Draft Clauses and Force Majeure: Why the 1929 Crash Stopped a Studio Deal (and How to Draft to Survive the Next One)

Hook: Why good drafting is the difference between closing and chaos

When markets drop overnight, M&A teams race to answer the same questions: who bears the risk, who walks, and what language controls? The 1929 near‑merger between major Hollywood studios — halted by the stock market crash — is a vivid reminder that macro shocks can blow up even well‑advanced deals. For M&A lawyers in 2026, the lesson is simple: the clauses you write determine whether your client survives the next market shock. This practical guide shows how to draft force majeure, MAC clauses, and termination rights that actually work in crises, with actionable drafting text, negotiation strategies, and a 10‑point checklist for closing‑room moments.

Top takeaways up front

• Define the risk: Use precise, layered definitions to allocate macroeconomic, industry, and counterparty risks.
• Carve wisely: MAC carveouts should be narrow and supported by objective metrics; force majeure lists should be tailored to likely systemic events.
• Link relief to remedies: Specify suspension, cure periods, materiality thresholds, and walk rights — do not leave these to implication.
• Layer protections: Combine interim covenants, escrow, break fees and specific performance language to discourage opportunistic termination.
• Integrate diligence and representations: Use diligence triggers to limit post-signing surprises and tie R&W survival to quantifiable standards.

The 1929 near‑merger: a historical warning that still matters

In 1929, as studio talks were advancing toward what insiders expected to be the Paramount‑Warner Bros. corporation, the stock market crash abruptly suspended deals and changed bargaining power. The headline lesson: a sudden market crash can transform an otherwise solvent counterparty into a deal casualty within days, before closing mechanics can be adjusted. In modern M&A, the equivalent shocks arrive from AI valuation swings, sudden rate moves, or geopolitical sanctions — and lawyers must draft to anticipate them.

‘Prosperity is back,’ declared industry leaders in the 1920s, only to see that confidence collapse in weeks when markets turned. Deals that looked inevitable evaporated because contractual risk allocation was not designed for systemic collapse.

Why ordinary clauses fail in extraordinary markets

Three drafting failures recur when markets crash:

1. Vague definitions let parties litigate whether an event qualifies as a MAC or force majeure.
2. Overbroad carveouts allow buyers to walk when the seller is merely affected by a market‑wide shock.
3. No operational relief means parties have termination rights but no process to cure or allocate interim losses.

To fix these, drafting must be precise, predictable, and pragmatic.

Drafting force majeure in 2026: practical rules

Force majeure in M&A is less common than in commercial contracts, but for purchase agreements it is vital for interim operation risk and statutory impossibility. In 2026, two trends affect drafting: increased prevalence of systemic risks (AI-driven market swings, climate events, sanctions) and courts scrutinizing overly broad force majeure claims.

Drafting checklist for force majeure

• Start with a concise definition that includes both enumerated events and a catch‑all for ‘other events beyond reasonable control’ but then limit the catch‑all with qualifiers (e.g., ‘not resulting from the affected party's gross negligence or willful misconduct’).
• Enumerate systemic events you care about: market crash, severe volatility, suspension of trading, government‑imposed market controls, widespread payment system failures, sanctions, pandemics, major cyber incidents, and prolonged energy disruptions.
• Exclude economic hardship alone: Make clear that general economic downturns or changes in market price do not automatically trigger relief unless accompanied by objective operational impossibility.
• Define consequences: Does force majeure suspend closing obligations, extend the outside date, excuse covenants, or only permit delay? Spell it out.
• Provide notice, proof, and mitigation duties: Require prompt notice, reasonable documentation, ongoing updates, and active mitigation by the affected party.
• Layer cure and termination options: Include staged responses — short suspension, extended cure, third‑party determination, and then limited termination or price adjustment mechanisms.

Sample force majeure clause template (annotated)

Force Majeure: If an event beyond a Party’s reasonable control materially prevents either Party from performing obligations under this Agreement, the affected Party shall give prompt written notice and shall use commercially reasonable efforts to mitigate. Specified events include natural disasters, pandemics, acts of government, material market closures or trading suspensions, sanctions, major cyber incidents, and prolonged energy or payment system failures. Economic downturns, changes in market price, or Seller’s loss of market share shall not, by themselves, constitute force majeure. If the event continues for more than 60 days, the Parties shall meet to negotiate equitable relief, and either Party may seek limited termination rights only after 120 days.

