No material adverse breaches: Overview, definition, and example
What is no material adverse breaches?
No material adverse breaches is a representation or condition commonly found in mergers, acquisitions, or financing agreements. It means that, as of a certain date (often the closing date), no breaches of the agreement have occurred that would have a material adverse effect on the transaction, the business, or the parties’ obligations. In other words, nothing significant has gone wrong that would justify backing out of the deal or demanding remedies.
Why is no material adverse breaches important?
This concept is important because it helps manage closing risk. It gives the non-breaching party the ability to walk away from the deal or delay closing if the other party has breached the agreement in a way that significantly undermines the transaction. The "material" threshold ensures that only serious issues—not minor technical defaults—would trigger this right. It also encourages both parties to maintain compliance and transparency up to closing.
Understanding no material adverse breaches through an example
In a merger agreement, the buyer agrees to acquire a company, but only if there have been no material adverse breaches by the seller before closing. If, in the week before closing, the seller violates a major non-compete covenant or fails to disclose a lawsuit that could impact the value of the business, the buyer could claim there’s been a material adverse breach and refuse to close until the issue is addressed—or terminate the agreement entirely.
Example of how a no material adverse breaches clause may appear in a contract
Here’s how a no material adverse breaches clause may appear in a merger or stock purchase agreement:
"As a condition to Closing, each Party represents and warrants that there have been no breaches of this Agreement by such Party that, individually or in the aggregate, have had or would reasonably be expected to have a material adverse effect on the ability to consummate the transactions contemplated hereby."
Conclusion
No material adverse breaches is a protective clause that helps ensure major obligations are met before a deal closes. It gives parties a way to pause or terminate the transaction if significant problems arise, without overreacting to minor or technical defaults. Including this clause helps maintain deal integrity and provides legal leverage when serious breaches threaten the transaction’s value or viability.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.