Deconstructing “Material”: Materiality Scrapes Between Contractual Design and Judicial Defiance

Introduction : M&A contracts, like the Sword of Damocles, constantly hang over the parties to a transaction due to the various vicissitudes that govern the success of a securities deal. The time frame between the execution of the deal and its closing involves the acquirer in risk. If the intervening adverse event adversely affects the financial standing of the target, it could prove to make the buyer's original strategic and economic objectives a hollow gesture. To reduce this risk, a Material Adverse Change (MAC) (also called as the Material Adverse Effect) clause is common in M&A agreements. It functions as a contingency provision to allocate risk and enable the acquirer to cancel the agreement or be released from their obligations in case an intervening event adversely affects the economic viability of the target company. 

However, the efficacy of MAC clauses is often compromised by the ambiguity as to what constitutes ‘material’ and the subjectivity of financial thresholds. While buyers naturally seek to broaden the clause’s ambit to minimize risk, sellers resort to carve-out provisions to shield themselves from seasonal economic shocks and external market risks. Adjudicatory bodies abroad have periodically held high thresholds for establishing MAC, while courts in India have adopted an even more stringent approach in allowing easy withdrawal to buyers. Such uncertainty surrounding MAC exegesis in India and abroad led to the emergence of ‘materiality scrape’ clause in M&A transactions. It removes the materiality qualifier from the seller’s representations and warranties when determining whether a breach has occur0red or whether a MAC has been triggered. Because MAC clause operates in tandem with other contractual clauses, the elimination of materiality threshold removes the subjectivity of interpretation and allows easier escape for the buyers. Yet, while modern contracts have leaned on materiality scrape provisions to defer confusion and conflicts, judicial interpretations both domestic and abroad have jeopardised their use.

This paper seeks to analyse the recent Delaware court decision regarding the applicability of materiality scrapes, examine the interpretation of MAC thresholds in the Indian context, and evaluate whether the contractual inclusion of materiality scrape provisions in India remains viable in light of recent judicial developments.

Materiality Scrapes and the JanCo Ruling

When parties negotiate representations and warranties in acquisition agreements, a key point of consideration is the notion of ‘materiality’. Sellers often attempt to qualify their representations and warranties with materiality standards to evade liability for insignificant claims or damages, as well as to lessen their disclosure obligations. Buyers, on the other hand, often seek to neutralise  the effect of such qualifiers by using materiality scrapes. A materiality scrape is a buyer-friendly provision in the indemnification section of an acquisition agreement that the indemnification part of an acquisition agreement that eliminates qualifiers such as ‘material’ or ‘material adverse effect’ from the representations and warranties in relation to indemnification.

Despite the longstanding inclusion of materiality scrapes in M&A agreements, their functioning is not as simple as parties might assume. Because the drafting and scope of such clauses are purely contractual in nature, any ambiguity or uncertainty within the clause leaves courts significant room to determine how the provision ultimately operates. This risk was exposed by the Delaware Superior Court in JanCo FS 2, LLC v. ISS Facility Services, Inc. delivered on 21 August 2025, where the court examined the relationship between a materiality scrape provision and a MAC-qualified representation. 

The dispute arose from an Asset Purchase Agreement (APA) in which the acquirer claimed that the target company’s absence of changes representation in an Asset Purchase Agreement (APA) was breached when it failed to disclose prior to closing that an increase in labour costs and operational disruptions from the target’s business operations had resulted in revenue being far lower than the buyer’s own projections. The question before the court was whether the scrape simply eliminated the materiality qualifier or whether it also removed the higher threshold usually associated with a MAC.

Following its observation that the term MAC was defined in the APA, the court held that  the proper order of operations is to first insert the full definition wherever the term appears in the agreement, and then apply the materiality scrape. The materiality scrape permits the removal of any references to materiality or any words of similar import from the resulting text. As a result, the phrase material adverse effect was effectively reduced to an adverse effect for purposes of determining breach, and the court held that the seller had breached the absence of changes depiction. The labour shortage and operational disruptions were sufficient to met that reduced threshold.