Commentary: the clause layers notice, mitigation, objective enumerated events, and time limits. It expressly excludes price movement, a common dispute source after 2008 and the pandemic.

MAC clause drafting: the battleground of buyer protection vs deal certainty

A MAC clause determines when a buyer can walk for changes in the target's business, financial condition, or prospects. Post‑2008 and post‑COVID litigation taught that courts often require a durable, substantial, and unforeseen change. In 2026, parties face new categories of systemic risk: AI adoption failures, supply chain collapses from climate events, and sudden sanctions. MAC drafting should balance specificity with objective standards.

Core drafting principles for MAC clauses

• Define the baseline: Use the last fiscal quarter, trailing twelve months, or a specified date to measure change.
• Set materiality and durability: Require a quantifiable threshold (e.g., a >15% decline in revenue or EBITDA over two consecutive quarters), and require the effect to be reasonably likely to continue for a defined period.
• Carveouts matter: Common seller carveouts exclude industrywide or macroeconomic events, regulatory changes, changes solely in market price, and announced transactions. Buyers should narrow these carveouts; sellers should broaden them. Use relative measures to the industry where appropriate.
• Use objective metrics: Tie MAC to GAAP metrics, customer concentration, or cancellation rates rather than expectations language.
• Delineate remedies: Decide whether MAC triggers a right to terminate, price adjustment, escrow draw, or post‑closing indemnity pathway.

Sample MAC language and negotiation notes

Material Adverse Effect means any change, event, or circumstance that has had or would reasonably be expected to have a material adverse effect on the business, assets, liabilities, financial condition, or results of operations of the Company, but in no event shall it include effects arising solely from (a) changes in general economic or capital market conditions affecting the industry generally, (b) acts of war or terrorism affecting countries in which the Company does not operate, (c) changes resulting from COVID‑19, pandemics, or similar public health emergencies unless such effects are disproportionately adverse to the Company compared to its peer group, or (d) changes in the market price of Company securities.

Negotiation note: sellers will push broad category carveouts like (a) and (d). Buyers should add qualifiers like ‘unless disproportionately adverse’ and require an objective peer‑group comparison to prevent abuse after industry shocks.

Termination rights and deal protection instruments

After force majeure or a MAC, termination mechanics decide the actual outcome. Break fees, reverse break fees, interim covenants, and escrow mechanics reduce opportunistic behavior and provide a penalty or cushion if deals collapse.

Practical protections to include

• Step‑down closing conditions: Convert absolute conditions into materiality‑qualified covenants where appropriate to avoid trivial defaults blocking closing.
• Interim covenants: Require the target to operate in the ordinary course and preserve key assets, with narrow exceptions for necessary responses to systemic events.
• Material adverse financing out: If the buyer’s financing is conditional, specify MAC standards for lenders, and consider a long‑stop financing commitment or sponsor representations.
• Break fees and reverse break fees: Use calibrated amounts tied to deal value to discourage opportunistic renegotiation; consider escalating fees after protracted delays caused by force majeure.
• Escrow and price adjustment formulas: Instead of termination, define short‑term price collars or earnouts to bridge valuation gaps created by transitory shocks.

Integrating representations and warranties and due diligence

R&W and due diligence allocate risk of hidden liabilities. In volatile markets, buyers often seek ‘knowledge’ qualifiers with varying standards. Practical drafting tips:

• Use defined knowledge standards (actual knowledge, constructive knowledge, or inquiry notice) with clear escalation procedures for ambiguous items.
• Use diligence exceptions: Limit R&W by excluding matters that were disclosed in diligence materials or in disclosure schedules provided before signing.
• Survival and cap mechanics: Shorten survival for reps tied to financial statements, lengthen for title and tax reps; align indemnity caps with anticipated downside from macro events.

Dealroom playbook: what to do when headlines turn red

1. Immediate review: Assess whether the event falls within force majeure or MAC language. If language is ambiguous, convene counsel and financial advisers within 24 hours.
2. Document mitigation: Parties should immediately document operational steps taken to mitigate loss; this record often decides disputes.
3. Invoke dispute resolution early: If contract contemplates independent experts or expedited arbitration for MAC disputes, trigger those provisions early to avoid a race to litigate.
4. Consider interim remedies: Temporary covenants, escrow draws, or bridge financing can keep deals alive while parties negotiate adjustment.
5. Negotiate in increments: Start with short extensions and price collar proposals before moving to full renegotiation or termination.

