs are breached. For example, in manufacturing and energy deals, price collars, which limit potential gains or losses, can be set to account for deviations from initial company valuations. Recent stagflation-driven swings in the cost of capital have contributed to the proliferation of such clauses. Like earn-outs, inflation-indexed formulas mitigate renegotiation risk by providing transparency on how macroeconomic changes affect payments. Such mechanisms give parties the chance for their contracts to be adaptable and adjustable, preventing static assumptions from causing loss. In essence, price adjustment clauses are risk calibrations by algorithm, indicating a mix of fixed pricing and open-ended negotiation. 

While earn-outs and adaptive clauses effectively align incentives, they also create risks of their own. In part arising from methods of accounting, discretion of post-closing management, and accusations of bad faith regarding inflation-related adjustments, disputes have become a side-effect of these contractual changes. Although objective calculation formulas, audit rights, and embedded dispute resolution mechanisms have mitigated many of these issues, uncertainty persists. In times of stagflation, M&A will continue to thrive through the methods used to design contracts, absorb liability, and factor unpredictability into evaluations of a company’s economic outcomes.

Conclusion

In a stagflationary economy, the traditional M&A playbook is being transformed to accommodate uncertainty. As inflation and stagnant growth continue to distort valuations, dealmakers are turning to adaptive tools such as refined MAC clauses, creative earn-out provisions, and price adjustment mechanisms to balance risk while keeping transactions viable. These changes reflect more than temporary adjustments; they represent a lasting shift in how M&A contracts allocate risk amid economic volatility. Looking ahead, the next phase of M&A will likely emphasize predictive, data-driven deal structures that anticipate disruption rather than react to it, shaping a market defined by resilience, efficiency, and strategic foresight.

*The views expressed in this article do not represent the views of Santa Clara University.