Importantly, the Court also noted even after all the filings and arguments, neither side clearly explained how the "materiality scrape" applied to the "absence of changes" part of the contract. Basically, neither party predicted how the court would understand the clause they wrote. The result was very different from what they originally intended. The seller objected that the court's interpretation would make the representation too broad, but the court didn't agree. It felt that the "basket" and "cap" were enough to limit the seller's risk. The court decided not to let business expectations override the actual wording of the clause, even though the interpretation led to a result neither party probably wanted. This case shows that uncertainty with "MAC clauses" doesn't just come from not defining "material," but also from not being sure how the contractual tools meant to control materiality actually work.

In light of the JanCo ruling, one could presume that precise and deliberate drafting might allow parties to achieve their desired application of the materiality scrape. This holds some promise for agreements governed abroad, where courts tend to enforce contract language on its literal terms. The Indian context, however, presents a different set of considerations.

MAC Interpretation in India and the Shrinking Scope for Materiality Scrapes

Modern Indian acquisition agreements have shown a growing inclination towards adopting materiality scrape provisions, mirroring global practice. However, the realisation of their intended objective in India ultimately hinges on judicial receptivity to such corporate drafting initiatives. Indian MAC jurisprudence has been historically conservative. Supreme Court (SC) precedents periodically demonstrate marked reluctance towards low materiality thresholds in MAC disputes, often equating the materiality standard with near-impossibility of performance.

This was held in the case of Nirma Industries Ltd. and Anr. v. Securities Exchange Board of India, where Nirma Industries invoked a pledge of shares following a borrower default, triggering a mandatory open offer under the Takeover Regulations. However, a subsequent investigative audit unearthed a massive fraud and embezzlement scheme perpetrated by the target company’s promoters. Citing these extraordinary circumstances, Nirma decided to retract from making an open offer. In construing Regulation 27(1)(d) of the 1997 Takeover Regulations, SC applied the principle of ejusdem generis. Considering that sub-regulations (b) and (c) provided for legal and natural impossibility of performance, the court interpreted sub-regulation (d) in the same genus of impossibility, holding that withdrawal under this sub-regulation is confined to situations where the execution of an open offer becomes impossible.

Subsequent judgements have reinforced a similar stance of courts. In Securities Exchange Board of India v. Akshya Infrastructure Pvt. Ltd. the SC held that a deferment of thirteen months on SEBI’s part was inadequate to merit the withdrawal of the open offer. Similarly, in Pramod Jain v. Securities Exchange Board of India, SAT relied on the technical interpretation by the SC and refused to grant withdrawal of the open offer despite there being a delay of two years in obtaining SEBI’s approval for the offer. SAT’s ruling was in turn confirmed by the SC in Pramod Jain v. Securities and Exchange Board of India.

This stance has persisted even after the introduction of Regulation 23(1)(c) in the 2011 version of Takeover Regulations, which added a new ground for withdrawal of an open offer. The provision states that an open offer can be withdrawn when: “(c) any condition stipulated in the agreement for acquisition attracting the obligation to make the open offer is not met for reasons outside the reasonable control of the acquirer, and such agreement is rescinded, subject to such conditions having been specifically disclosed in the detailed public statement and the letter of offer.” This gave acquirers the leeway to include MAC clauses as an alternative to the impossibility criterion, the invocation of which could result in the failure of both the transaction contemplated under the agreement and the corresponding open offer. Unlike Regulation 27(1)(d), its operation is not governed by the rule of ejusdem generis.

Even so, the subsequent SC ruling undid the clarity Regulation 23(1)(c) sought to establish, introducing fresh uncertainty instead. In the matter of the open offer of M/s Jyoti Limited, the buyer made an open offer to acquire 75% of equity shares of Jyoti Ltd. After the public announcement, the target company disclosed that it was registered as a sick industrial company with the BIFR, meaning any change in management required BIFR’s approval. The target company also secured a BIFR order directing status quo on control of the company until its case was resolved, keeping the open offer by the acquirers effectively on hold. Given the protracted BIFR proceedings, the acquirers sought SEBI’s permission to withdraw the open offer altogether. SEBI strictly denied the request for withdrawal and held that the reason had to qualify the threshold of impossibility as laid down in Nirma Industries, which was equally applicable to provisions of Regulation 23(1) of the Takeover Regulations 2011. The decision perpetuates old jurisprudence without reconciling it with the revised Takeover Regulations.