2026 trends that should shape drafting now

As of 2026, several developments make precise drafting essential:

• Systemic volatility from AI adoption: Rapid valuation re‑rating driven by AI announcements can create transient but dramatic price swings.
• Regulatory fragmentation: Post‑2024/2025, countries are increasingly using sanctions, data‑localization, and AI controls as trade levers; carveouts for regulatory actions must be carefully tailored.
• Climate transition shocks: Physical and transition risks cause abrupt supply chain failures and insurance shocks that impact target operations.
• Cyber and infrastructure dependencies: Large scale outages and payment network failures are increasingly plausible and should be enumerated in force majeure clauses.
• Judicial scrutiny: Courts continue to disfavor sugarcoated, boilerplate MAC and force majeure drafting; judges look for objective, measurable standards and concrete mitigation efforts.

Model drafting redlines: what to insist on, what to concede

Negotiation essentials for buyers and sellers:

• For buyers to insist on: Specific financial thresholds for MAC; narrow carveouts for macro events only where tied to industry‑level harm; express right to price adjustment or escrow draw rather than automatic termination on short shocks.
• For sellers to insist on: Broad force majeure carveouts for industrywide shocks; short cure periods and duty to meet in good faith before termination; protection from termination for general market price movement.
• Mutual concessions: Agreed independent third‑party valuation mechanism, tailored break fees, and a requirement to use best efforts to close that survives force majeure for a limited agreed period.

Practical clause library: quick snippets to adapt

• Notice and mitigation: 'Affected Party shall provide notice within 5 business days and furnish commercially reasonable evidence of the event and mitigation steps.'
• Objective MAC trigger: 'Material Adverse Effect means a greater than 15% decline in consolidated adjusted EBITDA measured over any two consecutive fiscal quarters ending after the Effective Date, excluding effects attributable to industrywide downturns unless disproportionately affecting the Company compared to its peer group.'
• Price collar: 'If the Company's trailing 12‑month revenue declines by 10–20% due to a systemic event, the Purchase Price shall be adjusted downward by X%; declines above 20% shall permit a buyer termination right after 60 days unless Seller elects to close with a commensurate escrow.'

Checklist for closing teams (printable)

1. Review force majeure and MAC definitions for double meanings.
2. Confirm notice and proof obligations; set internal 24‑hour response process.
3. Identify objective metrics and thresholds for MAC; ensure data availability to prove/calibrate effects.
4. Agree on staged remedies: suspension, mediation, short extension, price adjustment, termination.
5. Lock down interim covenants and operation in the ordinary course with disaster exceptions delineated.
6. Set clear dispute resolution path (expert, expedited court, or arbitration) and interim relief mechanisms.
7. Test break fees and escrow mechanics against worst‑case valuation models.
8. Document all diligence disclosures and keep contemporaneous logs of operational decisions after signing.

Case study: how the 1929 near‑merger teaches a modern drafting approach

In 1929, parties did not have contract language calibrated to a sudden market collapse. If a modern draft had layered force majeure and MAC clauses with industry comparators, it could have forced structured negotiations (price collars, escrow draws, short extensions) instead of immediate termination or litigation. The recommended modern blueprint:

• Enumerate market closures and trading suspensions in force majeure.
• Carve out industrywide declines from MAC only when proportional analysis is provided.
• Provide short, mandatory cure and negotiation periods before any termination.
• Use objective financial triggers to avoid subjective judicial interpretation later.

Final checklist: how to survive the next crash

• Be precise: avoid boilerplate MAC and force majeure text.
• Be measurable: tie relief to objective financial metrics or industry comparators.
• Be procedural: require notice, mitigation, staged remedies, and dispute processes.
• Be strategic: use break fees, escrows, and price collars to preserve deal certainty.
• Be current: update clauses to reflect 2026‑era risks—AI valuation swings, sanctions, climate shocks, and cyber outages.

Actionable next steps

If you are drafting a purchase agreement today, start by running a 48‑hour 'shock test' on your MAC and force majeure language: simulate a 20% revenue decline, a market trading halt, and a major regulatory sanction. Apply your clause language to each scenario and document the outcomes. If the clause outcomes are ambiguous or produce unfair walk rights, revise the language to add objective metrics, defined timelines, and mitigation duties.

Call to action

Want a tailored clause review for your next deal? Download our 10‑point drafting redline checklist, or contact justices.page for a contract audit that integrates 2026 risk scenarios and bench‑tested clause language. In transactional law, the right sentence can save a deal — and a wrong one can cost your client everything. Get ahead of the next crash by drafting for the worst and negotiating for certainty.

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