MAE Clauses in Data Center Acquisitions

In any acquisition agreement, the “material adverse effect” clause does a lot of quiet work. It helps determine when a buyer may be excused from closing if something sufficiently bad happens between signing and closing. In practice, MAE clauses are rarely successful as closing “outs,” but they still matter because they frame risk allocation, negotiating leverage and the parties’ expectations about what types of adverse developments remain with the buyer versus the seller.

At a high level, an MAE clause asks whether there has been a material adverse effect on the target’s business, assets, liabilities, operations or financial condition. But the most important drafting usually appears in the exceptions. Many MAE definitions exclude broad market, industry or macroeconomic conditions, such as changes in law, interest rates, capital markets, industry conditions, war, pandemics or general economic disruption. Those risks typically remain with the buyer unless the target is disproportionately affected compared to similarly situated companies.

That distinction is especially important in data center transactions because many of the largest risks sit somewhere between company-specific and market-wide. A general increase in power prices may look like an industry risk. The loss of a specific utility allocation, interconnection position or power procurement arrangement may look more target-specific. A regional grid constraint may affect many data center projects. A zoning reversal affecting the target’s site may be more specific to the asset being acquired.

For buyers, the key question is whether the MAE clause adequately captures the risks that are fundamental to the investment thesis. In a data center deal, those may include loss of a hyperscale customer, denial or withdrawal of interconnection rights, a moratorium on large-load connections, revocation of key permits, failure to obtain zoning approvals, material water-use restrictions, major construction shutdowns, equipment shortages, cyber incidents or a significant increase in committed power costs. Some of these risks may also be addressed through representations and warranties, interim operating covenants, closing conditions or special termination rights, rather than relying solely on the MAE clause.

Sellers, by contrast, will usually want to make clear that buyers bear broader market and industry risks. If the entire data center market faces transformer shortages, higher financing costs, permitting delays, supply chain disruption or general pressure on development timelines, sellers will not want those conditions to become an excuse for the buyer to walk away. Sellers may also seek express exclusions for changes in power markets, construction costs, data center industry conditions, capital markets or customer demand, subject to a disproportionate-effects carveout.

The drafting challenge is that data center value often depends on assets and rights that are both specific and fragile: power availability, land-use approvals, customer commitments, fiber connectivity, construction schedules and tax incentives. A generic MAE clause may not do enough work. If a particular risk is central to valuation or closing certainty, the parties should address it directly. For example, a buyer concerned about loss of a utility commitment may want a specific closing condition or termination right tied to that commitment, instead of hoping the issue rises to the level of an MAE.

MAE provisions also interact with interim operating covenants. If a seller is required to operate the business in the ordinary course between signing and closing, the buyer may have a separate claim if the seller makes unusual changes to customer contracts, construction budgets, power procurement arrangements, permitting strategy or project schedules. In some cases, an interim covenant breach may be easier to establish than an MAE. That is why buyers should review MAE language, covenants and closing conditions together rather than treating them as separate issues.

For data center investors, the practical takeaway is simple: Do not rely on a standard MAE clause to solve data center-specific risk. The clause should be reviewed against the actual underwriting thesis. Is the buyer paying for contracted cash flow, powered land, future development capacity, a customer pipeline, a utility queue position or a fully stabilized operating facility? Each thesis has different failure points.

A well-drafted MAE clause will not eliminate deal risk, and it may never be litigated. But it can help define which risks are part of the bargain and which risks are deal-breaking. In data center acquisitions, where value often turns on power, permits, customers and construction timing, that definition is worth negotiating carefully.