Even when the buyers in India attempt to protect themselves by including Material Adverse Change (MAC) clauses, they often do not manage to protect their interests due to the court’s strict approach to MAC interpretation. Proving impossibility is more difficult than proving material adverse change, and, thus, there is a low likelihood that the courts will adopt a liberal interpretation of the “materiality scrape” language in the contract. Such a clause may be interpreted by the courts as an attempt to use a sophisticated drafting technique and not necessarily the true intentions of the parties to facilitate a closing. Therefore, until the jurisprudence on MAC provisions matures, materiality scrape clauses will have little force and effect in India.

Conclusion: Way Forward

In India, companies cannot follow the Western approach when it comes to contractual adjustments, especially for transaction strategies. The court tends to set high bars for agreement termination in India, which means that a buyer will have a difficult time trying to get out of a deal. One way to mitigate the risk for the buyer is to introduce dispute-resolution mechanisms in the pre-litigation phase. This can be done without going as far as objectively defining and quantifying all the conditions for MAC. The fact that materiality is subjective creates room for negotiations and considerations.

Until Indian jurisprudence catches up to the practical needs of such clauses, companies can take a cue from the international experience to retain the commercial efficacy of the materiality scrape. In the US, MAC clauses are rarely litigated to actual termination. Typically, the parties use the MAC as a bargaining tool to renegotiate the purchase price or other aspects of the deal and then move on to carve out a private settlement. The reason for this is that litigating a MAC is an expensive proposition with no guarantees of success, even in a buyer-friendly state like Delaware. Thus, in India too, acquirers can take up the same approach by using the threat of materiality scrapes to get the target to reopen negotiations on the price, the inclusion of a price collar or a deferred closing. This is especially true since litigation around such clauses is likely to result in an unfavourable outcome.

This is not to suggest that India's regulatory position should remain static: SEBI would benefit from issuing a formal circular or amendment clarifying that regulation 23(1)(c) is distinct from regulation 27(1)(d) to help resolve the heretofore interpretive contradictions that have plagued judicial decision-making thus far. As 23(1)(c) was added later, and governs agreement conditions, as opposed to impossibility threshold applicable to open offers as per 27(1)(d), conflating the two (as SEBI did in the Jyoti Ltd. matter) defeats the very purpose the 2011 amendment sought to serve.

Until that clarity arrives, however, the burden falls on drafters, not adjudicators: materiality scrapes in India may not yet carry the weight they do in Delaware, but still serve as a useful signal of commercial intent that Indian buyers would do well to wield strategically, as leverage, not as an assured exit. The battle over 'material' in Indian M&A is far from settled. Until the judiciary and regulator move in step, buyers must treat every MAC clause not as a guarantee of protection, but a starting point for negotiation.

Author: Prakhyaa Tiwari in case of any queries please contact/write back to us via email to content@khuranaandkhurana.com or at  Khurana & Khurana, Advocates and IP Attorney

References

1. JanCo FS 2, LLC v. ISS Facility Services, Inc., 344 A.3d 1009 (Del. Super. Ct. 2025).

2. Nirma Industries Ltd. v. Sec. & Exch. Bd. of India, (2013) 8 SCC 20 (India).

3. Sec. & Exch. Bd. of India v. Akshya Infrastructure Pvt. Ltd., (2014) 11 SCC 112 (India).

4. Pramod Jain v. Sec. & Exch. Bd. of India, Appeal No. 111 of 2012 (Securities Appellate Tribunal, Mumbai Aug. 6, 2014).

5. Pramod Jain v. Sec. & Exch. Bd. of India, (2016) 10 SCC 243 (India).

6. In re Open Offer of M/s. Jyoti Ltd., WTM/SR/CFD/39/08/2016 (Sec. & Exch. Bd. of India Aug. 1, 2016).

7. Securities & Exch. Bd. of India (Substantial Acquisition of Shares & Takeovers) Regulations, 1997, reg. 27(1)(d) (India).

8. Securities & Exch. Bd. of India (Substantial Acquisition of Shares & Takeovers) Regulations, 2011, reg. 23(1)(c) (India)